#171 - From STRs to Roth IRAs: A Pilot’s Wealth Playbook

[00:00:00] [SPEAKER_04] Welcome back everybody. We're going to be doing a live episode of Passive Income Pilots from the main stage. We have our distinguished guest speakers that came today. Can I get a round of applause for our speakers? Thank you. Now, I have a pile of questions from the audience and we're going to attempt to get through all of them. No, we're not answering the Chuck Norris investing question. So if you ask that... Who asked that? That was funny. By the way, that was pretty good. Who knows?

[00:00:31] [SPEAKER_04] Okay. So, Tait's going to take the first question, which I love this question. We get this all the time. Well, let's start the podcast. Yeah. Okay, let's do it.

[00:00:42] [SPEAKER_01] Welcome to Passive Income Pilots, where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators. We interview world-renowned experts and share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll.

[00:01:02] [SPEAKER_04] Welcome back to Passive Income Pilots, everyone. I'm your host, Tait Duryea, here with my very good friend, Ryan Gibson. How you doing, Ryan? I'm just dreaming about flying my 185 somewhere. I just got back from... It's in the shop with the engine off, and it's getting overhauled. But no, we're excited to get back to the show today. We have an amazing group of guests here. Well, we're live. We're live. We're live in Las Vegas. We're live in Las Vegas. If you're listening to this on the podcast, you should have been here. Should have been. We got a round of applause for the audience if you can watch this.

[00:01:36] [SPEAKER_04] So if you're listening to this, you could have been on the show if you just showed up, as all of you now are audio. All right. So why don't we have our guests introduce yourselves for those that are just tuning in. We'll start at the end. Adam.

[00:01:48] [SPEAKER_03] Adam Kente with Nevada Corporate Headquarters, Executive Corporate Aest.

[00:01:52] [SPEAKER_04] Thanks for having me. All right. What are you going to be focusing in on today? What's your topic? What's your...

[00:01:59] [SPEAKER_03] My focus is going to be any tax strategies and self-directed retirement accounts. Awesome. Kurt?

[00:02:07] [SPEAKER_05] Oh yeah. Kurt Harris. I'm an attorney here with the Harris Law Office in Las Vegas, Nevada. And I'll be focusing on estate planning and those types of legal questions.

[00:02:16] [SPEAKER_01] Nice.

[00:02:16] [SPEAKER_00] David Graham Landyham, Executive Corporate Analyst. And anything from taxes to trust to entity structuring?

[00:02:25] [SPEAKER_04] All right. Well, the first question... So for those that are just tuning in, we actually took these questions from the audience. I have a stack of papers in my hand right here with a lot of really good questions that we sorted through. Great questions. The first question I have is, where do you recommend keeping your money while you are saving up for the next syndication deal? Do you keep it into your high yield savings account, your stock market, under your mattress? Where do you actually keep? And I'm going to give this question to Tate and he's going to take this first.

[00:02:55] [SPEAKER_04] I mean, there's a number of different places to hold it. Obviously, you put it into a stock market account. There's going to be market volatility. Honestly, one of my favorite places to keep it is in my life insurance. I run that as my savings account. So money comes in, it goes into life insurance policy, and then I borrow it back out. That's the entire flywheel of that vehicle. It's the reason why we do it. And again, you got to be disciplined. You got to put money back into it. You got to borrow against it to make it work. But that's where I like to keep it.

[00:03:24] [SPEAKER_04] But it depends on everyone's situation, of course. Awesome. So is it a real deal as to who the owner is? Should it be a quick claim question?

[00:03:41] [SPEAKER_05] No, that's a really good question. And yes, there is a paper trail. If you look on the assessor's webpage or wherever you see the title and the chain of title, you're going to see that you owned it at one point and at one point it went off of the radar. Your name goes off and then the LLC would now be on public record moving forward. So it does create some speculation with regard to the attorney as to whether or not you still own it or whether you don't own it anymore, whether you manage this LLC or own the LLC or whether you have additional owners.

[00:04:10] [SPEAKER_05] And so it does then lead to speculation, which requires an attorney if they had to file a lawsuit, they'd have to prove that and they'd have to jump through the hoops to be able to get at that ownership.

[00:04:20] [SPEAKER_04] Great answer. Okay. You buy an STR or a short term rental for $1 million. You do a cost seg tax savings of $300K. Everybody following along? Three and a half years later, we sell the house. Did I avoid depreciation recapture? How do I avoid it? Or how do I avoid it? Right.

[00:04:40] [SPEAKER_03] Yeah. So this is the tricky part. Again, if you lived in California, Pennsylvania, New Jersey, we're going to have issues because you're not getting the, they're not matching the short term part of it. But selling it within the three, three and a half years, you have depreciation recapture when you sell the property. But you also have to worry about, you're not going to get credit for all the things that you wrote off. There's going to be taxable income sitting on the table that couldn't be lived into the new property. That's the danger.

[00:05:10] [SPEAKER_03] Hold it for five plus years and it will be a lot less painful.

[00:05:15] [SPEAKER_04] And if I may, we had a question come in earlier in the day that I think this is a perfect segue into this question. You know, we talk a lot about taking the tax benefits and either 1031ing into another property or you invest in, let's say a syndication deal. It goes full cycle in five years, doubles your money. You recognize a gain. And then if you take that money and you reinvest it into another deal, you can do what I like to call Lazy Nance 1031 where you kick that can down the road. You get a passive gain.

