A case in point is the San Diego income property market. It’s been one of the nation’s darlings for my entire 40 year career. Buy something, hold it, sell it for a profit, usually a nice one, rinse and repeat. Let’s take a close look at the factors now in play that have quite efficiently rewritten the San Diego script.

The Kinda Sorta Perfect Storm OR A New Kinda Catch 22

So you do the math, and tell me how you compete with your San Diego income properties. Why on earth would an investor choose a 40-60 year old property with an inferior price/rent ratio that requires at least 50% more cash to acquire — yet still generate inferior results?

But what does this hafta do with makin’ up for my huge 401k/IRA losses?

Though I used San Diego as an example, there are many similar areas around the country. If you live in one, you recognized the bullet points above. You must adapt to local reality and embrace the real life opportunities available to you around the country. Being able to ‘drive by’ your investments simply doesn’t cut it any longer. In fact, it’s the reason most San Diego based investors find themselves mired in the inertia of false hope.

NewsFlash: Long term investment in San Diego and similar regions is dead for the foreseeable future. So when you want to use your self-directed IRA or Solo 401 etc. to recover your Wall Street losses, think short term, get in/get out type scenarios in places like San Diego. You can make some decent returns here if you know what you’re doin’.

We’re recommending safety in numbers — combine some of your self-directed capital with others to acquire properties for cash at huge discounts. Do it in a way that allows for Murphy to decimate your Plan — but still come out well. Protection of capital is now King of the HIll. The Plan must be designed such that the worst case scenario finds you with an unwanted property generating generous cash flow. If done correctly, you can turn your Plan’s invested capital 2-3 times a year.

What’s the most important point here? Simple — If you’ve lost money the last few years in your 401k, IRA etc., you must either convert to a self-directed IRA/Roth/Solo 401 or change how your current self-directed plan is invested. The smart money is adapting — using little or no leverage, while turning the capital quickly. The key is doing it through a professional team.

If you are interested in making measurable progress towards rebuilding your retirement plan so you won’t hafta work until you’re 80, contact me.

We’re the ones adapting — and it’s not our first rodeo. You can reach me at 619 889-7100. Call me — I need a fix. Have a good one.

BawldGuy Note: There will be Buy & Hold — Income — and Lender groups also. You might wanna gimme a buzz if you’re interested, as we’re designing this to be somewhat limited in scope — not dominate the world.

We’ll be buying highly discounted properties in need of no more than cosmetic fixing to sell to end user owner occupants — at below retail prices. The turnaround time is targeted for roughly 120 days, twice as long as it should take, but considering Murphy never goes on vacation, I’d say six months or so and be happy. These groups will be capitalized with funds from 5-10 retirement plans, and will be very homogenous in makeup. At this point none of these groups will be capitalized at more than $1 Million — in fact, most will be about half that figure.

The homes acquired will be, at least at first, exclusively limited to San Diego County — a region hit particularly hard by this correction. It’ll be structured so that I won’t benefit from any sharing of profits whatsoever — no exceptions. Furthermore, any ‘management’ fee will be nominal at most.

All transactions in concept will be vetted not only by our in-house tax guys, but they’ll be paid by and beholden to the investors — never me or my firm. The idea will be to get in, have professionals do any required work, get out, rinse and repeat. To the extent possible, we’re makin’ this venture as vanilla and boring as we can. Speculation is not our idea of catching up.

My team already includes Qualified Plan Specialists, CPA, Real Estate Attorney, Interior Designer, and Lender if we so choose to use, say a 50% leveraged position. Our worst case scenario includes being unable to sell the property, being forced to rent it, and holding. If the cash flow isn’t impressive in this ‘Murphy-authored’ script, we won’t acquire the property. Again, very boring and vanilla. We’re not tryin’ to set the world on fire, just make solid returns in a reasonable time period in a market in which we’ve worked for over 40 years.

