Thoughts from the Desk of Bob Repass…
Most of you probably know I am a huge football fan. I openly talk about the triumphs and tribulations of my Dallas Cowboys and I’ve been known to make a few “friendly” bets on the Cowboys with some of you as well.
What you may not know is that my first real sports passion is baseball. I grew up playing baseball from the time I could walk and played throughout high school and even dabbled with a little “semi-pro” ball while in college.
I am fortunate that my wife Angie enjoys baseball (and all sports) and when we have traveled over the years we have attended games at many of the major league ballparks across the country including some of the classics like Wrigley Field, Fenway Park, Dodger Stadium and both the “old” Yankee Stadium as well as the “new” Yankee Stadium.
We have also enjoyed attending spring training games in both Arizona and Florida. As a matter of fact, last month we attended a game in Palm Beach, Florida at the spring training facility shared by the Washington Nationals and the Houston Astros.
For baseball fans there’s nothing like Opening Day! It represents a fresh new start and hope is eternal for every team and every fan that “this is going to be our year!” Of course, once the season gets into full swing that hope dissipates for most and the mantra “wait ‘til next year!” can be heard at many ballparks.
“You always get a special kick on opening day, no matter how many you go through. You look forward to it like a birthday party when you’re a kid. You think something wonderful is going to happen.” – Joe DiMaggio
This year’s opening day brought to mind that as the fund manager for our capital funds here at Colonial, we have an “opening day” of our own when we start each new quarter. We report our results to our investors and pay out our dividends on a quarterly basis. So the start of each new quarter represents a fresh start. We have the benefit of building on the foundation we have built over previous quarters just as teams like my New York Yankees do each year, but each quarter stands on its own.
Wow I now realize I have the benefit of four Opening Days each year! How about you? How often do you measure your business and make a fresh start?
It’s time to Play Ball!
Creative Seller Financing Chases Away the Elephant in the Room
by Eddie Speed
Today’s real estate investors have a big, fat elephant plopped down right in the middle of the room, and this elephant laughs at traditional methods that worked in previous years to get him out the door.
Here’s a quick rundown of the tight market conditions that make up the jumbo-sized challenges for today’s investor:
- To sell a property you first have to buy it, and finding a seller willing to accept a discounted price is rare as hen’s teeth.
- Investors make an average of 20 offers for every one property they buy. That’s a 5% success rate.
- Investors used to be able pay 65¢ on the dollar for a property which left room for profit at the end. Investors are now darn lucky to buy a property at 75¢ on the dollar which means they’re right against the ceiling on what they can pay and still make a profit.
- It’s more expensive to locate and connect with sellers. Lots of established investors with sophisticated marketing spend up to 50K every month on direct mail to find sellers. So if you’re just getting started that’s what you have to compete against.
I was at a recent mastermind of top-level real estate investors. Every single person there was a true rock star at what they did; a real “Who’s Who” in the real estate world. They took turns speaking, and they were all moaning about these problems, and how they’re pulling their hair out to buy a property below the asking price. I was the only true note guy in the room, and my turn to talk was coming up. As I listened to all these stories, I had an “aha moment’ and couldn’t wait to share it.
When my turn to talk came, I floated my big idea: “If your offers keep getting turned down, why not offer 100% of the asking price?” That got their attention (probably because they thought I was crazy).
Then I went on to say, “Let the seller set the price, but you set the terms.”
That bought me a little more time before they called the guys in the white coats to haul me off to the looney bin.
I suggested seller financing was the answer to removing the elephant. I explained that most investors – even the bigshots like themselves – have a limited understanding of the scope and potential of seller financing. They think it’s something you only do when you’re the seller, but I’ve opened the eyes of countless investors to see the value of seller financing when you’re the buyer.
THERE’S A LOT MORE TO NEGOTIATE THAN JUST THE PRICE
Investors need to think beyond the selling price as the only thing on the table that’s being negotiated. Sure, the price has to be something the buyer and the seller both agree on, but when you as the buyer can get your seller to consider financing the sale of their property, you’re not just making a purchase, you’re architecting a deal that will be in your favor.
