August 3, 2021

Thoughts from the Desk of Bob Repass…

As the great Yogi Berra once said, “It’s like déjà vu all over again.” Who remembers the Hardest Hit Fund Program?

The Hardest Hit Fund was established in February 2010 to provide targeted aid to families in states hit hard by the economic and housing market downturn. Eighteen states and the District of Columbia were chosen either because they were struggling with unemployment rates at or above the national average or home price declines greater than 20 percent.

The Federal Government allocated the funds, however; each state housing agency was responsible for distributing them to struggling homeowners. Needless to say, some states did a much better job of getting the money in the hands of folks that needed it than other states.

As a matter of fact, according to the USA Today by the end of 2011, only 3% of the funds had been spent.

“If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience.” – George Bernard Shaw

Fast forward 10 years and the situation we’re faced with is similar as federal eviction moratoriums have expired as of July 31st. For almost a year and a half, landlords have been prevented from evicting tenants for not paying rent as long as their inability to pay was due in part to the COVID-19 pandemic. Nationally, about 16% of adult renters live in households that are behind on rent payments, U.S. Census surveys show.

Landlords, of course, are still responsible for the mortgage, taxes, insurance, repairs, and other maintenance on their rental properties. A recent interview with a landlord who owns a two-family row house in Brooklyn, NY stated “I’m owed over $65,000, my tenant hasn’t paid since August of 2019.We can’t take them to court, we still have to provide maintenance, heat, hot water, gas… and it’s coming right out of our pockets.”

Congress authorized more than $46 billion in aid to renters through two bills passed in December and March. However, just like with the Hardest Hit Fund Program a decade earlier, the job of distributing the funds fell on state and local governments. As of June 30th, only $3 billion of the funds have been disbursed to tenants or landlords.

Congress made a last-ditch effort to extend the federal moratorium once again but failed to reach consensus before heading home for the August recess. Meaning unless they are called back for a special session, it will be mid-September before they could take any further actions. Ironically, what no one is talking about is how state and local governments have failed to quickly and efficiently distribute the tens of billions of dollars allocated.

The question remains “How do we get the funds into the hands of the tenants and landlords as soon as possible?” The answer is not to keep kicking the moratorium can down the road, the answer is pressuring the states and local governments to do their jobs and remove obstacles to tenants accessing the funds and get the money disbursed. I suggest fining the states that are unable to do this. My guess is by turning the spotlight on them, they will figure it out.

Bob Repass
Managing Director

 

Stay up to Speed with Eddie

IT’S DECISION TIME, AND NOT TO DECIDE IS TO DECIDE

by Eddie Speed

Will Rogers once said: “The difference between death and taxes is death doesn’t get worse every time Congress meets.”

Congress is still meeting, and we have a new President. They all must be big fans of Robin Hood because they’re determined to raise taxes on the rich. This is why lots of top earning investors will soon be looking back on 2021 as “the good ol’ days.”

America first started charging income tax in 1913 and started taxing capital gains in 1916 (with a top rate for both of 7%!). From what sources tell us, the new President along with Congress have their sights set on raising capital gains taxes. (Capital gains are income earned when you sell an asset for more than you paid.)

The plan in Washington DC is to double the current capital gains tax on those with income over $1 million. The top rate now is around 20%, but they want to raise it to 39.6% plus a 3.8% Medicare surtax, making the top rate 43.4%.

Will this increase make Biden the hero of Nottingham, or just disrupt the real estate investing world to bring doom and gloom most people haven’t realized yet?

I talk to lots of investors, some of which earn above the $1 million mark and others are below. Most are not thrilled about the dark cloud of higher taxes. But this cloud is lined with silver, and I’ll explain two ways to mine it out.

SILVER LINING #1

As any real estate investor knows, there are seller’s markets and there are buyer’s markets. But in today’s market the stars are aligning for this to be the ideal year to either sell OR buy IF you can utilize creative financing with terms in your favor. It’s all being driven by the proposed increase in capital gains tax.

If you’re in the $1 million earning category and you own multiple properties, it seems logical (with prices as high as they are) that you should consider taking some profit off the table. Your rental properties have likely appreciated in value, so if you sell now, you’ll pay half as much in capital gains taxes compared to selling next year. But whether you make more than $1 million or less, could soon be losing equity should more properties flood the market and prices soften with the current on-fire market, it could be a good time to take money off the table by cashing in your equity.

When you offer seller financing to your buyer you can get money today (as a down payment from a well-qualified buyer) plus predictable long-term income to replace your rent checks. Another benefit is that you can eliminate the landlording headaches of repairs, property taxes, or deadbeat tenants. If your buyer defaults (which is not likely by choosing a well-qualified buyer), the house is your security for the loan.