If you have any interest or questions, please call me — 619 889-7100 will do the trick. We’ll be talkin’ about this in more detail soon. Have a good one.

A robust harvest was his end game. He had a Plan — executed it — adjusted to any unscheduled visits by Murphy, Though probably not the perfect analogy, it gets the message across.

Here are 10 ways folks investing in real estate for retirement can delay and/or diminish their retirement.

1. Start your journey without having a Purposeful Plan.

2. Notice having a Plan by itself won’t cut it. You must then execute it on Purpose. Doing things on purpose via your Plan improves your odds of retiring when you want, and how you want. Going from flower to flower like a bee won’t make it. Unlike flowers, investment strategies aren’t the same — they don’t all yield pollen.

3. Before you start anything, know where you are now, today. Wanna vacation in San Diego? Great goal. Those starting from Palo Alto, CA will take a far different route than those setting out from Olathe, KS. You’re gonna have a problem gettin’ to your Point B if you don’t have intimate knowledge of from where your trip is beginning.

4. This one is mucho importante. Assume there are questions you have no clue to ask, meaning of course, that you can’t possibly have the answers. Those answers will almost always bite you where you sit — either by costing you money, or severely limiting what you coulda, woulda, shoulda made if you’d only known that one itty bitty fact.

5. Excluding the effect of taxes and/or tax shelter from your core strategy is almost guaranteed to cause measurable damage. This means ongoing strategies for the present and future use of depreciation. Dealin’ with capital gains — will you make use of Section 1031 of the IRC, or develop other strategies? Will you end up with the paradox in which so many find themselves these days, living a good news/bad news joke? The good news — boatloads of retirement income. The bad news — little if any of that income is tax sheltered — or ever will be.

6. Your investments are geographically bound — that is, you refuse to own anything you can’t drive by at any time. Ask those in San Diego how that’s workin’ out for them lately. When acquiring income property located in other states is as easy as it is today, it makes no sense whatsoever to restrict yourself to locally inferior investments. Face it, your ability to drive by part of your ‘empire’ isn’t worth the $3,000 a month in retirement income local stuff may be costing you.

7. You haven’t created in your Plan a separate basket for income unrelated to real estate — preferably tax free income. A stand-alone source of tax free income, not reliant upon your real estate investments will be one of your best moves. Income from real estate is great, and should be tax sheltered to a great degree, but I’ve yet to run into anyone who’d turn down additional income — especially of the tax free variety.

8. Understanding retirement income should be as large as you can make it is one thing. Not including prudent timing in your Plan as it relates to both the income and tax shelter for that income can be very disheartening when Retirement Day arrives. Remember — we go on cruises with after tax income.

9. The investor who doesn’t incorporate a humungous dose of flexibility into their Plan, will not be able to adapt when outside circumstances call for it. Remember, Murphy knows where we all live, and sooner or later it’ll be your turn in his barrel. Oh, and don’t forget O’Toole’s corollary to Murphy’s Law: “Murphy was an optimist.”

10. Always hafta have the best deal. The guy across the table hasta lose in order for it to be a good deal for ya. That’s one of the best ways of gettin’ nowhere fast. Remember the lesson of the telescope, and don’t look from the wrong side. Satisfy your own needs and be happy. If the other guy makes out great too? All the better. Don’t consciously look to make the other guy a loser when buying and selling — in the big picture it usually backfires.

11. A bonus — If you don’t include the means and the wherewithal to include real estate investment properties in a self-directed IRA or Solo 401k, you’ve left yourself open for what happened to folks a few years ago. Even if real estate goes through down times, its cash flow remains a constant, even if reduced. Can’t say that for the vast majority of Wall Street investments. A word to the wise.

12. Bonus #2 — those who invest in real estate without a generous Sominex Account (cash reserves) are begging for the opportunity to work well into their 70’s. For some it’s proved to be the concept saving them from disaster — and more than once. Thou shalt have cash reserves.