When a seller gets 20 offers on a property, in most cases he’ll pick the one that meets the asking price. That means he’ll pick you. When the terms of the deal are structured in your favor, it opens up a whole new world of profit potential.
Again, let the seller set the price but you sent the terms. By the terms I mean all those things both parties agree to regarding how the loan will be structured and paid back; things like the down payment, interest rate, length of loan, first and second liens, balloons, partials, and so on. (These are the things we teach in NoteSchool.) There are a hundred creative things you can do to set favorable seller financing terms even when you’re the buyer. Whether you’re buying a house, apartments, raw land, or commercial property, creative seller financing can make the difference between a deal or a dud. I’ve learned to never underestimate the potential of creative solutions, but it’s easier to be creative if you already have experience.
I went on to explain things further to the group: “There are basically two types of problems every seller has. They either have a real estate problem or a money problem.”
A person with a real estate problem has a property they don’t want to own. They either inherited the property, or it’s run down, or the owners are divorcing and can’t saw the house in two, or they have to move to a new city, etc.
A person with a money problem is desperately holding out for every penny on the highest possible selling price because they need money to retire, or buy a bigger house, or pay for college, or all those other things money comes in handy for.
You have to determine if your seller has a real estate problem or a money problem. Trying to solve a real estate problem with a money answer is like asking a girl to a baseball game when she really wants to go to the symphony.
Before the smart investor floats an offer, they have to understand the type of seller they’re dealing with and what their pain is. When your offer includes a seller financing plan that is custom tailored to solve your buyer’s specific problem, you’ll have an edge over the other offers so you’re a lot more likely to ink the deal.
As I spoke to the real estate experts and explained more about how seller financed notes can solve their problems, I saw smiles spreading all around the room. Lightbulbs were going off in people’s heads as they were each having their own “aha moment.” Instead of thinking I was crazy, they were thinking how crazy it would be not to add seller financing to their business plan.
YOU’D BE AMAZED WHAT TERMS PEOPLE WILL AGREE TO
Here at Colonial Funding Group, we have a Pricing Desk where we review every deal people bring to us, and I’m talking thousands of deals every week. We look at deals from all sources – banks, mortgage companies, broker networks, portfolio owners, and individuals. This gives us a very close look at what exactly is going on in the marketplace day in and day out. We’re seeing the general terms that the population have agreed to, and from our vantage point we see everybody’s cards in the game. We’ve been doing it close to 40 years, with over $3.5 billion worth of notes. I doubt anybody has a better finger on the pulse of what is going on in the world of seller financed notes. That’s why when we give an opinion, it’s based on experience, not theories.
We see deals all the time where we ask: “Why would anybody agree to this?” Here’s a shocking example of what I mean: 19% of seller financed notes were carried at 0% interest! Plus, 43% of notes were carried at 5% interest or less.
It shows that sellers can be amazingly receptive to the terms you offer as long as you give them what they want the most – their selling price.
When you know how to structure notes, it gives you a knowledge advantage. But I say this with utmost conviction: I’m not teaching people to buy notes they don’t intend to pay back. We must be ethical.
YOUR PLAN B MAY SOON BECOME YOUR PLAN A
I’ve seen real estate investors reluctantly dip their toe into the world of seller financing because they see it as a Plan B. But this Plan B can easily double your profit without increasing your marketing costs. Once investors see how profitable seller financing can be, and how it can revolutionize their business, and how dad-gum fun it is, it often becomes their Plan A on all their deals moving forward.