[00:05:43] [SPEAKER_04] You get a passive loss from the new deal that you're investing into. You're able to effectively kick that can further and further and further down the road. So, and one of our attendees today asked, hey, how do I get off that ride? You know, let's, let's say I'm, I'm, I'm doing this over and over again. Is there any way to, to mitigate that tax hit when I want to get off the carousel?

[00:06:03] [SPEAKER_02] Die. Yeah. Uh, and that's a, you know, you die and then it goes, it goes with a step up in basis. Yeah. I mean, it's a real, you're, you're, you're right. I love it. If you're looking for a serious answer, there's not one.

[00:06:18] [SPEAKER_04] You know, well, and I think, I think you make a good point though. Like the step up in basis is why we do really good trust and estate planning. So that when you do die, what happens is your, your trust is going to get appraised and you're going to get a step up. And when that goes to your heirs, then that, that all the tax that's been mitigated over the years has been mitigated for your, your say it's right. It's good. It's fun. So that's a good reason to do really good trust and estate planning. So that's great answer. Okay. I'm going to personally take this one.

[00:06:48] [SPEAKER_04] Cause I love this question. Probably my favorite question in this entire stack. When you were starting out, how did you get past the scarcity mindset and fully dive in? And I think what people think is that there's not enough deals to go around. People think that they can't share anything because someone's going to steal their deal or there's not enough money in the world, or there's not enough deals in the world. I'm here to tell you there's enough to go around. I've always prescribed to having an abundance mindset. You know, Zig Ziglar quote, if you help enough people get what they want, you'll get

[00:07:17] [SPEAKER_04] whatever you want or something to that effect. Right? I share Tate shares. These gentlemen share tons of information about anything. I share the deals I'm doing. And the other thing to get out of scarcity mindset is to increase your deal flow. Right? If you only have one broker sending you a deal or one person sending you deals, guess what? You're going to feel like you have a scarcity mindset because you only are getting one or two deals. Right? I look at three self storage deals every single day because I've networked with every single broker in the industry.

[00:07:46] [SPEAKER_04] Right? So you just have to get over the scarcity mindset. There's enough money to fund all of your investments in this world. Right? There's $17 trillion parked on the sidelines. Right? There's a plenty to go around for everybody, which is why we started the podcast, which is why we share all this information and no cost for free on the show. Right? So, I'll also just jump in just from a personal standpoint.

[00:08:11] [SPEAKER_04] I know pilots, a lot of pilots in this room are probably traumatized from years of flying at the regional, sleeping on air mattresses. Right? And so, you know, the- Plugbeds. Yeah. Plugbeds. That's right. Cradle of flight class. Yeah. You know, and I think that that carries through to adulthood where it's like, you know, if you could steal the Diet Coke out of the cockpit and do it so you don't have to buy one. But you have, at some point you have to grow a lot of sprighty.

[00:08:39] [SPEAKER_04] You got to realize, hey, I've had this amazing income stream and it's time to live your life. Yeah. It's always a balance of holding back savings in order to invest versus enjoying your life. And I think that everybody should be encouraged to do both. You know, don't save so aggressively and invest so aggressively that you aren't enjoying these wonderful years of your life wherever you are in your life. But at the same time, balance that with putting money into real assets that are going to bear

[00:09:08] [SPEAKER_04] fruit down the track. So that's what my two cents. So I had a question in the break, which was, if I go to the short term rental strategy and I spend more than a hundred hours across multiple STRs, do I qualify for the short term rental loophole for all STRs because I'm spending more than a hundred across multiple? Question.

[00:09:34] [SPEAKER_03] You have to qualify. If you were to check the box that you are a real estate professional and then you have to do a grouping election.

[00:09:41] [SPEAKER_04] It's dash nine, right?

[00:09:42] [SPEAKER_03] If not, then every single property has to have those hours. And that could be killer. So make sure that your tax professional is checking the right box, fill the forms out properly to make sure you have the grouping.

[00:09:57] [SPEAKER_04] And I'll just tack onto that just for anybody listening that applies, whether it's short term, long term. You want that grouping election if you're going to be real estate professional. So if you're going to go after that real estate professional status, make sure that that CPA is checking that dash nine grouping election because otherwise that can double up your... You want all of the hours across all of the properties to count essentially. And there are very few instances where you see somebody claiming real estate professional status legitimately where it's just on a single property.

[00:10:25] [SPEAKER_04] So you're almost always going to need that grouping election. I love it. The diagram that we showed today at the conference had active business on the left and passive real estate privacy trust on the right. Where do STRs fall since they span both categories?

[00:10:44] [SPEAKER_00] Great question. So for a holding standpoint, you want them in a disregarded LLC. We see a lot of people come out and they've got rental properties in an LLC taxes and S-Corp because they think it's active income based on short term rental. And the problem is now if they ever go to refinance, they got to pull it back out, refinance it. There's going to be probably a transfer tax of some sort by doing so. So again, let's bring up death.