I’d love to talk with you — mostly cuz I need a fix. Call me at 619 889-7100. Have a good one.

BawldGuy Axiom: When life is boiled down to its essence, logistics rule us all.

Max and I thank you for your patience.

This conversation happens a few times a year. Got a call recently from a very nice house agent, who was concerned one of her clients/friends was entering into a tax deferred exchange. I asked why the concern? Doing an exchange is common, just do ‘em right. Apparently the transaction was being done as a result of the advice of a recently retained local accountant. She’d feel better if I’d talk with them — would I please humor her? Not a problem.

After the conversation with her investor buddy, it became obvious she had an immediate, but unknown (to her) option, which could be easily executed. But a much larger problem than that was systemic. Her tax pro was allowing her to enter into a classic, down the middle of the road, delayed exchange when there was another obviously superior way to go.

In a nutshell, the investor had an impressive amount of unused depreciation — sufficient to offset a pretty impressive hunk of the capital gain she was deferring. In plain English? She’d be able to take out over half of her net proceeds in cash — without ever paying capital gains taxes. She’d accumulated bunches of unused depreciation as a result of being barred from using any of it against her ordinary income. (read: job income — it was over $200,000) Hence, all the unused tax shelter.

By executing a tax deferred exchange (1031) sans the huge tax free cash exit, she’d have been penalizing herself. See, whether she does it using the original plan, or my way, she’ll end up with the same properties when all is said and done. What she will gain using my approach will be significantly more future tax shelter. That’s a huge deal in the long haul. It’ll result in an even larger offset for her next capital gain. We’re not talking nickels and dimes here.

Note: If she’d wanted to simply take the money and run, she could have. There’s no requirement to buy more property when you’ve exited cash which has been offset by either capital losses or unused depreciation.

So if she’d gone ahead with her tax guy’s original advice, she’d of cost herself, give or take, $50-100,000 in bypassed capital gains taxes the next time around. And all ‘cuz her tax adviser wasn’t versed in the part of the IRC (Internal Revenue Code) dealing with this issue. It’s ain’t rocket science ’till you don’t know about it. (Famous quote from Captain Obvious.)

This is serious stuff people. We tend to treat tax guys, even CPA’s, like doctors. Yet, like doctors, in my opinion it’s grossly unfair to saddle your tax guy with the weight of knowing the entire body of tax law. More clearly put — you wouldn’t ask your wife’s gynecologist to repair your heart valve. Yet we consistently expect our tax people to magically know everything about everything. It’s not fair to them, and it’s a potential disaster for the real estate investor.

Why?

‘Cuz it’s almost never the answers to questions that cause the problem. It’s the questions you don’t know to ask that find you jumpin’ out of a perfectly good plane without a ‘chute.

A quick call to my tax dude (currently busier than a one-legged man in a butt kickin’ contest), had him agreeing with my assessment — and the proper actions to follow. I then initiated a quick conference call, which made everything all better. I owe my guy a steak dinner — and I don’t mean Denny’s either. It’ll involve cloth napkins, real silverware, and heavily armed plastic.

How many real estate investors out there are blithely following tax advice often totally outa whack with their best interests, or worse, outright injurious? I see it on a semi-regular basis. Heck, my own guy has to ‘get back’ to me sometimes — and he knows real estate like Grandma knew muffins.

And for the record? Using a real estate agent who is not a full time investment type is an even faster route to nasty tax time surprises. I’d tell you the stories, but they’d sound so dang stoopid you wouldn’t believe ‘em. Several times accountants have taken me to task for even bringing up the subject — no kiddin’. Then, when the facts are clearly contrary to their advice, things change.

Your retirement and it’s income is simply too important not to have real pros on your team. Brown and Brown’s team is, (he says, foregoing any false modesty) an all-star squad. If we think your attorney or tax adviser may be a little mismatched for what your Purposeful Plan requires, we get you to someone who knows the answers to questions you simply don’t know to ask.