Tax Reform for Roth IRA
by Martha Speed
It’s that time of year again and the tax filing deadline is upon us. If you didn’t contribute to your IRA last year April 17th, 2018, the tax filing deadline, is the last date to make the contribution. More than twice as many IRA contributions are made in April of the following year than in January. It’s not unreasonable as an investor’s ability to contribute to a Roth IRA or Traditional IRA depends on their adjusted gross income. For many other investors the delay is just human nature. It’s hard to find the money, confusion surrounding the tax codes, income limits, age limits and what type of account you should consider. All of the rules and regulations can be overwhelming.
The two main changes to the 2018 tax reform in regard to retirement accounts were one, loan repayments to qualitied plans, such as 401Ks, extending the time frame for you to repay the loan and two, removal of the ability to re-characterize Roth IRA conversions. Under the previous rule you could simply undo a Traditional IRA to Roth IRA conversion if it caused unwanted tax liability by sending the money back to the Traditional account. Therefore, avoiding any unwanted tax issue from assets that appreciated in value, this is called re-characterization. Tax reform has removed the ability to re-characterization any Roth IRA conversions starting in 2018. You can still re-characterize your 2017 Roth IRA conversion up until the tax filing deadline of October 15, 2018.
The new tax reform has not completely removed re-characterizations from the bill; you can still undo a contribution to the wrong type of account. For example, if you make a contribution to a Roth IRA early in the year and then your earnings exceed the phase-out limits, you can re-characterize to a traditional IRA without being subject to an excess contribution penalty tax.
The most beneficial provision you should take advantage of in 2018 is creating a Roth IRA via the backdoor- a traditional IRA converting to a Roth IRA account. The caveat is if you have additional IRA accounts you’ve never paid tax on, for example, a rollover IRA from a former employer or multiple IRA accounts. In this case the IRS pro rata rule comes into play, meaning the tax on your conversion depend on your whole IRA pool, not just the new account.
If your tax bracket is lower due to the new tax laws, 2018 is the year to make the conversion from a Traditional IRA to a Roth IRA which remains a valuable planning option. Take advantage of the lower tax liability with the following precautions!
- Speak with your custodian or a professional who is knowledgeable about conversions. There are different pro-rata rules for a Self-Directed IRA VS employer retirement plans such as a 401k.
- If you are holding multiple IRA assets consult a professional in regard to the IRS pro rata rules. It’s crucial to think twice if you have pools of IRA accounts.
- If you are required to take a required minimum distribution (RMD) from your Traditional IRA in the year you convert, you must do so before converting to a Roth IRA. RMD amounts are not eligible to convert to a Roth IRA.
- Converted assets in the Roth IRA must remain there for the five year clock to avoid penalties and taxes at which time a distribution is tax-free.
- RMDs are not required during the lifetime of the original owner.
Deductions for Business Meals – Good News!
by Jeff Watson with Permission
Late last week I began reading information from various credible tax authorities indicating that Congress had collectively slapped their hands to their foreheads when they realized that the Tax Reform Act of 2017 had disallowed deductions for business and client meals when that was not what they intended. We are not exactly sure how the lawmakers can undo what they have done in the tax code, nor do we know when they will be able to do it; but experience says if there is a will, they will definitely find a way to correct this error.
Here is what I am doing. I am continuing to track and document client and prospect business meals as I have done over the past several years. When I am in Washington, DC in the next month or so, I will casually mention to the various elected representatives and their staffers when appropriate the importance of the need to clarify or codify that business, client and prospect meals are indeed tax deductible. Then I’m going to hope they get their act together and make it retroactive to January 1, 2018.
We have to think about this from a real-world perspective. It will have to be done in a way that doesn’t look like partisan politics or give one party the opportunity to say, “Oh, they’re caving in for the ‘rich’ business owners.” I expect to see this done in a low-key, technical way rather than in some piece of revisionary legislation. Maybe inside tax reform 2.0?
Here is a strategy I learned from a reliable source as to what I am also doing to further document the potential deduction of business meals to comply with the current portions of the code just in case Congress doesn’t get this problem fixed. You need to know that employee meals for the convenience of the employer remain 50% deductible, as well as employee meals for required business meetings and meals while traveling overnight. Those areas are especially important for someone who travels as much as I do.