[00:11:08] [SPEAKER_00] If they die with that property in it, they don't get a step up in basis on the property, but only on the stock. Right? So you want to make sure that you're holding your short term, long term rentals in the disregarded entity with the real estate privacy trust. And then if you have active or you've got material participation, then yes, you can drive some of that income over to the LLC taxes and S-Corp. Oh, love it.

[00:11:33] [SPEAKER_04] I've stayed at many Airbnbs where there's a rental downstairs and the owners live upstairs. What if, what considerations should I be aware of if I were to purchase such an STR, i.e. cost seg, tax deductions as a percentage of square footage?

[00:11:52] [SPEAKER_03] Well, first of all, you have to figure out what the square footage is. So if 50% is you're living in and 50% is being rented out, that's how you're going to do it from a tax standpoint. 50% will get your capital gains exemption, 50% will not. So that's how it has to be balanced is based on the square footage of the home. And whether or not you're, if you're renting a room for example, we have to figure out what that room is compared to the rest of the house.

[00:12:17] [SPEAKER_03] So these are, again, important things that you track all this stuff and figure out what those numbers are. When did you put the property in service? Now, if you went and say a show place, then put it on the market, that's going to change versus put it on the market and then finish up the furnishings. There's things that you can do to increase your tax deductions in this situation, but figure out the square footage. It's got to be tracked. Yep.

[00:12:42] [SPEAKER_04] All right. I'm going to change it up a little bit. We're going to get a little vulnerable, Tate and I on stage. A very personal question. At what point is passive income enough to stop being an airline pilot?

[00:12:53] [SPEAKER_02] Why?

[00:12:54] [SPEAKER_04] And I have a fun story about this one. Well, I think the simplest answer is the amount of passive income to stop being an airline pilot is the amount of money that you're making as an airline pilot. I mean, so as soon as you replace your income, I mean, to me, but here's the thing. I love to fly. And Ryan, you love flying as well. And we're very, very fortunate to be in a career that we're not trying to crawl out of by any means necessary.

[00:13:21] [SPEAKER_04] I think that everybody here would probably like to maybe fly a little bit less or rely on their paycheck a little bit less. But I don't I don't think there's a whole lot of people in this room, if I'm guessing they would quit if they won lottery tomorrow, which is a pretty spectacular place to be. So that's a little bit of a moving target. I think there's different levels as well. You know, there's there's enough to pay your bills and not have to go to work. There's enough to live comfortably and not go to work. And then there's like, well, F you money. Right.

[00:13:49] [SPEAKER_04] So here's here. Here's the way I look at it. Right. There's eight thousand seven hundred and sixty hours in a year. Twenty five hundred hours. You spend sleeping. Three thousand hours you're going to spend at the job at seven hundred and fifty hours a block times the four hours of getting to the airport and pre flight and playing all that in a way. You're left with about thirty two hundred hours. You're like divide that into fifty two weeks. You get about sixty hours a week.

[00:14:19] [SPEAKER_04] What's going to bring you the most happiness in those sixty hours? Maybe it is flying for the airlines. Maybe you get personal enjoyment on that. What is your return on life? Right. We're all making enough money to pretty much enjoy everything that you desire in life at this point. Right. We agree. So in that 60 hours of a week that you have, how do you want to spend it?

[00:14:45] [SPEAKER_04] And for me, I personally get a ton of fulfillment out of being an airline pilot. And having passive income gives me the optionality that I don't have to go chase every green slip or fly every trip that I'm on. I want to be there. I want to be part of this. I want to be trained to airline standards and I want to work with the people that I work with. And then I want to have flexibility beyond that. And I also want to create a tremendous amount of wealth for my family. And so that's why I'm not going to quit. I'm going to stay.

[00:15:15] [SPEAKER_04] And, you know, and it's a big decision you've got to make with your family. And it really starts with your why. So I don't really have a number associated with it until it stops being fun. That's it. All right. Do you have any examples of people having appraisals done on their traditional IRA and then converting it to Roth? Can you dive into the possibility of the numbers on this? Maybe you can explain that strategy first. Yeah. Go ahead and explain that strategy, Adam, if you'd like to take that. Yeah.

[00:15:45] [SPEAKER_03] So the appraisal, you're getting the fair market value of the property. So this is assuming that you have an IRA that owns a rental property. Right. Get the appraisal done. And you probably want to get make sure if they can get three appraisals, you could get a BPO, a broker's opinion letter. But in this situation, if you're going to be converting it to Roth, the whole reason for the appraisal is to document the value of the property. Because when we convert it, we're going to pay taxes on that amount. Converting it from traditional to Roth.

[00:16:14] [SPEAKER_03] And if we don't have it right, fast forward, just talking to a guy, 2018 was a problem. He just got a notice from 2018. So keep the records, keep good records so that we have evidence to show that that was a fair market value, a fair assessment of the property, so that our Roth account is not going to be questioned or scrutinized later on.

[00:16:36] [SPEAKER_04] I think before we get into this, too, we want to make sure that we're not giving any tax lead or investment advice. Friendly conversation, friendly conversation I've had with an investor goes something like this. When they went, so they invested in one of our mobile home park deals we did years ago. And the investor asked me, he said, hey, can I do this traditional IRA valuation? What they learned from getting that investment, they did a $100,000 investment.