Doing things on Purpose is what keeps most folks far from the cliff’s edge. Let’s start a conversation about how close you may be to your retirement. Send me your contact info using the Contact BawldGuy whatsit and we’ll figure out what’s possible. It’s all about making the right decisions. Or, you can call me at 619 889-7100. Have a good one.

San Diego income property owners are acutely aware of what I’m talkin’ about here. Many of ‘em aren’t laughin’. It’s past time most of them shift into forward gear and begin the process of moving their equities to better performing regions. The same could be said for areas like Palo Alto, CA.

Resent cash flow? Really? Are you thinkin’, ‘I’d love a chance to resent some ‘crazy good’ cash flow. Please, gimme the chance.’

I talk all the time with folks from all corners, who’re tired of relatively high equity, good to seductive cash flow income property. They come in all age groups too. Their complaints run the gamut, but almost always include at least two of the following.

The units are pretty old, sometimes Moses old.

Tenants are chronically below average if not downright low quality.

Functional obsolescence abounds — a big cause of frequent maintenance, not to mention already mentioned subpar tenants and lower rents.

The neighborhood is rundown, maybe a tad seedy, little if any pride.

They’re located just far enough away to make frequent trips irritating on an almost epic scale.

Take a step back. Look at any property you own that appears like it may fit this model. You may have allowed yourself to become seduced by the Benjamins, only to find out they’re not worth the trouble, they’re also driving your Plan into the ground. ‘Wait just a doggone minute, I know I complain, but hey, the cash flow, dude. And, um, the equity is pretty high too, over 50% I think. Not bad for a man not even middle-aged yet, right?’

Maybe, but probably not. Why? Let’s count the ways.

1. You probably paid a pretty impressively low price, which is why you have the cash flow you love to brag about so much. I get it. Been there, bragged that.

2. As the years passed, even though you sensed they were too old to get you to retirement, much less through it, you’ve ignored that little voice who’s been tellin’ you to make a change.

3. Demand by tenants to rent and investors to own in the neighborhood has been in a downward trend for quite awhile.

4. Rehabbing/remodeling simply isn’t worth the trouble. Lipstick on a pig, etc.

5. As fewer and fewer folks wanna live there, the quality of tenant descends into what you now have come to call, TenantHell.

What we have with this scenario much of the time, is a no-brainer alternative — a change must be made. The goal is to upgrade location, functionality, tenant quality, and age of property(s).

Here’s a recent real life case in a nutshell.

Real estate investor in his 30’s invests in local properties in the midwest. They’re from 35-100 years old, in neighborhoods where, according to him, most folks don’t have the credit needed to buy. Mild to moderate basement flooding is almost predictable in winter. Even with an approximate equity position overall of 50% or better, the cash flow, though nice in terms of dollars, isn’t what better located props would yield with less than half the equity position.

In fact, a quick check with ‘Old Reliable’, my 12C, shows that a tax deferred exchange (1031) would allow him to nearly double what he owns in property value, triple his annual tax shelter, while increasing both his before and after tax cash flow. That doesn’t address the most obvious result, which is the relative potential of appreciation provided by hugely superior location and property quality.

What this example clearly demonstrates, is that what I refer to as ‘rickety income’, is in fact a retirement-sabotaging time bomb, hiding in plain sight.

Cash flow from these kinds of properties/locations can be seductive to say the least. They have the insidious ability though, to suck the life out of your retirement Plan. As almost always true in life, it’s better to cure a small problem now rather than try to slay the fire-breathing dragon just before you’re set to retire.

You may contact me at 619 889-7100. Have a good one.

Put more succinctly, I was the typical 20-something know-it-all whose real life lack of experience, expertise, and knowledge was nearly immeasurable.

Then several ’storms’ converged to enlighten me.