When it comes to documenting your meals for overnight travel, make sure you have a hotel bill or other proof of travel for the same dates as those meals. For meals for the convenience of the employer and required business meetings, make sure you have adequate documentation for those as well, such as the date and purpose of the meeting.
Keeping records is essential!
Inflation, Your Retirement & Purchasing Power
By: Ryan Parson
You hear it all the time: you should make sure your retirement savings at least keep pace with inflation. But what is inflation and how does it really affect your retirement savings? Let’s explore.
In simple terms, inflation is defined as an increase in the general level of prices for goods and services. Deflation, on the other hand, is defined as a decrease in the general level of prices for goods and services. If inflation is high, at say 10% – as it was in the 1970s – then a loaf of bread that costs $1 this year will cost $1.10 the next year. Inflation in the United States has averaged around 3.29% from 1914 until 2016, but it reached an all-time high of 23.70% in June 1920.
Most will remember the high inflation rates of the 70s and early 80s. For comparison purposes, the inflation rate in Venezuela averaged 32.47% from 1973 until 2017, reaching an all-time high of 800% in December of2016.
So how does inflation affect your retirement savings? The answer is simple: inflation decreases the purchasing power of your money in the future. Consider this: at 3% inflation, $100 today will be worth $67.30 in 20 years – a loss of 1/3 its value. Said another way, that same $100 will only buy you $67.30 worth of goods and services in 20 years. And in 35 years? Well your $100 will be reduced to just $34.44.
How is Inflation Calculated?
Every month, the Bureau of Labor Statistics calculates indexes that measure inflation:
- Consumer Price Index – A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of
- Producer Price Indexes – A family of indexes that measure the average change over time in
selling prices by domestic producers of goods and services. PPIs measure price change from
the perspective of the seller.
How the Federal Reserve Attempts to Control Inflation?
Up until the early part of the 20th century, there was no central control or coordination of banking activity in the United States. In fact, the US was the only major industrial nation without a central bank until Congress established the Federal Reserve System in 1913 with the enactment of the Federal Reserve Act.
With the Federal Reserve Act, Congress set three very specific goals for the Fed: to promote maximum sustainable employment, stable prices, and moderate long-term interest rates. In order to help the Fed stabilize prices, Congress gave the Fed a very powerful tool: the ability to set monetary policy. And one way the Fed sets monetary policy is by manipulating short-term interest rates in an effort to control inflation.
If the Fed believes that prevailing market conditions will increase inflation, it will attempt to slow the economy by raising short-term interest rates – reasoning that increases in the cost of borrowing money are likely to slow down both personal and
The flip side is true too: if the Fed believes that the economy has slowed too much, it will lower short-term interest rates in an effort to lower the cost of borrowing and stimulate personal and business spending.
As you might imagine, the Fed walks a very fine line. If it does not slow the economy soon enough by raising rates, it runs the risk of inflation getting out of control. And if the Fed does not help the economy soon enough by lowering rates, it runs the risk of the
economy going into recession.
Currently, the Fed believes that “inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Fed’s mandate for price stability and maximum employment.”
What All Investors Need to Remember
Therefore, it is imperative that your long-term wealth strategies account for inflation and that you prepare for a decrease in the purchasing power of your dollar over time. The higher your net worth, the greater risk of inflation you have.
In The Spotlight
Register Now for the 2nd Annual Seller Finance Coalition Fly-In
Special Announcement – the dates for the 2nd Annual Seller Finance Coalition’s fly-in have been changed to May 9th & 10th! We will be back on the Hill this May to support HR 1360 The Seller Finance Enhancement Act. Please plan on joining us! We need you there!
Register now to be a part of the 2nd Annual SFC Fly-In on May 9-10, 2018!
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“Let’s go invent tomorrow instead of worrying about what happened yesterday”– Steve Jobs
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