Growing Your Wealth with Brian Evans

Welcome to Growing your wealth with Brian Evans and Jeff shade. A show this simplifies the complexities of investments, taxes, retirement and more so you can discover how to better sustain yourself and your wealth for years to come. Brian is a CPA with 30 years experience and a financial advisor, which brings a unique perspective to the financial world. This show is brought to you by Madrona, financial and CPAs. Home of the routed wealth plan. One a retirement plan designed to last 30 plus years, go to Madrona financial.com. And click get started to see what the routed wealth plan can do for you. And now, here are your hosts Brian Evans and Jeff shade.
Thank you so much. Welcome to Growing your wealth with Brian Evans, the show that gives you the straight talk and honest answers you need to help you sustain yourself and your wealth for 30 plus years. On today's show, we're going to be discussing a CPAs take on the strength of the market. Also the three phases of a real estate investor and why this last phase matters. My name is Jeff shade. And as always, I'm just here to ask the questions. But of course, the words of wisdom and self advice come from Brian Evans, CEO and President of Madrona financial and CPAs Hey, Brian, how you doing today?
I'm doing just great. Thanks, Jeff.
Glad to hear that. Brian, I certainly hope our listeners are doing well. Today, too. We've got a lot to talk about on today's show. Brian, according to the Federal Reserve, the US loan market is shrinking rapidly. Apparently there is a similar pattern with what's going on today, when compared to 2000 to 2008, and so on, how does play a factor in economic growth? And should we be concerned about a tightening loan market? Do
you think? Well, yeah, I mean, there's a lot of things that go into the analysis of economy and so forth. But what I found interesting is, you know, history is meant to repeat itself very often, certainly, we're always in a different market than we had been historically. But there are a lot of concerns out there right now about interest rates, and what that might mean for borrowers, not only just consumers, you think about consumers, and with interest rates going up, you know, you bought a car, you bought a house, I will talk about this later about, you know, leveraging and all of a sudden, you never anticipated that your interest rate would double on you. And now that puts a whole new spin on things. Well, businesses tend to much like the government businesses tend to borrow a lot of money as they expand as they grow as they acquire other firms. And when that cost of capital goes up, then that can have a wave through the economy. And then on top of that just federal government having to, you know, they anticipate their tax revenue, they anticipate their expenditures, they always want to spend more money, it seems like and then they go, Oh, we just got the bill on the interest, the interest is going up. And when we borrow new money, which they're always doing, that interest is going up. So now the money that projected to spend on other things is going to interest. And so we have this ripple going on. It's interesting, as I look at standards for making loans over the last several decades, the standards have gone way up, it's harder to get loans right now. And the only other times it was this hard, which is kind of alarming, was at the start of the.com drop at the start of the real estate dropped 2007 COVID. And now, so it's kind of unnerving when you're looking at a graph and you go when were the bad times mm hmm.com 2008 banking crisis COVID Oh, now, so when I'm looking at this going, Oh, okay, now, we're being alerted that we might have some issues. And with interest rates up. The other interesting thing I've seen is that banks are aware of this, too. I'm not the only person who can look at these, these graphs and so forth. And they are coming out with the loans that they're making, relative to what they're paying for the money that they're getting to make these loans, their profit margin is at a very high level, the spread is huge right now. So they're not paying as much to acquire money to lend out. But they're lending it out at very high rates, because you know, there's the default risk. So they're trying to cover their rear sides by making sure they have plenty of cushion, which again, hurts the economy. So there's a lot of ripple effects of all of this, maybe this kind of like drinking through a firehose, and I think any analysis of the economy is sometimes gets that way. But there are some warning signs out there. And I did want to talk about them today.
Brian, I get loan offers all the time for my personal small business, and there's no lack of those things coming in. But as you said, they want to make loans at 2930 35% interest rates. I would imagine that when businesses have to borrow money, and it's at those exorbitant interest rates, that that's really going to affect whether a business is able to continue to operate.