The starry-eyed optimism and unearned confidence of my early adult life was both a help and a hindrance. It helped as I forged ahead in things only a lack of fear made possible. It hindered cuz, well, ignorance and arrogance always hinder. Duh. So what were these storms?

I embarked upon an intense and extended period of education. The teachers were, with rare exception, not ivory tower professors. They were doing what I was doing — and with excellence.

I became a father — that should be self explanatory.

The disastrous inflation/recession of the early 80’s hit HARD and taught exceedingly well.

Grandma explained what she’d been tellin’ me for years — that the fundamentals, physics if you will, of economics would not be long mocked.

I learned a priceless lesson: ‘Adapt or perish’ wasn’t just a slogan.

In my experience, the principle of adaptation has two basic levels. 1) We must adapt to market changes, often temporary in duration, or if not, they’re generally not soul-wrenching events. (Captain Obvious now rollin’ his eyes.) 2) We must adapt to huge changes, often systemic in nature, that will make previously profitable strategies and/or endeavors disappear faster than steam.

An example of #1 would be temporary but problematic interest rate increases, or minor but irritating modifications of a particular tax law. An example of #2 might be TEFRA, an act passed by congress in 1986 which threw wrenches in all sorts of real estate investment strategies. It causes much grief and chaos in the years immediately following its passage. It decimated limited partnerships, a very popular investment vehicle of the time. Many said it took away much of what ERTA gave a couple years earlier.

If you’re over 40, and especially over 50, the big picture as it relates to your retirement income is now more important than ever. Specifically, that means the real estate goddess of forgiveness, appreciation, has been banished for the foreseeable future. Without the reasonable expectation of properties consistently moving up the value escalator, the real estate investor’s expertise and knowledge will be tested. Mistakes will now be punished — solid investing will be rewarded.

The ability for you to adapt to all the changes that have rained down on us in the midst of this perfect storm will, more likely than not, make or break the quality of your retirement. Those who’ve lost so much on Wall Street are acutely aware of this principle and how it will affect their future.

Be bold, but Plan — then do things on Purpose.

This is where Self-Directed IRAs, Solo 401Ks, and Roth IRAs come into play for so many of you. Best case scenario for many is a number of years on the treadmill playing catchup — making up for all the money lost. Be strong, and take heart — then make the decision to be an adapter. It could be the difference between the retirement for which you planned, and 10 more years on the job.

We’re not in Kansas any more, Toto — it’s back to the Old Normal.

Frankly, I’m thrilled the Old Normal has made a comeback. It’s the silver lining to all these storm clouds. Those who make Purposeful Planning the foundation for their retirement will reap the benefits. The next five years will see the amateurs left by the side of the road. Appreciation, the goddess of forgiveness has left the building.

Let’s talk. Contact me at 619 889-7100. Have a good one.

BawldGuy Axiom: Those unable to adapt when necessary are those who cease thriving.

Truth be told, though I was wicked strong, especially for being over 50, I was never a threat to Arnold — not even in my mind. What was important was the ability to adapt to the new reality. Serious bodybuilding using the traditional methods was no longer on my menu. Even lightening the weights made no sense, as eventually I’d get stronger again, jump starting the same predictable cycle with the painfully familiar end result. What to do?

After sufficient time to gain way too many pounds, becoming shamefully overweight, I got serious again and discovered CrossFit. I adapted to the new reality. The goal never changed — I used a new vehicle while also taking a different road to get there.

Real estate investors have had a relatively smooth ride the last 40 years or so. Sure, there have been some challenging times. But ’till now all the recoveries have found property values rising to higher levels than before the downturn began. Those days have been relegated to fond memories. Most of us have read/heard the phrase “This is the new ‘normal’”. I get what they’re sayin’, but disagree — there’s really not much about it that’s new. It’s actually more accurate to say “We’re back to the ‘old normal’” with which our parents and grandparents grew up.