[00:16:59] [SPEAKER_04] And what they learned when they went to the appraisal companies, the appraisal companies said, because you lack control and liquidity in this syndication deal, we're pretty much without even looking at it, they're going to mark it down 10, 20, 30%. They ended up getting a 70% reduction. Do not take that to the bank. I think that's ridiculous. So they marked it from $100,000 value down to $30,000 value in this case. I don't think that, I don't know how he did that.

[00:17:28] [SPEAKER_04] But they got the appraisal certified. And so now, instead of having to pay taxes on the $100,000 traditional to Roth, they only pay taxes on the $30,000 contribution. About a year later, that $100,000 investment when we sold the deal paid out $250,000. So here's the takeaway.

[00:17:51] [SPEAKER_04] If you're planning on doing like an STR next year, maybe you're planning to not be at work half the year or something, or you're having a lower amount of income, that's the time to do it. The time to do it is when your income is lower, because that next dollar that you have to contribute to the conversion is going to be at a lower effective marginal tax rate. Right?

[00:18:16] [SPEAKER_04] So do this in a year where you're not going to be way above the 37.5% tax bracket, right? Remember, your tax savings is not about what you pay or what you owe in tax. It's about that next dollar. Where is that next dollar in your marginal tax rate? And do it in a year that's low. I was like, Peyton, I always talk on the show, like, if you're a new hire at an airline, that's the lowest time, that's the lowest pay you're ever going to make. Those are your lowest earning years.

[00:18:42] [SPEAKER_04] If you're going to convert traditional to Roth, please do that in your first year. If you can afford it, right? I mean, you should try to convert as much as you can because you're never going to be that low in a tax bracket. Everybody see that article in the Wall Street Journal like a month ago? It was a United captain who retired who had millions of dollars in his 401k and it was all traditional. And so what that meant was he was going to have R&Ds at age 72 and he was going to pay taxes on his entire retirement account as he blotted out over retirement.

[00:19:10] [SPEAKER_04] Right. If you're younger, you have the benefit of trying to get as much of that stuff over to the Roth as you can throughout your career. I get the traditional savings against the income today, but try to convert that Roth, get that Roth chunked over and do these different strategies to do it and have it cost you a lot less. That's kind of my two cents on it. All right, Tate, I'm going to throw this one to you.

[00:19:33] [SPEAKER_04] Explain in simple terms how to decide what funds we use on an investment, cash, SDIRA, raw, et cetera. Oh, good one. Okay. So, and Adam, maybe you can back me up on this, but when I'm thinking about what to do with cash, I want my cash to be in extremely tax advantaged investments. Take oil and gas, for example. Oil and gas investment gives you an 80% deduction thereabouts in year one, the year that you make the investment on.

[00:20:01] [SPEAKER_04] So on $100,000, you're going to be able to take an $80,000 write-off. It's active against your airline income. What happens if you take your Roth SDIRA and you invest in oil and gas deal? Nothing. I mean, nothing bad, but that tax benefit is going to be locked up. It cuts both ways, right? You're not going to pay taxes on the income that you're producing through the production revenue, but you're also not going to get that tax benefit. So that makes absolutely no sense. You want to be investing in an oil and gas deal with cash. And this is just to optimize where those dollars go.

[00:20:31] [SPEAKER_04] It doesn't make the investment any better or any worse, right? It's just optimizing where those dollars are coming from. I think that when you look at what to put in your SDIRA, you want to put those home runs in there. Those things that are going to do 2X, 3X or more that aren't otherwise tax advantaged. And you're looking at it going, okay, well, if this does what it's supposed to do in five years and we get a 3X return on my money, I don't have a big tax problem at that point that I'm going to have to deal with. Well, you won't have that tax problem to deal with if it's in an IRA.

[00:21:02] [SPEAKER_04] I don't know if you want to tag onto that at all.

[00:21:04] [SPEAKER_03] It's 100% right. And then the question becomes if it's a Roth IRA and you can get that 2, 3X and you're in a great spot. Right. So like when I was talking about converting those things over, now when those unique opportunities come along, getting the tax-free growth versus the tax-deferred growth, you're 100% right. Do it and get your tax-advantaged accounts in cash.

[00:21:27] [SPEAKER_04] The other consideration too is if the investment is cash flowing, you can benefit from those distributions today. So if it's in cash. Right. If it's in cash. But if it's in retirement, it's just more of a promise in the future. Right. Like that you'll get that money in your retirement account and it's locked up. Right. So like cash today, distributions today, where if it's like a ground-up development deal, we're not going to get paid out for a long time. Put it in your IRA. It's going to sit there. Yeah. Development deals in your IRA are great. Those are my favorite.

[00:21:54] [SPEAKER_04] Because yeah, if a deal throws off a bunch of cash flow, it's like if a deal is putting $300 a month into my IRA, I can't do anything with that money. It's just sitting there. So I want that cash in my bank account. Plus it's going to be tax-free because you've got the appreciation that offsets it. All right. Next question. How can you tax efficiently end or terminate self-directed 401k and its syndication investments once you retire or quit working?

[00:22:20] [SPEAKER_03] How can you end or terminate the investment? Well, when you sell out the investment, you've got your cash sitting there. And there's one way to get the money out of the 401k, and that is to take distributions. So it is what it is. You're going to pay taxes at the end of the road. Unless you die and pass it to your kids, that will turn into an inherited IRA. And if it's a traditional, they will pay taxes at some point because they have 10 years to get that money out of there. Right.