Yeah, or just even to expand. I mean, we're probably gonna see defaults go up, obviously, when interest rates go up so much, and we think about it I was looking at a credit fund a credit fund is something that we can invest in where pooling money is lent out to businesses, successful businesses, and security is taken from that business's stock. And I was looking at the individual loans because me and my clients are gone. How can they pay us so much? Why is the yield so high on these, and then I look at the individual loans, and they're loaning them out at prime plus six prime plus 5.75. And when Prime is is high, and you realize, gosh, these these companies are paying 10 plus percent, I mean, big successful companies 10 plus percent, to borrow money. Well, back when they, you know, a few years ago, when they were thinking about doing that, they certainly didn't anticipate that they would be having to pay this much. But you know, businesses when they're borrowing money, they're usually borrowing based on a plan that was put together years ago, years ago, the plan did not include interest rates been as high as they are. Now we're going to see this ripple I think threw out a lot of our industries I, I was up at a very expensive housing development. And I see all these houses for sale, kind of the luxury home market, because that's dried up. People can't sell their house to buy the other house, they can't finance anymore and afford the mortgage payment because the rates have gone up. So you see all these houses that are for sale. At the same time, I see dozens of housing starts that are midway and I'm thinking to myself, these poor contractors, they got nailed, again, this happened in 2008. It's happened before where everything looks so rosy. So let's go out I'm all my projections look good, my spreadsheet, say I'm going to make a lot of money, housing prices going up, interest rates are low, I'm in great shape. And now they're trying to hold on to these houses paying exorbitant interest rate just to hold their profits gone. Even if they could sell which they won't be able to. It's almost say it's like watching a wreck in slow motion. I mean, it's just, it's really scary out there. And so we're seeing warning signs of this. And these kinds of things will ripple through because we weren't prepared for this. We weren't prepared not only for the inflation, and interest rates go up so high so quickly, but we just weren't prepared with our plans or future plans, you know, if we'd known all this, and then you can plan ahead and so forth. But you know, you see all these cranes building office buildings, and you go, you know, that that was put into play 10 years ago, or five years ago, before we had COVID. Before we had high interest rates before we had the Fed trying to kill the economy to lower inflation. Well, that's having ripple effects, too. That's that's really going to hurt businesses, which is their intent, which sounds crazy, but it is. And we're seeing these ripples go through the economy. We've all
seen these trucks on the road yellow Corp. and I was really surprised Brian to see that yellow Corp has gone under which could be due in part to the higher interest rates and more difficulties in getting a loan. But you talked about ripple effects. What are some of the other financial patterns that we should be aware of? Do you think,
yeah, one of the other things is, credit card debt is at historic highs now too. And now with interest rates going up, and people having less money to spend, because they're spending more on because of inflation on other things just to get by. And so debt is going up, a savings is going down, the free money that was pumped into the economy during COVID is essentially spent, it's gone. It's not coming back, people kind of got used to that. And when all this happens, your economy is 70% consumer driven, when consumers can't go out and buy, you know, discretionary items, because they're needing to survive and pay their rent. Oh, by the way, my rent just went up. In fact, my sons, they have a house and, and it was just a few years ago, it was $1,800. And now it's $2,800. Wow, for them to rent. And I'm like, Whoa, wait a second here, a 50% increase in just three years, three, four years, I'm pretty sure that they're not getting 50% increases at their job, wherever they are. Imagine going to your boss and yeah, my expenses went up 50% kind of a 50% Raise and go away. So yeah, this ripple effect does go through, so they're tightening of the belt and all of that. But yeah, it goes all the way up to corporations. As I mentioned a little bit earlier, we're gonna we're gonna see default risk go up, defaults are going to happen, we haven't been seeing defaults hardly at all for years. So now they're gonna have to factor that into lending. Now, that will keep rates high, too. So you get the government kind of created the inflation. Now the Fed is trying to kill inflation by killing the economy. And that ripple effect means, again, that banks have to be more careful. I'm seeing this in the graphs I'm looking at here. And they're gonna have to charge more to lend money out because defaults are going up and on and on and on. It goes and it's just it's a very scary time when you think about the overall economy as it relates to different things that we're doing. So it's, it's just, it's just so important and we harp on it on the show to make sure you take that into account because what I'm also seeing out there is that investors confidence in the stock market's way up. Right? Well, that's because the markets been going up. And everybody feels like, well, I'm an expert. And this just keeps going, right? And how many times have we seen this? I mean, just a couple years ago, or a year ago, we thought, oh, housing prices, they just go up, up, up up, oh, until they don't, oh, and you know, that the interest rates are low, and they aren't. And stock markets go up, up, up, and then you buy and they go until it's not. And so we see this repeating pattern over and over and over of over exuberance, you know, everybody feels like, wow, markets up, I better you know, if you're missing out, I better get in, I better get in a better move everything into the market. I don't want to miss this. And that's usually the worst time you can pick to do that.
Brian, you talked about the.com crash the housing crisis COVID-19. If retirement is supposed to last 30 years, or sometimes 30 plus years, can we expect these sorts of things to come along regularly?
Absolutely. Yes, there isn't a time where we don't have issues, you can go back over 100 years, tell me the times where we don't have problems with the economy problems with the stock market problems with whatever it is out there, we will continue to have this kind of stuff. So that's exactly what we're talking about. You know, you hear the stories when the market dropped last year, about people going back to work and and their retirement got you know, up ended the first year out and their investments dropped all this money in the stocks and bonds. And maybe they put a bunch of into crypto and a bunch into tech stocks and just wrote it down. They're gonna wait a second here, I just lost a quarter of my career, essentially, of savings in the first year out of retirement. So you hear these stories. And while they aren't people that went through our process, and frankly, if you know that these things can and will happen, then you project for that, and you invest for that, and you take the steps that are necessary, so you can have a successful retirement. And if you didn't do that, well, then now you start reading these stories. So yes, Jeff, answer your question, we will have problems. In fact, you know, it's kind of an easy call. I remember I remember seeing this old clip from Ronald Reagan, where he was complaining about the debt, the national debt, because it was 50 billion with a B, and, you know, 30, some trillion or whatever it is, yeah, trillions. And it's 500 times what it was. And we're not fixing that anytime soon. As far as I can see, we've got conflicts, we got other countries, China and so forth, that I absolutely think is going to be a problem going forward, we're going to have problems, there's going to be wars, you know, we look at our own economy. And just this last week, we saw the US get downgraded downgraded on their debt. Now, the whole world uses the US debt. And I'm looking at this going, Oh, my gosh, we've got some serious problems when the US is being downgraded by the ratings agencies. And so that's going to increase the cost of borrowing, that's going to increase the cost of the government because they're gonna have to pay higher interest to borrow money by selling bonds to fund all the programs that they can't pay for. So yeah, bottom line, Jeff, yeah, we're gonna have problems going forward. And it's imperative for a successful retirement to plan ahead, knowing that that is going to happen not have any rational exuberance eternally, every year, they all the market is going up, up up, my real estate is gonna go up, up up everything I wanted to just going to continue to go up until it doesn't. And so we need to plan ahead, knowing that that's going to happen multiple times during our successful retirement.