Some obvious changes

It’ll now take longer, sometimes much longer to grow our capital.

The passage of time will no longer suffice to produce future retirement income.

The silly practice of relying almost solely on appreciation will, mercifully, cease.

Investors must now revert to Old School analysis — Each property stands alone.

Most of all, solid Planning is now at a super premium.

Understanding your end game is now more important than ever. You’re now living in an especially made, just for you Back To The Future movie in real time. Often without knowing it, investors have relied upon, even expected their properties to rise in value year after year. In fact, their analysis bakes it in. Think about that. If an investor’s initial analysis of his acquisitions will only get him to his ‘Point B’ if he hits what the analysis assumed for appreciation, just one ‘backward’ year has an excellent chance of derailing the Plan. Adapting to what’s very quickly becoming the Old Normal is now the most valuable thing the real estate investor can do for themselves.

Financing is no longer a necessary irritation — it’s now a full blown dance with the Devil.

Understanding once and for all that real estate doesn’t have to remain local for investors. Think coast to coast.

Maybe most importantly, fundamentals have never lost their importance. They’re now Rulers of your real estate investment world.

The new reality will reward solid Planning, and strict adherence to the fundamentals — unchanged for centuries. Those who continue playing by the old rules will soon learn the penalty — and it won’t be something as simple as sore elbows.

You may contact me any day after 9 AM ’till I’m more or less done. 619 889-7100 will get ya there. Have a good one.

This is one of those nuts ‘n bolts things every real estate investor should know. The IRS doesn’t usually buy the whole ‘dog ate my homework’ — ‘I had no idea’ type of excuse when it comes to unintentionally recognized capital gains. So, heads up.

Here’s a way you’ll possibly experience what I’ve termed Stealth Gain.

Let’s say you bought a property some time ago. The boom generated two things — an increase in value — and your Happy Feet dance which came immediately afterward. Now though, you’ve been clotheslined by the market correction. Your property’s value zoomed — then came back down to earth with a rough landing.

When times were goin’ your way, you refinanced. For this discussion, the reason isn’t relevant. The loan amount was for quite a bit more than you paid for it. Also, your adjusted basis — basically what you paid, plus any sales costs and/or capital improvements, minus all the depreciation you took while you owned it, was far less than the loan balance at sale. And before you ask, NO, it doesn’t matter if it’s a foreclosure sale or a short sale. If you’re mortgage over basis, you’ll have a capital gains tax to pay. (And I haven’t even brought up the whole ‘debt forgiveness’ nightmare.)

Why am I tellin’ you this?

Simple, if you sell for what you think is a very small gain, or even a loss — even through foreclosure or a short sale — you still might discover you owe taxes.

I won’t go through all the ins and outs here, as it would go on forever. Suffice to say, it’s very possible to walk away from a sale with $1.98 and still owe capital gains taxes on a sizable ‘gain’. If your loan was $100,000 over your adjusted basis, regardless of any subjectively perceived profit or loss, you’ll be scramblin’ next April 15th to deal with it. See what I mean about Stealth Gains?

Here’s another way you can get bushwacked.

The same thing goes for those of you selling for what you naturally think is a very small gain, or even a loss. You may actually be bringing in your own cash to close the escrow. Yet — WARNING: Here comes another clothesline. If your adjusted basis is lower than your sales price, you’ll be recognizing a capital gain. This time though it could be couched in terms of the depreciation you may have taken during the holding period. They’ll call it ‘depreciation recapture’, though there may indeed be a cap gain too. For the record, tax rates for ‘recapture’ are higher than cap gains rates. Just so ya know.

This often happens when an investor acquired the offending property via their third (or fourth, or fifth) tax deferred exchange. This results in two consequences — neither one of which is good if you’re selling, not exchanging.

1. Each time you exchanged, your adjusted basis, which is almost always smaller than the day you acquired the property being left behind, went with you to the next property(s).