[00:22:48] [SPEAKER_03] So if it's a traditional account, Uncle Sam is going to get his money. Unless it's Roth, right?

[00:22:54] [SPEAKER_04] Unless it's Roth. All right. Next question. Can I sell my primary residence to my self-directed IRA and then turn it into an investment?

[00:23:04] [SPEAKER_03] You cannot sell your own primary into an IRA or 401k. It's a prohibited transaction that violates the self-dealing rules. So no, you can't do that.

[00:23:13] [SPEAKER_00] And that's for any property. You can't take a rental property that you own, sell it to your self-directed as well.

[00:23:18] [SPEAKER_04] And the reason why that is, is typically because the IRS doesn't want you to pump up the value or lower the value for whatever you're trying to do. Right. You're basically, it could be a backdoor way of stuffing more money into your 401k or trying to pump up, you know, how much cash you're getting. Right. Your self-feeling, which is essentially the intent. All right.

[00:23:39] [SPEAKER_04] So Tate mentioned waiting to fund his 401k after the airline had mixed in their contributions or maxed out their contributions. Is there any benefit to doing this versus spreading the 8,000 in personal contributions throughout the year? Yeah. Or do it in January? So what I was talking about earlier with you, Adam, you were on stage talking about advanced tax strategies.

[00:24:05] [SPEAKER_04] And you had a section in your slide deck that talked about the 18% 401k contributions that airline pilots are enjoying today. Well, what that creates is a problem where if you're making over $360,000 a year, which a lot of people in this room are, your airline cannot contribute another dollar to your 401k after you have reached that 360k limit. So it doesn't, this isn't a how much money is going into your 401k.

[00:24:35] [SPEAKER_04] This is a how much money can be made on a gross year, your gross year to date income on your pay stub. Soon as you hit 360, airline can't put that 18% into your 401k anymore. It doesn't matter whether they're contributing 16 or 18%. It's stopped. So what this creates when you've got an 18% contribution is I believe it's $64,800 is the math on 360, which is the maximum this year.

[00:25:01] [SPEAKER_04] Well, and then you have a maximum contribution limit of, I believe is $24,500 for this year, disregarding catch-ups and things like that. Well, you add those two things up. I'm not a math wizard, but it's more than $72,000. And $72,000 is the maximum for everybody. And it's almost 90 grand. So the issue here is saying you can't fit both of these items into that box. So somebody is going to win out, right?

[00:25:30] [SPEAKER_04] And not be able to contribute anymore. What I'm saying is I would rather have the airline take that, fill it all the way up, and I'll top off the 8,000 or 7,000 remaining at the end of the year. Because if I'm a super saver and I get an early start and I'm doing maximum contributions into my 401k and I put $24,500 into it in the beginning of the year, Delta, United, American, whatever, they're going to run out of runway a lot faster. They're only going to be able to put $40-something thousand into that account.

[00:25:59] [SPEAKER_04] It's going to spill over into that market-based cash balance plan a lot sooner. So you're essentially forcing more money into that market-based cash balance plan or just right back out onto your paycheck and canceling out those contributions early anyway, right? If it's a spillover. So hopefully that makes sense. And on the cash balance plan, staying on that topic, when a pilot turns 59 and a half, can they take the money in the market-based cash balance plan and convert that into a self-directed IRA?

[00:26:27] Sure.

[00:26:29] [SPEAKER_03] I could say this. I don't know that one.

[00:26:31] [SPEAKER_04] I don't know. We'll put it in the show notes. We'll find out what. We'll put it in the show notes. Yeah, that's a great question. Because I guess, I mean, at some point, it's got to be distributable or- Or if it's not an half, it should be, yeah. Yeah, it should be is kind of my thought, but interesting. Okay. You stumped us. Good job, everybody. Okay. Great question. How do I find a fractional family office that will quarterback, synergize taxes, asset protection, investment options, et cetera?

[00:27:00] [SPEAKER_00] Micro office. Go ahead, David. Yeah. I mean, you can do it, but just, again, it's going to depend where you're at in your journey. Where is it worth it going to that extreme? So family office has been around for a long time. Sometimes it's called just a management company. Sometimes with a guaranteed payment that comes up.

[00:27:19] [SPEAKER_04] What is a family office for anybody that doesn't know?

[00:27:21] [SPEAKER_00] So family office is an entity that you typically LLC taxes an S corporation most frequently where there's multiple different businesses that can be conducted in that one entity. There could be family members in there as well. We see a lot with trade people as well doing, not doing day trading, but being able to set up a business to get the same write-offs as a day trader. So it just allows you to push more expenses through an entity from a lot of diversified different types of companies or businesses.

[00:27:49] [SPEAKER_00] And then you could always do a guaranteed payment that just kind of bleeds down some of the money out of there for tax liability.

[00:27:56] [SPEAKER_04] Love it. All right. This person has previously purchased a single-family home. What are the rules and benefits available for converting it into STR?

[00:28:06] [SPEAKER_03] So you've got a single-family house. You're going to convert it into an STR. The rule is when are you putting it in service? So once you get all fixed up, remember, all the money you spend finishing the home, everything before you put it in service, before it's ready to go on the market, is treated differently from a tax standpoint. That will generally go into the cost basis of the property. If you're doing the accelerated depreciation, it might not be a big deal. But once you put the house on the market for rent, that's where the clock starts.

