All Forum Posts by: Charles Worth

@Nicholas Aiola

If you invest with a sponsor as a passive investor and the sponsor files a composite return how much easier does that make it from the CPA's perspective vs. say investing in a C-corp or a REIT. I know generally K-1s with state filings can be a royal pain from a CPA's perspective.

@Account Closed this is BP we celebrate doors here not ROI.

@Aj Parikh On a more serious note, now the hard part begins. Since you bought at market there is no equity so its all about management. Stay on top of them like a hawk. Its not easy what you have done up to now but the tenants, toilets, charges etc. are tough. My own opinion take breather see if you even like this and then if you are going to look for more do so only after that point. Lots of people go and keep going only to find out the management part is not nearly as fun as the buying part.  

ahh another great cap rate debate. cap rate is not a perfect measure but unless you are very very good or have a lot of time on your hands you need a cap rate to weed out the stuff you don't want to focus on. yes you should use IRR like @Ben Leybovich will tell you again and again. Problem is that takes time. Garbage in garbage out. So yes if you know your market and can estimate a rehab budget in 20 minutes flat maybe you can use IRR to evaluate properties to look at and once you find something you like already it is absolutely the right metric. For everyone else it is a good screening tool of basic valuation not unlike P/E might be a decent metric in the stock market but is far from the only thing one would look at for judging a stock. Many of the other things people argue about related cap rate are also fairly obvious. Of course, a 10 cap in some terrible part of town or in some tiny town of 500 people is not the same as a low cap rate in LA. 

What is true is that properties that used to sell for say a 7 cap now might sell for a 5.5 cap. This is the data in many many markets. It doesn't lie. There are numerous explanations for this and none are the right answer in full. Some is due to growth expectations (right or wrong), some is due to the fact that investors are just willing to go where they did not before so there is more demand, etc.  The key, at least in my opinion, is it shows the expectations. Just like the stock market if you buy a stock with a high P/E it just means the expectations are rosy. You might be right you might be wrong. The issue on lower priced cap rates is that if the expectations are wrong or if there is a shift in market expectations it is already priced for that growth. When or if the market changes those expectations or if the growth just is not there it is a major issue. For instance, take NYC. Last year you would have baked in a very rosy picture of rent growth and maybe even some cap rate compression. This year? forget about it.  Now in truth will COVID impact things in 5 years or 10 years. Opinions differ but there is certainly a shift in expectations and thus demand. 

The confusion is there because growth and expectations are almost impossible to quantify. rent growth of 5% forever, sure why not? Nevermind the fact that rent growth of 5% over 10 or 20 years means that no one can really afford to live there. 

High cap rates are desirable because you know that if you have $X dollars in cash flow that is $X dollars in cash flow today and tomorrow. The caveat to that is the cash flow has to be steady, expenses can't grow quicker than rent and generally not take all your time to get. Neither of those three factors will be true in some terrible area or where the population is generally declining or even just staying at some tiny number. 

That is why @Andrey Y. I think saying it is a "more desirable, higher-quality asset" is problematic for newer investors. Yes this is mostly the case and there is a correlation but it kind of makes it seems like the lower the cap rate the more signaling of quality there is.  It is simply a measure of how much others are willing to pay. In some markets where I certainly would not say they are all that desirable or high quality, the cap rates are down huge.  True it is not at 4% but still very low by historical standards. I assure you the assets are not all that desirable and not all that high quality. The issue is as long as expectations are still there it doesn't matter to many people. Prices are there because of expectations and as long as those expectations are still high.....

@Jeffrey Holst

yes and there should be a correlation is what I was saying. Are you saying a major drop in equity markets wouldn't hit RE? It would not impact demand for homes? Rent price growth? Come on. The only difference is one is priced on daily basis and one is not. Also one is generally hyper local (at least for a one investor) and REITs are generally not.  

Now the other thing is different I was not arguing that. Generally deals should be better in the private market because a lot fewer investors who can do the deals, longer lock up and much smaller deals vs. a REIT. However, there are times when this is not true. During major dislocations I would argue REITs can sometimes offer a better value proposition vs. locking up your money or taking on leverage for maybe a few % points in return.

@Henry Lazerow Investing in a syndication is no different vs. a property except that you also have to evaluate the track record of the sponsor as they generally control your money. It is just as easy to buy a bad deal as a bad syndication. Plenty of folks on here preach high leverage and grow to the sky type investing. Heck there is even a name for it BRRR. The sponsors you are talking about are just this in syndication form.

Also, most LPs value time at least as much as money. A bad direct owned property is a nightmare in both time and money and worse you are generally on the hook personally for the loan. I can tell you I have been in good and bad for both direct ownership and syndication and direct is much worse. In addition, yes there are property managers but very few want to manage my B or C class property for an extended period of time in the fashion I would if I was managing it or that a really good sponsor would. I don't fault them for this but they are making maybe $100 a month per $1K in rent normally less. You can't expect the world at those levels and its a fee based business. When it breaks down things can go really bad and it takes a lot of time to fix for the owner. 