But it’s also a great time to BUY because many landlords are gaining motivation to sell—especially hobbyist landlords who only own a handful of properties. They’re eager to get out of the hassles of landlording. (It’s never as fun as it looks on HGTV!) As long as they get their asking price, they are by far the most likely candidates who are willing to carry the financing because the monthly payments will replace their rental income. Just make sure to structure the terms in your favor.

That’s Silver Lining #1. But there’s also another layer of silver inside this cloud—and it’s even better than the first.

SILVER LINING #2

Silver Lining #2 is that you can spread out your capital gains tax payments (on the current low rate) over the next fifteen years with no interest or penalties.

This technique is called the “installment sale method,” and it’s been around for years. Seasoned real estate investors know about it, but it’s probably not on the radar of the hobbyist landlord. Your capital gains taxes are paid over time as you receive the payments. You can utilize the installment sale method whether you make way over a million or way less. I don’t claim to be an accountant and I’ve never played one on TV, but lately I’ve chatted with fifteen of the most savvy, real estate investor strategists that I know in the industry. Every single one is in complete agreement on doing this BEFORE year’s end.

Let’s say you bought a property years ago for 100K and sold it for 250K, so you made 150K. (Yay!) Your capital gains tax on the 150K at today’s rate of 20% would be $30K. You could pay it all at once if you want to, but by using the installment sale method you could spread out the gain and pay taxes on $10K per year which means you’d pay the IRS $2K a year for fifteen years. You’d be paying today’s tax bill with tomorrow’s dollars (which are likely to shrink due to inflation). You can also be earning interest on that $30K (minus the $2K annual withdrawals) over the years to come.

One quick sidenote. Tax laws have historically locked in the rate for the installment sale method to the year you took the capital gain. All the experts I’ve consulted with say it would be “unprecedented” for the current law to change, but it can’t be ruled out with 100% certainty.

When you calculate your capital gains taxes you can also reap the benefits of depreciation on your property. (This can be complicated, so find an accountant who has experience in the area of rental property income.) Here’s a simple explanation of the three ways to depreciate:

  • Regular long-term depreciation: Most residential rental property is depreciated at a rate of 3.636% each year for 27.5 years.
  • Accelerated depreciation: This method allows greater depreciation expenses in the early years of the life of your asset.
  • Personal property depreciation: This covers items that are sold along with the house such as a refrigerator, stove, washer/dryer, etc.

People mistakenly assume that all three types of depreciation have to be figured in for the year you sell the property. But that’s not correct; it only has to be applied in that tax year IF you use the Accelerated depreciation or the Personal Property depreciation. The Long-Term depreciation allows you to spread it out as part of the installment sale method to continue to stretch-out your taxes.

I mentioned earlier that most hobbyist landlords who sell their properties don’t know about applying Long-term depreciation under the installment sale method. So, if you, as the expert, can clearly explain that to them when you’re making an offer on their property, it’s a strategy they probably haven’t considered, and it can pour jet fuel on their desire to close the deal.

The funny thing is that you’re claiming depreciation on something that has increased in value. That’s where “recapture” comes into play. It’s the process the IRS uses to collect taxes on the gain you’ve made from your income property and to recover the benefits you received by using depreciation to reduce your taxable income. Say you made $50K in profit on the sale of a property, and you took depreciation. However, the IRS says you took a tax advantage you didn’t need—you said its value depreciated but it went up. You got the tax benefit, so the IRS recaptures that depreciation. To put it simply, “The IRS giveth and the IRS taketh away.” Fortunately, you can spread that part of your recapture out over time just like your capital gain on the sale.

THIS IS DECISION YEAR

This is decision year for investors who want to buy properties from motivated sellers. It’s also decision year for anybody who owns a rent house and plans to someday sell the property. If they decide not to sell now, the property may go up in value, but the tax rate is doubled (if you’re in the million-dollar club). How many more years would you need to keep a property to make that math work? How many years would it have to appreciate to make the same net profit as selling this year?

Part of being an entrepreneur is to discover voids in the market and provide creative ways to fill those voids. There are some massive voids suddenly appearing now because of the proposed tax changes, which make it the perfect time for investors to buy and/or sell properties with creative financing.

Necessity may be the mother of invention, but creativity is the father.

 

Capital Markets Update

How Good Is the Advice You’re Getting?

By: Ryan Parson

In our work with both advisors and high-net-worth clients, we see a troubling trend: Too many successful, wealthy individuals and families are getting poor financial advice.

They are simply not getting the guidance, services or products that are most appropriate to help them achieve their key financial goals.  So, it’s a good time to ask yourself: How good is the financial advice I’m getting these days?