[00:28:34] [SPEAKER_03] And your primary residence, remember, if you live there two out of the past five years, you sell it, you have a $250,000 or $500,000 capital gains exemption. So you turn it into a rental. Okay, watch the clock here. We've got up to $500,000 of tax-free money that we could be receiving if we watch that clock.

[00:28:55] [SPEAKER_04] So that's actually a good way to get out of a rental property. If someone is willing to go and just live in it for two years, you've got $500,000 as a married couple of capital gains tax-free exits there. All right, I love the next question. Someone has a house that they live in currently, 2.5% assumable VA loan. They've got $400,000 in equity.

[00:29:19] [SPEAKER_04] They're going to move to domicile and they're debating, do I sell this house, take the equity out and invest it into an STR somewhere else? Or do I rent out that house and let it cash flow for $750 a month of cash flow? What do I do?

[00:29:36] [SPEAKER_03] 2.5%, you're never going to see that again. So the question becomes, could you invest that money and make more of their own 2.5%? I darn should not be paying off the mortgage. And if it's, depending on the area, if it's in a decent area, it's paying for itself. It's not a bunch of problems. I think the buy-and-hold strategy for that one is a wonderful idea. As long as it wasn't a buy-and-may or you're going to not lose that on a $500,000 tax benefit.

[00:30:04] [SPEAKER_03] I want to keep that thing in place as long as possible.

[00:30:08] [SPEAKER_04] All right. The age-old debate on a traditional versus Roth. As a captain at a legacy, should my 401k contributions be traditional or Roth? And he also has a Roth IRA. He or she does.

[00:30:24] [SPEAKER_03] So if you're making a 401k contribution as an employee contribution, and we're talking about a regular 401k plan, right? So if you're putting money into the Roth, you're not going to get the tax deduction, but you're able to put a lot more money in. So based on your retirement goals, knowing that you've got this extra $24,500 that you can put in as an employee, knowing that you're not going to get the tax deduction,

[00:30:48] [SPEAKER_03] but understanding long-term that is going to pay off big time to not take the tax deduction now. Instead, get that money growing tax-free, bigger chunks of money. It goes a lot more in retirement. So I see it. It's a great move.

[00:31:04] [SPEAKER_04] Great. Would using a self-directed IRA invested in self-storage be not as advantageous as outside money from a tax benefit standpoint?

[00:31:17] [SPEAKER_00] What do you think, David? Yeah, I mean, a couple different ways to look at it where you're at in your investment journey. And are you an appreciation type of person? Is this something you want to hold? Something you want to get rid of in two or three years because it's cash flowing well? So I think you have to look at it and look at all of the different layers here and see where, you know, cash flow meets appreciation. And, you know, what's my exit strategy? Those are the three things that would be considered.

[00:31:46] [SPEAKER_04] Yeah, I mean, personally, like I've used my self-directed IRA to invest in self-storage. And, you know, at the time, it's like what buckets of cash do you even have available? Right? Like I may be maxed out of how much taxable money I want to deploy that year or not have any. I may have fun sitting in an IRA and I might see an opportunity that I absolutely will love and I want to do it. And it doesn't matter how careful I want to be. But I want to do this opportunity. I'm going to use it in a self-directed IRA.

[00:32:12] [SPEAKER_04] I also think it goes back to that question that we talked earlier about, which is what cash do you use for what's investments? Right? And if you have a ground-up development deal that's building a new self-storage, self-directed IRA could be a great thing because you're not going to have any cash flow and you're not going to have any real tax benefit for at least until that facility is entered into service, which you still get the bonus depreciation cost segregation. But later. But later. Right? So I would say that that would be like an edge case for that.

[00:32:41] [SPEAKER_04] And I would say that if you talk to somebody at Turbine Capital or Spartan and you're like, hey, what do you think? Or maybe talk to the folks at NCH. Like, hey, get all the cards on the table and tell them what's going on. I think we can pretty much kind of at least give you some thoughts about kind of how and where to put that cash. And we'll give you financial advice, but I'll certainly give you my opinion what I would do. Exactly. Perfect. All right. Financing an STR. What is the best way to do it? What's the best loan type?

[00:33:11] [SPEAKER_04] How much money you want to put down, et cetera?

[00:33:15] [SPEAKER_03] For financing, if you can get a 30-year fixed rate mortgage, generally you're going to get the best rates. However, they look at your debt-to-income ratio and assuming you're good and your debt-to-income ratio is good, then a 30-year fixed rate mortgage is great. They do have products, a 30-year fixed rate DSCR, a debt service coverage ratio.

[00:33:36] [SPEAKER_03] So if you're debt-to-income and you're stuck, as long as you have your 20%, 25%, 30% down, you can go get the loan on the property regardless of your personal credit, regardless of your personal income. We can get that loan on the property. So most of the time, it's going to be best to buy it personally. But sometimes, you're first to buy it with a DSCI loan or a commercial loan. So that's where you really got to talk with your mortgage guy, make sure that you're doing something right for you.

