All Forum Posts by: Mike S.

Quote from @Nicole Heasley Beitenman:

Beyond the match, I don't plan to invest in a 401K beyond $100k. You can only borrow half of your 401k up to $50k, so once you hit that ceiling, it's pretty useless. I'm only interested in borrowing against it for other investments. 

The borrowing out of a 401k is very limited in time and amount ($50k or 50% of the value, whichever is lover). Not only you have to pay it back within 5 years, but also you can't deduct the interest. Investing in real estate through a solo 401k on the other hand is very powerful. But to be eligible to a solo 401k you need your own side self employed business and make enough money to contribute.

In the context of using it as a cash pool to borrow from, a cash value maximum overfunded permanent life insurance may be a better fit as you are not limited in the premium and you can borrow up to 90% of the cash value. Also, if using a third party lender, you can deduct the interest of the loan as investment expense. When borrowing from a 401k, the balance of your 401k is lowered by the loan amount so your money is not working any more (except for the interest you pay back to yourself)... When you borrow from a cash value life insurance, the cash value does not change. You are still earning dividend/interest on the full amount of the cash value, while you are using the same money in other investment at the same time. So your money works at two places at the same time. Pretty powerful concept.

Quote from @Paul Vail:

Quote from @Chris Breezy:

Would a 457 be tax deductible 

Chris, no.   401/403/457 -- these plans all come out of your paycheck BEFORE taxes are calculated.   And their earnings are TAX-DEFERRED (not tax free like HSA or Roth IRA earnings), so you would pay taxes on the withdrawal (distribution) when you elect to take them.   But -- contributions lower your taxable income.  So if you are in a higher bracket now than you'll be in retirement, that's also a win.

Some 401/403/457 have Roth portion and you could contribute after tax money. So you will pay income tax on it now, but it will come tax free when you retire.

The issue with these plans is you can only invest in some limited classic bond/stock related funds or ETF offered by your plan manager. Also, this money is locked in the plan until you quit or retire (with some other limited way to access it through short term loans). If you have a side self business, it may be advantageous to create a solo 401k for it, and as the plan trustee you could then invest in any real estate venture you would like.

Cash value life insurance are similar taxwise with Roth plans in the fact that you put after tax money into it and when you die, the death benefit goes tax free to your beneficiaries. It is also asset protected against creditor. On the other hand, there is no hard contribution limit (but may be limited by what each insurance company will agree to insure based on your age and health ); it is very liquid as you can withdraw your contributions anytime (not recommended). Better, you can take a loan using your cash value as collateral while the cash value continues to grow (similar to taking a HELOC out of your home). So you can reinvest that money into other investments and you money grows at two places at the same time while you can deduct the interest of the loan as investment expense (if using a third party lender instead of the insurance company itself).

Personally I am using Roth IRA, Roth 401 and cash value life insurances. They are complementary in my portfolio and not exclusive. More than 80% of my yearly contributions are going toward the life insurance and the "classic" retirement plans are less than 20% of it. During retirement, I will have different buckets of resources to use, including my real estate passive income. Each of them are evolving differently yearly and the diversification will insure I can take money the most efficient way when needed.

It's very close to Infinite Banking. There has been multiple threads on this forum about the benefit of using a maximum overfunded cash value permanent life insurance as the place where to circulate your cash flow.

The Infinite Banking crowd only swear by Whole Life insurance; There are other options like Index Universal Life.

In a few words, it's a long term play as the upfront fee make it a negative return until year 5~7 depending on the product. After it become a good wealth multiplicator as your money is working at two places at the same time.

It has great asset protection, liquidity and tax advantages. On top of it, you have a life insurance that will provide for your family if you die early.

However it is a complex product and you will need to spend enough time to understand its intricacies and use a knowledgeable life insurance agent who is specialized in it as the vast majority of them don't know enough how to use it or are unwilling to sell it because, if properly set up, it gives them a lower commission.

I am using the same concept but with Index Universal Life Insurance instead. Better return on the long term than Whole Life but with more volatility year to year.