And, Brian, I'm willing to wager based on a conversation today about the problems that we're facing that a lot of people do have questions about how to proceed with their retirement plan to make sure that it's going to last 30 plus years, and that these bumps in the road are not going to have a big effect. We've said many times on this program that these bumps in the road should not be a life altering event, but just a minor annoyance. So if you want a comprehensive retirement plan designed to last 30 plus years built by financial advisors, and CPAs, I want you to call this number it's 833-673-7373. You can call it right now, so that you can take the first step and request your Madrona 30 Point analysis. Now if you're feeling that something is off with your plan, your retirement plan and your portfolio, I want you to call that number 833-673-7373 and request your 30 Point analysis. There's no cost of that there is no obligation whatsoever. You must have at least $500,000 of investable assets to qualify for the Madrona 30 Point analysis but those who do qualify will be able to enjoy this conversational analysis intended to dynamically cover a wide range of topics based on your unique and individual situation. So you can adjust your financial plan and strategy to help avoid unnecessary stress during your retirement. And as a bonus, we'll send you out a copy of Brian's Book Seven Steps to s six zestful retirement, so I invite you to do it today. Again, it's not going to cost you a dime. It's a 30 point analysis, that could be just what you need to help uncover several blind spots while improving your overall quality of life for the next 30 plus years. I'll repeat that number again. 833-673-7373. That's 833-673-7373. Brian, we've always heard that the stock market is a place to grow. But you know, the stock market can certainly be volatile. We have learned that I mean, as an investor in stocks, should we just ride this roller coaster up and down? Or what are some of the other alternatives? Do you think?
Yeah, I do want to talk about alternatives. Because I think a lot of people listen, they go, Well, you know, I know stocks go up and down. But you know, I'll just stick with that. And I'll do it myself. Do it yourself kind of investor and why do I need to hire a financial advisor when when I I can watch CNBC. I can read the Wall Street Journal, I can do all this. I can go online, I have an E trade account, what do I need anybody else's help for? Well, one of the things that I wanted to reiterate from prior shows here is that most of the things that I'm talking about to protect you from a market said could be devastating your retirement, you cannot get on your own as a do it yourself investor, you're just not allowed to the SEC doesn't allow you to go out and purchase many of the products that we need to use many of the tools. And it's like, you know, back to our tool analogy, you want to build a house, but you're not allowed to have to use particular tools to do it with so how you're going to be able to do that properly. You can have some semblance of a house, but you can't do it correctly. So some of the tools that you cannot buy on your own whether they be fixed annuities indexed annuities for lifetime, cashflow, or protected growth, universal life either for tax free death benefit or tax free cash flow in your retirement, Delaware statutory trusts to get out of investment, real estate without paying income tax, and diversifying and quit being a landlord opportunity's own investments, structured notes, private equity, private, non traded debt, REITs, and so forth, and so on. There's, there's all these areas that we tend to use for our clients that you have to again, go through licensed financial advisor that actually works in these areas to see most of the stuff I just named off, if you go to your typical advisor, go to the strip mall or the or the big box, they're gonna look at you and go, well, we don't do that. But we'll give you stocks and bonds. Well, if that's the one thing I can do on my own, why do I need you for that? And so, you know, I'm telling you, there's a lot of things that we want to do outside of stocks and bonds, because every investment has its purpose. There's basically six main areas, you can put your money, there's cash and cash equivalents. The bond market, which is very suspect right now, with interest rates, going up the stock market, you got insurance company products, passive real estate, and alternative investments. And so yes, you can go out and buy stocks and bonds on your own. But do they accomplish your goals? Well, depends on what your goal is. If you're 40 years old, or 30 years old, maybe they do, but most people we're working with are looking at retirement planning. So in retirement planning, I ask people this all the time, there's three things that an investment can easily do. There's five potential, we'll focus on three in retirement, it can grow, it can provide cash flow, or it can be secure. I cannot do all three with one investment. Now most people in retirement say, Well, my order would be I gotta live. So I think cashflow is my most important. I don't want to go back to work. So security be second, and I've had growth, but I don't need it as much now that I'm retired, so growth be third and say, Okay, well, stocks are really good at the one you care about the least potentially long term growth. But they're not really good at cashflow. And they're not really good at security. So if you're trying to build a successful retirement with cash flow and security, and you're using the wrong tool for that, putting all in the stock market, then you're pulling money out of your stock market investments, and then the sequence of return risk can bite you. That's where the the market drops, you're pulling money out, you're never going to put that back in and get the recovery back. And so that is a terrible idea for most people long term, to just put all your money in the market while you're pulling money out of the market. Hope your timing is good. If it's good, then it'd be great. If it's not good, you're going back to work. I don't think we want to hear that when we're doing our retirement planning. So we have to use different kinds of tools for that and do it yourself investor isn't doesn't have access to that as I mentioned. So it's very important that we look at proper financial planning, understanding what we're trying to accomplish and then which tools are best for that job. And I'm not saying stock markets bad it can be very, very good long term if you're not pulling money out of it and subjecting yourself to sequence of return risk. So if there's a percentage that you're comfortable with in the market then that can be absolutely a part of this plan the growth part. But we got to address the cashflow, insecurity too.