[00:34:05] [SPEAKER_03] You can look and see that short-term rental. We're going to hold it for five years. Some people like to do the interest-only loans, where they're going to do interest-only, which could be very dangerous unless you know that in five years you're out. And no one has a crystal ball. Can we sell them five years or what's going to happen? So I think if you're going to be a mortgage professional, it's a really good idea when it comes to deciding how you're going to buy it personally or through an LLC and what type of loan you're going to use.

[00:34:31] [SPEAKER_04] I think there's three things that are going to mess up a real estate deal. And that's, well, first of all, the one thing that will mess up a real estate deal is debt. And there's three things about debt that'll screw up any deal, no matter how good or bad it is. Fixed or floating, right? You want fixed rate debt. The length of the debt has to be long enough and the leverage has to be low.

[00:34:54] [SPEAKER_04] And I know that there's a lot of companies out there that will tempt you to get the highest leverage possible and a short-term loan. And it's super easy. Just sign here on the dotted line. And I'll tell you that all of the real estate screw-ups in 2021 and 2022 and 2023 were all short-term debt, floating rates, high leverage. And everybody can tell you, oh, it was the economy and the interest rates and all that.

[00:35:24] [SPEAKER_04] Short-term loan, floating rate debt, super high leverage. Here's something to think about, guys. You buy a million-dollar property and you put a million dollars down. Okay. 100% paid cash. What happens to your dollars invested if it goes down 20%? You lose $200,000. If you sell it. If you sell it, right?

[00:35:49] [SPEAKER_04] You take the same property and you put a $500,000 loan on that and it goes down 20%. How much did you lose? 44% of your capital. So everybody will come on these real estate conferences and they'll talk about leveraging and how awesome that is. And it is awesome. Don't get me wrong. It's how you amplify returns.

[00:36:09] [SPEAKER_04] But anything that screws up a real estate deal is because it was over leveraged, high of not of debt, short-term debt that had a very short window and the rate was floating and changed. So when you go into an STR, lower leverage, in my opinion, lower leverage, super long-term loan, fixed rate financing. And that is the tale as old as time. Anything that messes up a real estate deal is usually surrounding the debt.

[00:36:39] [SPEAKER_04] All right. So please describe what type of funds Roth or pre-tax marry best with different investment types of any, such as oil and gas, STR, down payment, and syndications, et cetera. I think we got Oregon text on that. We did, yeah. Cash for sure for oil and gas, but do you want that active text right up? All right. We are getting close to the end of these. While you look for those, I'd like to get Kurt involved here. I was doing good.

[00:37:07] [SPEAKER_02] I've blown it up there. I'm like, oh, I'm. Kurt has the best. I should be taking notes.

[00:37:12] [SPEAKER_04] Who had the best jokes today? Kurt, right? He was. So Kurt Harris is an attorney that does all the trusts. Trusts. Over at NCH. Yeah. Revocable living trusts, land trusts. Kurt, I'd love to hear from you, what are some of the biggest mistakes that people make in trust and estate planning? The people that are actually doing trust and estate planning, you know, not the people that are just ignoring it, putting their heads in the sand, or forgetting to get around to it. People that are actually attempting to do it right. What are the biggest mistakes that you're seeing them make?

[00:37:42] Okay.

[00:37:42] [SPEAKER_05] Well, we had a question earlier today, and funding is a really critical element of it because the trust has to be funded. And oftentimes people get it drafted and they get it signed, and yet they neglect to put something in it. To at least make the notation of some asset, identify something around this house that I want to dedicate to the trust. Because then once it's funded, then you know it's really solid. That's the one thing that the attorney, you know, I can't go to your house essentially and do it.

[00:38:09] [SPEAKER_05] You know, I could write something down if I knew what to write down, and I would, believe me, if I had an inclination. But yeah, funding is a big concern. The second part that I struggle with at times is clarity. You really want to be clear with how you want the distributions to go. Not overcomplicated, but clear. So that your trustee can be able to read the roadmap, and essentially it's the flight plan with a lot of you, you know, and just follow it. You know, just do what it says.

[00:38:37] [SPEAKER_05] If I just do everything that it says here on these bullet points, then I'll get to the end, and I'll be discharged as the trustee, and I will have effectuated all the terms of the trust. That's something that we find a lot of times. It's just unclear as to, you know, who your beneficiaries are or what you want to go where. And so if people were a little more detailed in that, it would make a world of difference at the end when you were passing on.

[00:39:04] [SPEAKER_04] What do you recommend for somebody who is maybe in the process of setting up trust, and they're getting to some of these more sticky questions. It's like, okay, what kids get what, and when are we going to give it to them? What would you say to them? Because you can amend these things, right? So what would you recommend in terms of just getting something down on paper, and then when you have time to have those more advanced conversations with more minutiae details, what do you recommend people just get down so that they can get the trust formed?

[00:39:33] [SPEAKER_05] Yeah, I try to push people quickly to move forward and to get it signed, to get it funded, and to get something written down. And with my own brother who is going through his second marriage, and we're trying to put a trust together, it's kind of a difficult, complex thing. She has two kids, he has three, and they're trying to figure out how that's supposed to be. And there's been some bickering that I got involved in the middle of at a meal, which is unfortunate. But I just said, hey, I'm just going to do it this way.