Quote from @Dmitriy Fomichenko:

@Ernesto Barragan JR

They have a vested interest selling the policy to you, they do not have your interest at heart.

Do not trust any financial advisor, they have a vested interest to manage your money. They don't have your interest at heart...

Do not trust any real estate agent, they have a vested interest to sell you the most expensive house. They don't have your interest at heart.... They are making a 3% commission on the sale of the house for just driving you there...

Please don't generalize by making such broad statement. Yes there are unscrupulous people in each profession, but saying a whole profession is unethical because a few of their members are is ridiculous.

An optimized overfunded permanent life insurance policy give less commission to the insurance agent as he or she is tweaking it to give the best return to the owner by lowering all the fee, including his/her commission.

The long term IRR of an optimized whole life insurance is in the 3-5% range; The long term IRR of an optimized Index Universal Life insurance is typically in the 5-8% range.

Yes it is not excellent compared to some 10-20% IRR you can get with real estate, but you have to remember that it is also tax free (so a few percent more to compare apple to apple). It is asset protected, it is liquid, it does not go down. On top of that, you also have a life insurance in case you die early.

Last but not least, you can use the cash value as collateral for a bank loan at sub prime rate, and reinvest that money to outside investments while deducting the interest cost. So your money works at two places at the same time. By combining the two, your returns are higher than if you were only investing without the life insurance in the middle.

Quote from @Drew Sygit:

If a legal issue occurs with your property resulting in a lawsuit, there's a decent chance the plaintiff's attorney will be successful in "piercing the corporate veil" of your LLC and being able to sue you directly.

To pierce the company veil of an LLC is not that easy. Of course if you are sloppy and commingle fund, or not record annual meetings, or sign in your personal name instead of the LLC name, that will make the job of the plaintiff easier. But with basic company management and bookkeeping, the hurdle to pierce the company veil is very high.

I would suggest the latest book from Garrett Sutton, Veil Not Fail: Protecting Your Personal Assets from Business Attacks, that goes in detail into the errors not to make to avoid piercing the veil.

Anonymity is also recommended to avoid ambulance chaser attorney finding your assets.
I have seen in this forum a lot people complaining that it was not worth it as in a lawsuit you have to disclose your assets. No, you will only have to disclose your asset during a late phase of the lawsuit, mainly if you have lost. By hiding your asset, you are already avoiding many lawsuits to start.

Also by having LLCs, the plaintiff's attorney will only have a reasonable expectation to get only the company asset. If they are mortgaged, there is not a lot of equity left to reach. And as it is very unlikely to pierce the veil and will take a lot of attorney's resources, if there is no known other assets to go through it will be difficult to justify the cost. You will get in a much better position to settle for the insurance amount than going to a full lawsuit.

Last, even if the corporate veil is pierced into one of your LLC, if everything else you own is in other LLC, the plaintiff will then need to reverse pierce the veil on these other LLCs too as the charging order will block any access.

Quote from @Sam Mathew:

Thank you all for the guidance and feedback.  Quite a bit to take in and research on this topic.  I didn't mention also, but being a single dad, I should look into some type (i.e. Estate Trust) that will allow me to minimum any government taxes for my child in the future, in case anything happens to me before I one day liquidate my rentals (which I don't really plan on).  So that adds an interesting layer...not just 1) Protection but 2) Minimize taxes for my family in the future.

There are multiple ways to take care of it. But I would suggest you look into maximum overfunded cash value permanent life insurance (whole life or Index Universal Life) properly set up. They are great multiplicator of wealth when incorporated in your investment cash flow and also provide substantial death benefit for your family if you die early.

If your estate will be substantial (over $12M for current estate tax exemption), and if you want to put some money aside for your kids now, you can also look at creating an irrevocable trust for each of them and funding them every year up to the gift tax exemption ($16k yearly currently). You can also with that trust buy a cash value life insurance, or invest the money but you will then have to pay trust tax rate on any gain.

Quote from @Kim Hopkins:

@Mike S.

Thanks for your thoughts on the limited risk of leaving the HELOC and LOC "in the bank". That's comforting.