And I have heard many times over the years. I mean, I think it started with the old shop teacher there used the right tool for the job. But if you don't have the right tools, what do you do? And I think that's the advantage of using an advisor such as yourself is that there is a very large toolbox at Madrona, financial and CPAs. So you're bound to have the tool that is going to help people build that house that you can live in for 30 plus years. Brian, we've talked about a lot of things on the show today, and I'm sure our listeners are looking for some guidance there. What is the first step that our listeners should take? Or someone who's interested in a 30 point analysis or a comprehensive retirement plan? Yeah, I
just had a conversation with somebody this week, long term client parents passed away and his inheriting a bunch of money more than they had total, up to that point. And so we're talking about, okay, now it's time to retire. And what does this look like? And he was kind of overwhelmed by everything. And certainly, there's a lot of variables, but we were able to kind of break it down. Because the first thing we want to know is what do you want. And so as I'm talking to him, I'm here, okay, I hear that you want to retire, I hear your wife wants to retire, I hear that you don't want to have to worry, I hear that you need to know how much you can spend each year in retirement, I hear that you don't want to go back to work. And I hear you worried about our political system and what that means for the US going forward. So a lot of things came out just in our talk. But the first step was that I said, Well, I'm going to send you a questionnaire, and it'll take less than an hour to fill out. And it's going to ask you questions on a scale of one to 10, what keeps you up at night kind of thing? And then what are your assets? Which what you're spending and what you know, so forth like that? What are your goals? How important are different things to you. And so we send that out. So again, it's less than an hour, they can fill it out and send it back to us. And then we can start our analysis, if they become a client, we'll run through the 30 point analysis of everything having to do with what a successful retirement can look like. But we started talking investments. He's saying, Well, I'm kind of overwhelmed by the investments. I said, Really, it's, we can break this down. Because I've gotten enough information. When we did a financial plan for him, I was able to see what the future look like how much he could spend, where our problem areas were, how to fix them. And so I plugged all that stuff in there. And in the end, there is the one variable, it's like, most people have a feel for how much they're comfortable with in the market, because I can work around that if he was to say, Well, I'm okay with half in the market. But I'd like half not subject to the whims of the market, the ups and downs, great. I can work with that. I can take the other and put it into many of these areas. I've talked about to add security, cashflow for life, better cash flow from various other kinds of investments, you know, the cash flow and security areas that I talked about that the stock market doesn't do very well. And there's no right or wrong answer to this. Well, there might be wrong answer is wrong answer might be zero in the market or 100% in the market, that might be the wrong answer. But generally, people have a sense for where they think they are okay with the market. And once I kind of have that, and it aligns with the questionnaire and our conversations, and all this is in alignment, then we get a sense, okay, I think we're in the right place here. So let's say in this example, 50% was the number we will do the rest of the work, we'll put together the mix of diversified investments from that point forward, the stock portfolio will be very light on bonds, we'll have liquidity through maybe insurance company products offering liquidity, very stages in our retirement will have security will lifetime cashflow will have real estate will have credit funds will have all these different things in there. So that whatever happens in the market, whether we go through very turbulent times or not that we can have a successful retirement. So those are the steps. So when you break it down again, just to summarize, when somebody says well, what do I do, I said, Well, we'll send you a questionnaire, take a listen our and then you know, as we get to know each other, we think it's a good fit, and we want to move forward, then we'll take you through the 30 point analysis. And we'll take you through a mix of assets and investments that will get you to where we need to be. And we can do all of that through our communicating with you and getting to know you and finding out what you want. And once we know what you want, and we can work together with you to provide you with the help to have a successful retirement, Brian, for
our listeners who want that 30 Point analysis very simple to get that call 833-673-7373. So you can discover additional ways to potentially improve your quality of life for 30 plus years. Once again, that number is 833-673-7373 no cost and no obligation whatsoever. We're gonna take a quick break, Brian, when we come back, we're going to be discussing the three stages of a real estate investor and the last phase really does matter. All that and more when our show continues. Stay with us.
Do you ever worry if you see CPA and financial advisor are on the same page, you won't have to if you call Madrona, financial and CPAs at 844 Madrona, or go to Madrona financial.com. Now back to more growing your wealth.
Welcome back to the show. I'm Brian Evans, CEO Madrona, financial and CPAs. And this segment where we talking about the three stages of a real estate investor.
And Brian, I saw a tweet if that's what you still call it these days. And it said, I'm at a 22 year old competent bar, he owns three Airbnbs at a remote part of Massachusetts, that he financed with an adjustable rate mortgage at 2.75% in 2021. Now he only put 3% down, then all the comments that I read, were expressing concern for this seemingly successful real estate investor. I mean, what is wrong with this picture?