2. Over the years (and exchanges), each year of depreciation makes that basis smaller and smaller.

So when you bought it for $100 back in the day, executed a few exchanges, the last one at an acquisition price of $300, your ultimate sale will cause problems. Here how: You sold for $295, which meant after your costs of sale, the net check you received from escrow was enough to take the family to 31 Flavors for double-dip waffle cones. HOWEVER — since your adjusted basis at the time of the sale was the proverbial ‘buck-three-ninety-eight’, you can readily see what’s next.

See, your adjusted basis was WAY lower than your $295 sales price, which means you just entered The Twilight Zone — episode title, Nightmare on Cap Gains Street. And yeah, I know the sales price was less than you paid for it.

BawldGuy Takeaway: The cash you net from a sale has no connection whatsoever to the reality of how your capital gain will be computed. Before you have even a semi-serious thought about selling, PLEASE PLEASE PLEASE consult with your CPA. Don’t have one you think knows the ins and outs of this stuff? Not to worry — gimme a buzz and I’ll hook you up with someone who knows which way is north on the map.

Contact me at 619 889-7100. Have a good one.

BawldGuy Axiom: Figuring return on disappearing capital is oxymoronic. Treating appreciation as anything but a luxury is akin to walkin’ in an unmapped minefield.

If you’re a real estate investor with property in places like San Diego or Palo Alto, California — you know what I’m talkin’ about — painfully so. Those who’ve moved their capital and/or equity to places like Texas — Dallas/Fort Worth MetroPlex and Austin are my favorites — have not only stopped hemorrhaging investment capital, but have actually enjoyed rent increases the last 12 months. No, really. Increases.

Let’s make your own Back To The Future movie.

Whether on your own or through a 401k/IRA of some sort, you were pretty happy at one time with your mutual funds. I say mutual funds cuz that’s what well over 80% of folks do according to multiple Wall Street analysts. Over the last 20 years BEFORE the meltdown, those poor people were ‘enjoying’ returns of just under 4.5% annually — hardly retirement numbers, unless the plan was to retire at 86. To add insult to injury their kinda sorta growing stock portfolio then took a hit of 40% — virtually overnight.

Go ahead now and hop into the DeLorean. Get it up to 88 mph and land in 1994 or so.

Take the same $50-60,000 you had back then and get the duplex in the post linked to above. Instead of having approximately $150,000 post meltdown, you’d have about $250,000 AND $1,500-2,000 in monthly income, much of it tax sheltered.

Think about that.

Now think about where you’d like to be in the next 16 years or so. Remember the main theme here: The duplex investor started with less than $55,000 and ended up with an equity of $250,000 — PLUS a sweet annual income, much of which won’t be taxable for over a decade into his retirement.

You have a self-directed IRA? A Roth maybe? You can get this done there too. And if it is a Roth, you can grab the cash flow sans income tax as it comes in, as long as you’ve followed the rules regarding age, etc.

Readers: It’s all about adapting to the curve balls life throws our way. Those who make the strategic and tactical adjustments in a timely manner will not only survive, they’ll thrive. It’s all about having a Plan and doing things on Purpose.

Sound familiar?

You may contact me at 619 889-7100 as I’m in need of my daily fix. Have a good one.

Most financial products need to be properly structured to get the best performance. EIULs are especially needy in this matter. If there is an Achilles heal in EIULs it is that most insurance agents don’t have the experience to structure them for the best performance. Add in the fact that many insurance companies are more interested in attacking other company’s products than in educating their agents and you have a troubling problem. Real estate investors understand this, because they have seen the massive amount of RE investment failure over the last couple years due to folks not knowing what they are doing in the real estate world.

Each individual has a slightly different need and slightly different circumstances to build from. For the point of this post, I will assume that the client has the ability to max-fund the EIUL and is looking for tax free retirement income or tax free money to their heirs. Universal life insurance has much flexibility built into the product which allows us to consciously keep expenses down and performance up.