Four types of advisors

We have been able to segment professionals—financial and legal—into four types, based on their intent and expertise. Of course, you want to work with experts who are committed to your well-being and agenda, and who are extremely technically capable. These are advisors we call consummate professionals.

The other three types are best to avoid—which isn’t always easy.

Pretenders truly want to do a very good job for their clients. They have the best of intentions. The problem: They lack the knowledge and capabilities to do so! Pretenders want to do well, but they “don’t know what they don’t know.”

Regrettably, Pretenders comprise the vast majority of professionals, in our experience. Most financial advisors simply are not familiar with many of the more advanced wealth-building and wealth-protecting solutions in existence. And those who are often struggle to implement them as well as possible.

Advisors who are Pretenders are not bad people. To the contrary, they tend to be intelligent, hardworking, and well-meaning. They want to do what is best for their clients, but from an objective vantage point, they are just not capable. Their earnest, hard work does not change the fact that a great many of them probably are not able to provide you with the high-level, sophisticated tools, strategies and products that are almost always necessary to become meaningfully wealthier, and they probably aren’t adept at the strategies that are so critical to protecting your wealth.

Predators are criminals. Their objective is to separate you from your wealth. Using cunning, guile, and duplicity, they seek to capitalize on the greed, naiveté, or goodwill of their intended victims. Predators may or may not be technically sophisticated. However, they’re superbly capable of being manipulative and building rapport and trust.

Unfortunately, it can be difficult to spot Predators. They tend to be narcissistic and very clever grifters. Predators can be superficially extremely charming and are usually quite adept at faking caring and concern. Unknowingly engaging a cunning Predator as an advisor potentially can be disastrous to your wealth.

Exploiters are often quite technically adept—highly skilled in advanced financial strategies. The problem is that the financial and legal strategies they often turn to are technically legal but highly questionable. Thus, there is often a good possibility that the strategies they advocate will blow up on you—often years after you’ve taken their advice. Put simply, Exploiters are not looking out for your best interests.

Exploiters can also be hard to spot, because of their technical skills and because the complex strategies they often promote make it hard for other professionals to effectively question what they are proposing. When Exploiters are also adept at building trusting relationships, they can be extremely persuasive—and therefore potentially very dangerous to your financial security.

Without question, you want to work with a consummate professional. The issue then becomes how to find one.

Finding a consummate professional with whom to work

There are a few ways to help give you greater confidence that you are working with a consummate professional.

The way that most high-net-worth investors find exceptional strategic advisors is via introductions from professionals with whom they work. Example: If you need an exceptional money manager, your accountant may know trusted experts to which he or she can make an introduction. Or if you have an estate tax issue for which life insurance is the best solution, your trusts and estates lawyer likely know leading life insurance agents.

Going to professionals who have proven themselves to you can be a very powerful way to find other consummate professionals. When accountants or lawyers refer you to other advisors, they are putting their reputation and professional judgment on the line. This is not something they are likely to do unless they feel the advisor is a consummate professional.

Another consideration is whether the advisor is a thought leader. That is, he or she is recognized as a leading authority by other professionals, entrepreneurs, high net worth individuals, and even competitors. By identifying true thought leaders, you increase the likelihood of working with some of the most knowledgeable and experienced professionals in their fields.

If you’re not sure

We find that many successful, wealthy individuals and families recognize when something feels wrong—or at least, not quite right—about their professional advisors. For example, entrepreneurs with years of experience building and growing a financially strong company are often able to spot when they may not be getting enough financial value—or when they may be dealing with someone whose advice could get them into trouble down the road.

One of the best ways to deal with a situation where you’re just “not completely sure” or you “feel a little uncertain” is to conduct a stress test. This is a process of critically evaluating key aspects of your current financial situation and how they are being managed. Or it may involve carefully assessing a particular strategy or technique you are considering and “putting it through its paces” before deciding whether to move ahead.

Stress testing gives you the opportunity to correct mistakes or use solutions and strategic techniques that can do a lot more to help you accomplish your goals. Simply put, stress testing often makes a lot of sense if you want to avoid advisor who are Pretenders, Predators or Exploiters.

To your financial independence,
Ryan Parson

The Spotlight

NoteExpo 2021

We’re excited that NoteExpo 2021 will once again be meeting in person this November 5-6! We can’t wait to catch up with all the folks in the industry we haven’t seen since the start of the pandemic.

But this NoteExpo is lot more than just the chance to see old friends. We’re putting together a powerhouse lineup of top leaders in the note industry. If you want to know what’s coming down the pike and how your investments will be affected, you need to be there!