Well, there's a couple of things wrong, a couple of things, right. And so we'll kind of go through it. So when I talk about real estate investing a lot of people, their timing was just awesome. They bought at a good time, markets went up, real estate prices went way up, and they feel like I'm pretty much a genius, you know, I invested a little bit of money and leverage that into a big win. And that's what happened. Now, is that gonna be the case going forward? Well, I don't know, as a lot of this depends on timing. Because when you get into real estate, it's a business and businesses can fail. Businesses can succeed in depending on your management, your timing, your financing, many different aspects. So the first thing that this person did, right or wrong, was a leverage, lots of leverage 3% down, I'm not sure how he got 3% down on rentals, because generally, banks require a much higher downpayment. So somehow he did. So the bank's taken all the risk here. So I'd say that was something that was done right, because even as this goes south, it's person doesn't sound like they have a lot in there. I, again, I don't believe it. I don't believe someone that gotten three rentals for 3% down this 22 years old, but let's assume that it was 20% down or or even higher, for rentals, it typically is, there's a lot of money going in, but leveraging, you know, using other people's money, OPM can be a good thing for a business. And I just mentioned, this is a business if you have adequate cash flow. So now we're looking at this going alright, generally speaking, when you buy rentals, you're underwater, you do not have adequate cash flow, the cash flow from rentals is not going to be sufficient to make your mortgage payment, property taxes, insurance, repairs, and everything else. So you have to sell fun that as a 22 year old, in this case, policeman, then I got a problem because I don't think I have a lot of excess cash flow coming. I don't think that person's at the top of their wage scale. So anytime that anything goes wrong, a tenant moves out or repair has to happen. Now I'm trashed unless she has a big inheritance or you know, had a lot of money from somebody somewhere somehow, but most 22 year olds do not. So there's the other problem is, is in this business of owning rentals, cashflow would kill this person. Essentially, the other part of that example is it's an Airbnb. So now we don't have reliable cash flow in a remote area, I can't count on that cash flow coming in, I have to count on that going on that Airbnb being popular, they kind of ebb and flow too. And also I've seen regulations change on Airbnb is depending on where you're at, so that can be an issue too. The other thing is the time involved. Airbnb is very active, that's a lot of work, you got a new tenant every week, um, he pretty much I mean, that can be an issue, as opposed to just renting out to somebody having them pay you every month. So I see all kinds of issues here. Now, again, there's this tweet or whatever we call them these days, right? The 3% down jumped out at me is not possible probably. And so maybe this person isn't taking a lot of risk if this actually was a case, but I'm gonna guess I'm gonna replace that variable with 30% Down 3%. And now I'm saying wow, this person took Max Max risk, better hope the value that went up, but then that jumps out to me it was purchased in 2021. So anybody buying real estate in 2021, probably paid top dollar. Remember how everybody was paying way over ask price and they're bidding wars and all that. So now we got that problem with the person is probably way in the hole. As far as equity probably would walk away from this loan, the bank would have to take it back. So yeah, on the surface, it sounded great. You know, what a great start to investing for this person. But I think I just ripped that one apart for this poor fella. Brian, one
of the things that jumped out at me about this particular man situation is that he used an adjustable rate mortgage of 2.75%. Can you comment about adjustable rate mortgages? I mean, would there have been a better way to go with this?
Yeah, I left that part out if it wasn't bad enough already. Now we've got a situation where an adjustable rate mortgage depending on how long it is where the mother is, three years, five years, seven years. Yeah, you got in 2.75% of the numbers work. Okay. Not great during that time, but what about when they jump up to 7.75% or whatever, and he's painted another 5% of the value just interest, well, that's going to happen. And that's, again, what is really going to put this person under. When I talked to people during that time period, I was really begging him to fix her the rate we'd never seen rates so low, and it's a teaser rate. Yeah, 2.75, you know, well, gee, the fixed rate 3.75, I, I'm gonna get 2.75. Now, you're only going to get it for a little while, and then it's going to jack up and there's nothing you can do. And you're going to ruin the investment because you got a little greedy lock in when you can get a fixed rate loan for long term at a reasonably really low rate, which we had, we certainly had, they're available in 2021. In this example, lock that in. So big mistake was made by going with a teaser rate probably went with the teaser rate just to make the numbers work at all. And now, of course, this is doomed from the start, because of maybe the reasons I already mentioned, but especially because of that adjustable rate mortgage.
Brian, let's assume that the mortgage rate would have been today's fair market rate, let's say it's six and a half 7%. I mean, should he have really counted on that instead of the teaser rate and made the numbers work on that rather than just you know, what looks good on paper may not look good a year from now?
Yeah, no, I think we couldn't be expected to know what was going to happen with interest rates, but again, locking in a fixed rate and then doing your analysis and saying, Okay, what am I what is what could go wrong and making sure I've got that covered? What if Airbnbs aren't as popular? What if I have big repair bills on these rentals, some of those what else and that's what we do with financial planning. Frankly, we do go through these what ifs because we know everything's not going to work out great guys. Here's a guy that got in and everything seemed awesome and 2021 I got this low interest rate rates are gonna stay low, hardly any downpayment. Airbnb is taken off, prices are going up, up up. I can't see anything wrong with this. Well, I can equate that the stock market today. Wow, the stock market, the tech stocks went up, up up. I feel pretty good. Everything's up this year. I'm doing great. What could go wrong? What could possibly go wrong with my stock market investments? Well, what could possibly go wrong with this real estate investor? Pretty much everything. Pretty much everything that could go wrong did go wrong. And we're just talking two years ago, this example is 2021. It's 2023 Right now, and everything that could go wrong went wrong prices dropped rates again, it went way up. Airbnb wasn't awesome. He paid too much for it. And you know, all this stuff that went on, we can equate that to any part of the retirement planning. So as we look at real estate investing, which is what we're talking about right now, there are a lot of things to look at. And I've seen too many people go, they've come to me and they said, Yeah, I'm gonna get into real estate and really, okay, tell me about that. Well, I see everybody making money on real estate. Okay. Do you know anything about real estate? No, nah. Do you know how to buy? Well? Nah. Are you good at fixing them up? Not really, I'm very handy. I'm gonna hire that all that out. What do you bring to the table? Well, nothing. I just know people make money on real estate. Well, this is a business Ionic, I'm gonna start a business. I don't know anything about you know, retail shops selling whatever I'm like, I don't know anything about that, I'm not going to do that. And I would recommend people that don't know anything about real estate, maybe being an active landlord isn't the best thing if you don't know how to buy, right? Manage property, right? Fix it, have a plan, all this stuff that if you're just buying it off the shelf thinking you're gonna make money. While you might, you might get lucky a lot of people did over the last couple of decades. But I would hope you do your research and make sure it makes sense. There are ways to get into real estate without having to be the landlord private, non traded equity REITs, you can get out of being a landlord. Obviously, with the Delaware statutory trust, there are ways to invest in real estate, private equity, different things you can do that can get you there without taking all the risks that this person did in this example. But yeah, what could go wrong. And we have to put that into our plans. We can't say why this year, the stock market's been awesome. Let's just project 10% increase every six months for the rest of my life. And I'll give you a spreadsheet saying you're gonna be worth $30 million. By the time you die. Well, it's not going to work out that way. And we have to anticipate that things are gonna go wrong, even where we don't even know what they are, we have to anticipate that that's why we use the different tools in the toolbox, knowing that things are going to go wrong. I just can't tell you what they are today, Jeff, I just know they're going to happen. And so we have to prepare for that.