With regards to the options for arbitrage, as you mentioned the CD is quite negative, so I think I would table that one. (The LOC and HELOC are sizeable so the interest is very significant).

With regards to the hard money lending and crypto, these are the exact areas of the market that I think could fail in the near future. If we invest in them with leveraged cash, and they go down, we go right down with them. Am I missing something? 

No, you are right, you need to assess your risk appetite.
I personally have hard money loans and crypto, but it is a small part of my asset and while losing them will set me back, it won't be a catastrophic change in my lifestyle.

Quote from @Account Closed:

Quote from @Greg Scott:

My 2 cents

Why would you NOT get a liability umbrella? They are super cheap. They protect you from problems that may occur at your properties. Most people don't even think about this, but an umbrella also protects your properties from YOU. If you look at your phone because you received a text message and run into someone, they could sue and take your properties. An LLC won't help against that. Take a good look at an umbrella policy.

Trusts are great for estate planning but have minimal legal protection.

Hi Greg, you mentioned that an LLC wouldn't help protect against an outside-in lawsuit.  Can you expand on that a little?  (I would love to learn more about this.)  We recently did move property into an LLC to (hopefully) protect against both outside-in and inside-out lawsuits.  Thanks for any info you can share for my learning.
-tom

An LLC in any state will protect you against inside liability. So if something happens within the property owned by the LLC, in a catastrophic law suit, the most they can get is the property (Unless you screw up your LLC by commingling money, failing to maintain the company veil, etc...).

Regarding outside liability protection (if something is happening in your life and you are sued for it), some states have better protection than others. If your LLC is in CA for instance, your creditor can foreclose on your LLC and force you to liquidate it to get their money. In WY, the best they can get is a charging order, so if you get money out of your LLC you have to give it away, but if you don't get money, you don't have to give anything (your operating agreement should be written accordingly to not have to make distribution).

So one of the best setup with LLC is to get a WY holding LLC that owns all your other state LLC where you have properties to get the WY charging order protection on all your assets.

An umbrella policy will not protect your asset. All your asset owned directly are at risk. Not only you may have a catastrophic lawsuit exceeding your policy limit, but worse, your umbrella may denied coverage (have you read all the fine print exclusions?).

A revocable trust will not provide any asset protection. An irrevocable trust will but then you lose ownership of your asset and the taxation may not be favorable.

Each one of us has to assess what their asset protection needs are. Some will sleep comfortably with only an umbrella policy. Some like me would not consider less than a single LLC per property and a WY holding LLC in addition to basic liability and umbrella insurance. Some more exposed persons may need to add on top of it an offshore component either from the start of with the intermediate option like the hybrid domestic/offshore asset protection trust.

I can not tell you what you need. You will have first to learn all the nuances of asset protection available and then discuss your specific situation with an asset protection attorney who can guide you to the best option for you. Each of these options has different cost and amount of work to maintain them.

So stating that an umbrella policy is enough, or saying that you don't need an LLC or multiple LLCs is not the correct answer. It may be for the poster, but no one can tell YOU what YOU need.

My HELOC had been closed a few weeks before I was closing on a new property and was trying to draw the money out of it. But that was a few years ago when many banks where starting to close their HELOC business.

Now with the raising interest rates, I see more banks reentering the HELOC business, so unless your personal situation changes drastically (loss of employement, loss of credit rating, ...) I would not be too worried about a line being closed.

Drawing the money out the HELOC to make sure it is there when you need it is a good option, but as you mentioned you want to park that money in something that will give you some money back to avoid paying interest on idling money.

There are multiple opportunities to make your money work short term, some are very secured, some are way more riskier (either regarding the principal value or regarding when the money will be available).

You can use bank Certificates of Deposit with duration from a month to a few years. Rates are in the 0.25 to 3%, so you will have a negative arbitrage with your HELOC.

You can find some hard money lending funds that will give you a 6% return but you will need to give them 2 to 3 months advanced notice to withdraw funds.

You can find some hard money loans giving you 10% return but your money will be locked for period as short as 9 month, some up to 2 years.

You can put your money into crypto stable coins with a 6 to 7% return, with a few days availability.