NoteExpo 2021 is not just another real estate conference. It’s the industry’s TOP event for note investors at every level of experience. Our outstanding speakers are subject matter experts who will be sharing insights and valuable information you’re not likely to find in the mainstream press.

They’ll cover important topics that affect note investors like:

  • Upcoming capital gains tax changes
  • Loan servicing and compliance
  • Default and foreclosure guidance
  • Turning big profits from nonperforming loans
  • Upcoming trends on pricing and inventory availability

The entire note industry looks forward to NoteExpo every year because it’s helps you adjust your investment strategies for the year ahead. This is our 8th NoteExpo, and it’s going to be the best by far!

In addition to top speakers delivering insights into the future of note investing, we also have dozens of vendors, lenders, and exhibitors. You can make more new contacts in less time than anywhere else!

CLICK HERE and use Promo code Expo to secure your spot!

The Trading Corner

Negotiating with Note Owners

By: Scot Tyler

The last few months we have been discussing “why a seller should sell their loan”, “how is your follow-up” and really dialing in those conversations and negotiations to sharpen up our skills and lock up more deals. I’m really blessed in my position here at Colonial as I have access to years and years of industry knowledge just like our NoteSchool members do with all the training materials, videos, documents, and articles available at our fingers tips. Last week I was scrolling through some of that material on members.noteschool.com and ran across an article that Mr. Eddie Speed wrote years ago regarding “Negotiating with Note Owners”. Although this article was written 15+ years ago Eddie’s fundamental truths in dealing with a note seller are still accurate in today’s market a decade plus later.

  • “Happy sellers always have a say in the negotiation process – everyone wants options, and if they choose an option you have provided, they feel that the choice was theirs.” – ES

How true is this fundamental! In past articles we addressed if you are not offering partials and or creating a purchasing option specific to the sellers needs you are leaving deals on the table. If you are asking the seller the right questions, what their motivation is, what are your immediate personal/cash needs, listening and not talking through their response, then you are able to create a selling option solely catered to their needs. How many sellers would say they were NOT part of the negotiation if you delivered pricing to them this way?

  • “Don’t let negotiations turn into bartering – rather, re-emphasize the value in what you are offering. Always be prepared to provide non-monetary benefits to the seller.” – ES

What non-monetary are you offering your note sellers? Is it your service and your ability to make decisions quickly without having to get others approval? Is it your reputation in the industry? Make sure you identify your personal non-monetary benefits before your next call. Make a list of the top 10 reasons why a note seller should do business with you. When delivering your offers, we should all be ready for a counter offers. Have those top reasons ready and use them as your counter offers. Make sure you are re-emphasizing the reasons through-out the conversation. The seller has to feel you are an expert in this field and that your pricing is solid, includes your expertise to follow through and execute on what you said you would do in the time frame you said you could do it in.

  • “He who talks most with the customer wins! Repeat contact is essential. Statistics reveal that on average it takes seven times to present an idea to someone before it is accepted!” – ES

Last month’s article, “How Is Your Follow-Up”, ties right into this fundamental. Are you scheduling a time/day for the next call? Are you leaving messages with a CTA (call to action)? Are you making it easy for the seller to communicate with you? As we all know follow-up is key to getting to the yes with any note seller but what is even as important is consistent contact with the seller. Building that rapport each and every time there is contact. I know I have reached that point when I call a note seller and he picks up the phone and says, “Hey Scot”. He is expecting and eager to hear from me. Even if you don’t get the yes, consistent reminders to the seller either by email, text, mail are essential. You want to make sure you are the person he thinks of when the seller is ready to cash in on their asset.

Here is a note that came across our trade desk that we recently funded. If you’re interested in purchasing it, email me at: scott@colonialfundinggroup.com

Performing Loan – Double-wide Mobile Home on 1 acre   
Pinetops, NC
BPO $84,000.00 – March 2021
$69,000 sales price with $5,900 cash down
$63,100 / 6.0% / $770.00 for 110 months
31 made / 79 left
Current UPB $48,254.60

Until next month.

Quote of the Month

“Fear of failure must never be a reason not to try something.” –  Fred Smith

This Month’s Poll Question

Do you own any rental property?

Connect With Us

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Bob Repass
Managing Director at Colonial Funding Group
Bob Repass is a 25-year veteran and expert in the seller finance mortgage and distressed asset industry. Over the course of his career, he has purchased over 40,000 performing and non-performing mortgage loans totaling over $2 billion dollars in volume, giving him an unparalleled track record in the industry. Mr. Repass most recently served as the President of Pathfinder Equity Holdings, LLC a mortgage consulting, loan trade advisory and real estate investment firm whose focus is to assist clients in realizing the maximum potential on their investments by improving acquisition returns, as well as loss mitigation and exit strategies.