@Jeffrey Holst that is not true, you don't get pass through tax advantages but not all W2 employees can fully use them in the year taken and the K-1 accounting can cost a lot. The tax advantage is just taken prior to distribution by the corporation. Also, REITs are correlated with the stock market and with the RE market. There is a NAV and premium and discount to NAV. Most REITs should not trade at huge premium and/or discount to NAV and when they do it is often a lot about perception about the future of that REIT or that RE market. This is more a function of liquidity. if you tried to sell your syndication to a third party this might be the price you would get too (or less because they would probably discount for non liquidity)

@Cliff H. The issue with those type of things (like Consumer Reports) is that most people are not the right demographic (i.e. they don't really have a net worth, don't really make much above their income level and don't invest). Most people also if taking the extra money out of the policy would spend it and some would and will invest it badly. In that case, term typically wins in everything I read just like what you read. Most people here are assuming you can invest at high rates of return on the money borrowed. 

Also, as I noted in my first post, there is an assumption here that people will just keep investing at high rates and not make bad investments. This is kind of the prevailing logic here on BP where everyone should rush to 1,000 doors as quickly as possible. In reality though I can't tell you how many people I have seen come on here itching to grow to the sky and then 6 months later they are gone because they got their wish and probably should have been a little more cautious. Not saying it is a bad deal but I think people should go into it with their eyes open and its a very long commitment. The outcomes of doing a bad deal or just sitting on your hands should be considered. After fees (just my opinion) its not great until you start using some of the other factors (like the borrowing, like the asset protection etc.), which generally applies to those with higher incomes. There is also the death benefit which is something.  All-in-all, I think this thread does show what most generally feel about WL. The people who really like it are excessively aggressive and so are those that don't The reality is really somewhere in between imo.  Its very situational and requires careful consideration and planning. 

@Jennifer C.

Do you know what type of value they are looking for? Is it just the land value or are they trying to get value for the minerals in the ground? I know someone who would discuss the former. The latter is much tougher.  also, do you know if there are any major issues like environmental issues etc.? 

@Mike S. 

you need to include fees, commissions etc. Most policies don't break even until a number of years out. There is nothing wrong with that if someone is ok with it but not to include that is very misleading.

@Jenning Y. you can still borrow money for RE. The money comes from the WL policy and can be used to obtain leverage for RE the two are not related. 

For some of the others looking at the IRRs, you need to include the DB and the other benefits of the policy in there too though (leverage, protection etc.). These are very very hard to quantify. On the flip side as noted it takes a very long time to break even on a WL. Assuming you will have opportunities to earn outsized returns for all five years (or worse won't do bad on any of your investments) is not as much of an easy conclusion as people make it seem. This is both a plus for WL (the investment returns are normally a lot less risky) and a minus (you need to pay fees so this whole well you will make the spread plus a hefty return is not even close to certain). 

@Brian G. I have met those who use it. Whole life itself is not what you become wealthy on but you can use it for other things that you do. Just like tax strategies and other things like that you normally use it for once you have money not to get money. 

@Account Closed

A little surprised at your answer considering I have read a lot of your stuff and you are normally fairly sophisticated.  I am not going to argue for or against insurance. Its situational just like legal or tax items. However, some of the things you are pointing out are way off base. Its a gigantic industry so of course there is a lot of bad acting and bad reps. The same can be said about equities, derivatives, etc. etc. Most of those by the way are also complicated, come with bad reps and are not generally understood by many. 

As for transparency, there are very clear disclosure rules. Yes it's very complicated and yes many agents try and make it more complicated to hide what is in it for them. 

You are also not wrong (and this is just an opinion I know many might disagree) that on its own merits whole life might not be worth it if all you want is insurance, esp if you are not high income or have a lot of liability exposure. Term is easier to understand and many times it is cheaper. 

What you are missing though, in my opinion, is that insurance, for whatever reason, has some very unique advantages in what you can do with it. This has nothing to do with insurance. Yes you will end up paying the piper (the salesperson, the insurance company etc.). The insurance company I don't think is too complicated its basically risk-based pricing. Insurance companies are some of the most sophisticated companies in the world on risk pricing. Most also reinsure it so there is a cost there but also protection if there is a disaster. 

The commission structure can be more complicated and is more opaque. However, if say you have a tax rate of 40% to 50% (in CA or NY fairly typical) it can be very advantageous and outstrip the costs. Not saying run out and get it, I think there are other strategies that work too esp for RE, but it is definitely more interesting than you give it credit for, at least for those who are high net worth or high income. I would also note that most of those RE tax strategies are at least as complicated and fraught with fees, middlemen, etc. in some of the structures used like DST, etc.

There are also liability advantages. 

To me, insurance is just a contract you can put some interesting stuff into. It has a cost and that cost is sometimes worth it, sometimes not. It is a lot more interesting than you imply though in my opinion.