And that's a very good point figuring out what could go wrong. And Brian, I know that you have been a real estate investor in the past you've owned some rental properties and really the things that could go wrong that you never even thought about. I would never think that there were people or tenants that would move into your house who would fail to have a shower curtain. I mean, that seems like a basic thing but you had that happen. The floors were all wet. Well, we didn't use the charcoal. We don't have one. But that was a real life story, wasn't it?
Yeah, unfortunately. Yeah. My replacement floors floors are squishy because their their shower curtain fell down or whatever and they never put it back up. Yeah, I had to wear they had great history and all that stuff. And they moved in my house and both decided to become addicted to drugs. And I've trashed the place. Sure, my huh. I didn't anticipate that I didn't, I don't know what it is about my houses that makes you want to do drugs. I thought I fixed them up pretty nice. Well, that's the thing, I put all this money I fixed up nice. I thought, Okay, I'm a good landlord. I'm gonna give him a really nice house and new carpets and paint and all this stuff. And then you get the house back six months later, and they completely trashed it. And you look at your the rents you received during those six months ago, that wasn't even enough to pay for the repairs, I would have been better off just having an empty house, then then renting it on several occasions. And that's why I knew I'm in the wrong business. I am lousy at being a landlord. I help people get out of being a landlord. Now. That's the right business. For me, Delaware, statutory trust for real estate investors are wrong business for me was being an active landlord. And especially today, I can't even imagine that just the thought of being an active landlord is I'd rather have my teeth pulled out without Novocaine. I mean, it's just I do not want to do that.
And there's the misconception, too, that all real estate goes up in value. I've heard that they're not making any more. So if I buy rental real estate, and I'm an active landlord, it's going to go up and up and up. Is that necessarily true?
Oh, gosh, I've seen fortunes lost because just timing. They bought it in 2006 2007. They're toast, I knew a person that inherited $4 million from her dad and decided to go out and buy 15 houses in Phoenix and was going to be a landlord Baron in 2007. And by 2009, all gone all 4 million equity, poof, all the properties went back to the bank. And so just destroy them. There was no diversification. There was no plan, she wasn't particularly good at real estate, but prices were going up up up and wanted to jump on the bandwagon Fear Of Missing Out and all of that. And we see that with stock markets, we see that with Bitcoin, we see that with real estate, we see that with virtually every asset out there. Once it's been going up, up up, people go, Oh, I'm gonna get rich doing this. And well, you might want to back up the train there. Because you don't know what's going to happen in the future. All I can tell you that is happening though is you're paying a lot more for that investment now than you would have back you know, a couple of years ago when you should have been probably been in it instead of buying it when it's an all time high. So we have to be careful about that. And markets are at an all time high right now. They're very high. They're highly priced based on earnings, especially the growth side of the market. There's still a lot opportunity on the value side, I would say but we have to make sure we integrate all the diversification strategies to protect the retirement if you want it to last and you know, getting back to our topic here on the real estate, there's a lot that can go wrong at the entry point, the phase one of being a landlord, there's a lot that can go wrong on Phase Two during the landlord's life as I just shared some stories with a few of my own problems I had when I owned the real estate and the time it took the consternation and the worry and the phone calls every time there's a phone call from the property manager your heart sinks young guys now what shower curtain Huh, what? What are you saying? Oh my gosh, you know, and over the time that someone moved into one of my houses, they had a small little dog and yeah, okay, well, that small little dog died about two weeks later. And they replaced it with a pitbull, and the pitbull jumped the fence and bit someone. And then I got a call saying I'm getting sued. And I'm like, what? I mean, these things happen to me. And I was like, Okay, I don't want to be a landlord anymore. This just is terrible. I know people make money at that. I'm not one of those people, evidently. So I got out of them. And certainly, but yeah, owning investment. Real estate is a job. It's a business. And so treated as such would be my advice here. Brian, if
our listeners are hearing this, and they have real estate, maybe they have investment, real estate, it's actively managed real estate, they want to keep it how do you incorporate that real estate into their financial plan?