[00:40:00] [SPEAKER_05] We're going to do 20% each, and we're going to get it down on paper. That's fair is fair. And then you guys can amend it later on. But let's just at least get it done, get it set, get it scanned into my computer. I'll save it, whatever. And let me know when you want to do the amendment, because the amendment portion can be a lot easier after a little bit of time and some discussion and some time to think that over. In the case of some of these second marriages, for instance, too, sometimes we just recommend doing two trusts on that.

[00:40:29] [SPEAKER_05] It's kind of a dual trust solution where I can have a trust for my family, that previous family, and the one for the current. And that can just solve a lot of issues right off the bat by doing that or to set something up so that it's separate and maybe so that they don't have the same trustee, because that can lead to all kinds of issues and problems. And so seeing that, who do I want the trustee to be? Is the trustee someone that the family will rally around? Is it someone the family will respect?

[00:40:57] [SPEAKER_05] Is it someone the beneficiaries will listen to or whatever it happens to be? That can be super helpful as well.

[00:41:02] Wonderful.

[00:41:03] [SPEAKER_04] Thank you. So we're actually through all questions except one last one. And this one is a love note to Tate. Do you not invest? It's about investing. Do you not invest your 401k to use your take-home pay to invest in alternatives? Or is there another motivation? That's a funny one. I haven't not contributed to my 401k for about the past eight minutes. I got a better place to put the money.

[00:41:33] [SPEAKER_04] But that's a personal situation. My personal opinion, that's certainly not financial advice. I think that I was very lucky to get hired in airline very young, just before my 24th birthday. So if I stick around, I'm going to have plenty of money in that thing. I don't really need an extra $10,000 a year going into it. I can think of better places for that to go. I run an oil and gas fund.

[00:41:57] [SPEAKER_04] So there are other places that can enrich my life today through property ownership, through tax-advantaged investments. And because this is what I do day in and day out, I feel very comfortable just directing my personal funds elsewhere. Yeah, I think this is where it gets really personal and specific to your situation. I can probably say that I have tens of millions of dollars of depreciation piled up on my tax return.

[00:42:28] [SPEAKER_04] Right. So my motivation to go do deals is pretty high because the depreciation benefits that flow into my earned income section wipe out all the taxable income. Right. And also, I don't want to put money into a 401k when I know I can invest my money into my own company and make a lot better returns that come back to me. Right. And that's very personal and specific to me.

[00:42:56] [SPEAKER_04] If you're flying the line and your only thing you're doing is contributing your 401k and you have nowhere else to put that money and it's not tax-advantaged in any way, well, then it might make sense for you to max out your 401k and max out your max cash balance plan. Right. Might as well. And we always say that. It's like, I laugh. I always say when I have industrial calls, I'm like, listen, we don't want your first 50,000. We don't want your last 50,000.

[00:43:20] [SPEAKER_04] So max out your 401k, do all the Dave Ramsey stuff first and then shift to the Kiyosaki side of things. Right. And the big thing in that is, and I'm going to talk about this tomorrow, is like the 10-30-30-30. That first 10% liquidity bucket is so important. You got to make sure that 10%, at least 10% of your total net worth, if not more, is in something liquid. Right. And I don't mean some crappy checking account at Wells Fargo or Bank of America that pays you no interest.

[00:43:49] [SPEAKER_04] I mean, in some sweep account that you have access to within $24 to $40, that is at least paying right now probably 4.5% to 5%. Right. And that's like your, it's your safety net to not have to make a dumb decision about selling appreciated assets or really good things because your water heater broke or something happened on the property. Like you got to, you got to make sure you've got that cash so you can move with what happens in life. Right. Like something might come up and you're like, oh my God, I don't have any cash.

[00:44:19] [SPEAKER_04] And so now you've got to go sell a bunch of stuff you don't want to sell. So I would say that, you know, every situation is going to be completely personal and individual to you. So one more, I got a quick fire round for everybody. Top piece of financial advice you've ever been given in your entire life. Just maybe real quickly, Adam.

[00:44:38] [SPEAKER_03] As the value of money over time and the investments you make today and the tax savings you get today that is invested is going to be, you'll look back and see it's one of the smartest things you've ever done.

[00:44:53] [SPEAKER_01] Kurt?

[00:44:53] [SPEAKER_05] You make your money on the buy and you can't pay somebody to care as much about your money as you do.

[00:45:00] [SPEAKER_00] I love it. David? Yeah, I mean, mine's easy. It's better done than perfect. You know, stop waiting around for the right deal, move, take action, get it done because good deals don't stick around long. So if you're going to sit there and hem and haw over something over a couple of days, somebody else is going to get it.

[00:45:15] [SPEAKER_04] Same thing can be said for trust and estate planning. That's why we wanted to have you here at this conference. This has been absolutely fantastic. For you out there that are listening to this podcast, one of the benefits of this in-person event is the fact that we've had some opportunities for the attendees to have one-on-one consultations. We are very, very fortunate to have you here. It's been very gracious of you and your time for your team to come and join us at this event. So thank you for your attendance and thank you all in the audience for being here.

[00:45:43] [SPEAKER_04] But before we go, make sure you go give us a review. Five stars on Apple iTunes. Get those reviews up. Thanks for listening. Catch you on the next one. Bye.

[00:45:53] Bye. Bye. Bye.