Five policy premiums are scheduled to be made one year apart. Generally these payments are equal although sometimes the first or last premium can be different. For the point of discussion let’s say that the client puts $30,000 in each premium moving a total of $150,000 into the policy. The face value can be either set up as level or as increasing and can be changed at any time on an annual basis. We set up the initial face value as option B or increasing value. This allows us to keep the face value at the smallest possible. The smaller first year’s face value keeps the expenses from insurance lower during the premium load period, adding to the performance. It also lowers the amount of commission being paid and the overall premium charges. However, you don’t want to leave it on option B for the life of the policy because the insurance costs would start to eat you alive when you reach your late 70s. So after the last premium is paid [year 5], you switch to a level face value. Now depending upon the actual performance and how long you have the policy, you more than likely would have the ability to move the face value down at around year 13. The company will tell you how low you can move it, based on the IRS corridor regulations. This would reduce your insurance expenses even more. However, if the performance has been excellent during that first 12 years it is possible that the corridor rules will force the face value of the insurance to actually increase. This is a good sign as it means your cash value has gone up rapidly. The point being is that you can manipulate the face value to your benefit but have to abide by IRS corridor rules.

There is one exception. If at any point you get a poor health diagnosis you would then move to an increasing face value situation to increase payout at death.

When you get to retirement age and you want to start pulling out your tax free income you need to make a couple of decisions. How much? What type of loan? Again a call to your agent or the company will help you establish how much you should pull out. It will be dependent on how much accumulation you have and how long you plan on pulling out cash.

The way you access the cash value is through “loans.” These loans are considered return of premiums and therefore are considered tax free. There are two different types of loans available with several different permutations of each. The fixed rate loans are either offered at a particular rate or offered as a “wash loan.” A wash loan is one where the loan rate is matched to the interest paid. The Minnesota Life fixed rate loan cost you .1% each year. In other words what you earn is .1% less than what you pay in interest. This is the safest way to get your income. However, ML allows you to switch freely [up to two times a year] between the fixed rate and a variable rate loan. Variable rate loans are tied to the Moody’s published corporate bond rate. Here you get the full interest crediting that you would normally get and pay that variable rate. Historic data indicated a 1-2% advantage for the interest crediting over the variable rate. In other words if the variable rate is 7.5% and the interest credited from the index is 12% you get the difference or 4.5%. If the interest credited is 0% then you pay the full 7.5% that year. Critics of the variable rate loan point out that in the 1970s the Moody’s corporate bond rate went to 12% and that could repeat itself causing for losses. They usually point to some variable products that go negative to put fear into people. I agree that a variable rate with a variable product that could go negative is risky. But Minnesota Life has eliminated that risk by allowing you to switch to a wash loan at any time. So if interest rates go high you can make one phone call and switch to a wash loan. Minnesota Life is the only company that allows that much flexibility in loans.

Finally, there are two riders that I put on policies. Both are free from ML. The first allows you to access up to 75% of your face value if you get a poor diagnosis. This can be a great deal if you get cancer or other diseases early on. You can use the money to get alternative treatments, take your family around the world or any other use you can think of. The second rider makes sure your policy will not lapse. If at any point you have pulled out so much cash that the insurance costs can’t be covered going forward, this benefit clicks in, and freezes the face value [minus policy loans], guarantees the policy will extend to your death, but doesn’t allow for any more cash to be pulled out. This way the policy and the tax benefits are kept alive.

As you can see there are several issues that need to be thought out to maximize the performance of an EIUL. Much of the fear mongering about EIULs surrounds poor planning and under educated agents. However, when structured to the client’s advantage, EIULs perform well and does exactly what it claims to do. Provide tax free income and a decent internal rate of return. Next week I will take actual policy illustrations and demonstrate the costs and internal rate of return received.

BawldGuy Here: Man, do I know how to pick ‘em, or what?