Yeah, absolutely. I have a lot of clients that decide to keep their real estate. So I'm not just gonna sit here and go, Oh, if you want to invest in real estate, you need to sell it and do a DST? No, I'm not going to do that. We're going to look at that. So the first thing we do is analyze what is your cash flow from the real estate. So I want to pull two years of tax returns, look at your Schedule II and figure out fair market values and net return after expenses as a percentage of the fair market value. Just make sure that you're getting adequate cash flow, because that can be a big decision tree piece right there. Just talking to a client yesterday about that he has a commercial building. And we figured out he was getting a certain percentage return on that, which was quite good, actually. However, so I told him, Well, why don't you just keep it in a well then he kind of started saying, well, a couple reasons I'm worried about it. One is I have a single tenant, it's a warehouse and they're in an industry that's going through a lot of change. I don't know if they're going to be there and if they move out my cash flow goes from whatever it was 5% to negative because I got to pay property tax and insurance and that would kill my retirement. Boy, that was pretty potent thing to say, Okay, well, then yeah, maybe we should think about it. that he also made an interesting comment because he lives in another state, Hawaii. And he said, you know, much like your business, Brian, you know, being a landlord is 24/7. It's always on your mind. You never get away from it. And I said, Well, I get that I think about my business, not just from eight to five, I think about our weekends, I think about a night I think about it all the time. That's not the only thing I think about, but it's always there. It never goes away. Same thing with real estate. And he says, I just don't want to do that. And so he was taking tenant risk, and so forth. So the question was, you know, what do you do with your real estate? Well, the first thing is to analyze what your cashflow is, is it something that you want to hang on to? Is it something you think fits, if you have multiple pieces of real estate, maybe figure out an ordering of what you want to do with them? Maybe some of them, we need to analyze again, some people say, Well, I don't want to be a landlord anymore, but I don't have much of a gain. I said, Well, then don't do a DST, just sell it pay whatever tax or is. And we can reinvest in a better diversified strategy without as much of your time and involvement. So selling a piece of investment, real estate paying the tax sometimes is the answer selling a piece of real estate and doing a partial DST, and taking out some cash from it to that you pay tax on that can be the answer. There's a lot of things you can do when you have a plan. Now one of the things that often comes up is I'll meet with people, I've got to talk tomorrow with this, I think she's 78 years old, and she's got a whole bunch of rental houses, and isn't sure what to do with them. No, she doesn't want them anymore. One of the things I recommend on those is, as soon as a tenant moves out, that's when you list it for sale. And then we'll do a Delaware statutory trust with that. And over time, you'll have a lots of different DSTS in your portfolio and different types of real estate for diversification different parts of the country, and you can you know, basically dollar cost average out of your real estate doing that, or in her case, I think she's just gonna list them all get out, because she just says want to be the landlord anymore, which I get. And so some people go all in on that. So there, there's a lot of options you can do with your real estate. But the point of this is where we're talking about having a plan and exit strategy for your real estate, we are really good about that. We talked to a lot of people about your business, your business of being a landlord, what is your exit strategy for your business? It doesn't have to be that you have to keep these till the day you die. And it doesn't have to be that you have to sell them all, you know, when you come meet us, it's going to be probably something in between, and we're going to help you work through that. What makes sense? What's your gain? What's your cash flow? What would it be replacements? How do you get out of paying tax? Do you want to step up in basis when you leave it to your your spouse or your errors? What do you want from this real estate investment, and very often says I don't want to worry about it. And I want to have adequate cash flow and I want better diversification. I don't want to pay tax great. We're gonna have a DST discussion for you then. So we definitely would talk to you about them if that's the case, but it may not be the case for everybody or you again, you may have a mixed bag of real estate some you love some you don't love I often ask that is there. Is there anything on here you love? Yeah, these two you hate the Yeah, the other five? Okay, let's have a plan for the other five then and keep the two you love, you know, whatever. So we can we can work with you on that to develop that exit strategy for your real estate. It doesn't have to be today's exit. It can be an exit strategy over five years or 10 years. But just knowing what that looks like most people don't want to own their investment real estate until the day they die through the last couple of years of their life, which where their health or their mental or physical health may not be awesome that you usually want to take care of this before then, Brian, I
want to continue to talk about these real estate exit strategies. You've talked about the Delaware statutory trust, and we'll go into that a little bit more and the 1031 exchange but the question I have is that there are a lot of people listening to the program who may be home flippers I mean, they buy these houses specifically to fix them up and then flip them and sell them can home flippers. I mean, that's an investment real estate, can they use the 1031 exchange?
Generally not. That's a business. And so 1031 exchanges are for investments in real estate that you're holding where it is your business, then it goes on Schedule C and it's no longer eligible as an investment property. But I will caution people when I watch these shows, once in a while we're the home flipper shows on HGTV or whatever. And I always have to chuckle because they go in there and the place is just completely trashed again to replace everything. And they get a contractor's estimate of $35,000. Yeah, that's crazy, silly, just dumb number. Try to get a kitchen remodel bathroom, new floors and a new roof and the Puget Sound for $35,000 Oh my gosh, you wouldn't even get a half a kitchen for that. I mean, that's not going to happen. And so yeah, they made $5,000 Flipping this house I might now okay, that's because you put in two months of your own time which is time worth. Let me punch it out here it's worth about six bucks an hour okay, if you want a job a six bucks an hour flip a house you Let's be very careful about house flipping and don't believe the numbers you're seeing on HGTV. I don't know anybody that's flipping houses and really making money. There might be a situation here and there where you're very handy, you're gonna live in it, you're gonna fix it up, you know, and do the work yourself on your own time where it has a reasonable return on investment of your time, which is worth something. But for the most part, I would discourage that. And if you did, it's probably not qualifying for 1031 exchange.
So what does qualify for a 1031? Exchange? Brian if house flipping does not?
Yeah, so a lot of people say, Well, why do I do a DST when I could just do a REIT or whatever, and then they won't, because REITs don't qualify for 1031 exchange. So you can't, when you sell investment, real estate and you want to do a 1031 exchange, you can exchange into another actively managed piece of real estate that you buy, you sell your property, you have 45 days to identify your replacement property. Good luck with that one is difficult to find a really good investment in 45 days isn't being bid up by other people that you can say, you know, before the 45 days is up, yeah, this is the one I'm going to end up with and hope it passes inspection and hope it goes through bank financing, or whatever you need to do to secure that from the date of sale of your of your property. So you can go do that you can continue to be a landlord, but most people I'm talking to they've had their share of being a landlord for decades. They don't want to be anymore. And so they can go into a Delaware statutory Trust, which can be multiple properties. Let's say you sell a piece of investment, real estate for a million dollars. And you say, Yeah, I want to earn 50,000 In each of four different DSTS. I like this apartment DST and this self storage DST in this grocery store DST, and this net lease DST, or student housing, whatever, and so they diversify that way. And then there are a fractional owner, is there any one other way to do a 1031? Not really, again, you can't sell your piece of real estate and go into a REIT or a partnership or an S corp or or other form of ownership and have a qualify for 1031 exchange. So it's either you're going to continue to be an active landlord, or you can be passive through Delaware statutory trusts very popular, especially with my 60s 70s 80 year old clients. They love the idea of retiring from being a landlord diversifying their investments, getting cash flow and newer properties professionally managed by someone other than yourself, you'll never get another phone call or capital call or anything like that. So they can be a wonderful solution for folks wanting to retire from being a landlord.
Well, Brian, I'm sure that people listening to this who own active real estate or they're thinking of an exit strategy certainly may have questions for you. They're at Madrona, financial and CPAs. So if you do have questions about real estate and your exit strategy, I invite you to call this number, it's 833-673-7373. So you can request your Madrona 30 Point analysis. If you're tired of being a landlord, you want out that I want you to call this number and possibly discover what your life could look like without the stress of your properties. Now, once again, you've got to have at least $500,000 or more investable assets to qualify for our Madrona 30 Point analysis. But those who do qualify will be able to enjoy this conversational analysis intended to dynamically cover a wide range of topics based on your unique situation, so that you can proactively adjust your financial planning strategy to help avoid capital gains taxes on the sale of your properties. Now, as a bonus, we're gonna be sending you a copy of Brian's book seven steps to a successful retirement, when you call, you're gonna get a friendly voice on the other end of the line, we'll ask you a couple of basic questions. And then your information will go to our team, who's going to reach out to you within one business day to schedule your 30 Point analysis. Now, once again, it's not going to cost you a dime, totally complimentary. But this 30 Point analysis could be just what you need to help uncover several blind spots while improving your overall quality of life for the next 30 plus years. Once again, that number is 833-673-7373. That's 833-673-7373. And you can make that call right now.
Well, Jeff, let me jump in with with something that has happened a number of times where somebody I'm talking to about their real estate, they're not necessarily sure why they came in and they want to talk about it because he hear it hear me on the radio and they say, you know, actually, it's not that bad. I It's okay, being a landlord. I don't mind it too much. And I'm not sure why I'm here talking to you about it, because I'm probably okay with my properties. I said, Okay, well, that's fine. I'm not here to convince you otherwise. But let me ask you this. If we're having this conversation five years from now, or 10 years from now or whatever, pick a number does your response change? And then very often they're going oh, gosh, yeah, you know, five years I I'm gonna have some I haven't replaced a roof on a couple of my houses. That's gonna be really expensive price has gone way up on roofing materials and roofers and all of that I probably gonna have to spend 60,000 on that. Gosh, I've got some health issues right now and I know As you know, my wife wants to go on more vacations, but I can't get away because I always got to, you know, I get phone calls. As soon as I get on that plane, that's when my phone starts lightened up with with problems from my tenants and, and I really can't get away. And I think about this stuff all the time, and I want to spend more time doing something else. And so they start actually convincing themselves of Gosh, I'm okay today, but in five years, I don't know that I'm going to be okay. I don't think this is gonna be awesome, especially when comparing, you know, there's pros and cons of everything. There's pros, just keeping that real estate five years, maybe, but what are the cons? What are the pros and cons of a DST now or in the near future, relative to five years or even 10 years? You know, if I'm talking to a 78 year old, and he's going well, gosh, in five years, I don't know my health, but I'm pretty sure in 10 years, I'll be 88 I don't know that I'll be awesome landlord at 88. Or be able to climb that roof and fix the gutter or whatever. I'm gonna gosh, I hope not. Maybe we ought to think about making those changes now, as opposed to going forward. So often, a conversation is not about how things are today. It's about picturing where you want to be in the future, whether it's five year 10 year plan, whatever, and creating that exit strategy now, knowing that things change over time, and if you if you know, things are inevitably going to change not for the better, then now might be a great time to have that conversation.
Thanks, Brian. I want our listeners to call and request their Madrona 30 Point analysis, don't wait until it's too late and pick up the phone right now and dial 833-673-7373 That's 833-673-7373. So you can discover additional ways to potentially improve your quality of life that could last 30 plus years. And particularly if you're interested in real estate, we've been talking about a CPAs take on the strength of the market today and the three phases of a real estate investor and why that last phase, the exit strategy matters so much once again, don't miss the show by subscribing to growing your wealth with Brian Evans, wherever you get your podcast. Ryan, we're out of time for this week. I want to thank you for your time and most of all, thank our listeners here in the greater Puget Sound area for listening to us. For Brian Evans. I'm Jeff shade. Have a great weekend. We'll talk to you again next week with another edition of growing your
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