Announcer: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401Ks, Scott Hanson and Pat McClain would like to help you by answering your call. To join "Allworth's Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.

Scott: Welcome to "Allworth's Money Matters." Scott Hanson.

Pat: And Pat McClain. Thanks for joining us.

Scott: That's right. We're glad... Actually we are glad we have people who listen to our program. I mean, it's funny we've been doing this program, Pat, for 27 years on financial matters.

Pat: Now a podcast, but we started in terrestrial radio.

Scott: Correct. [crosstalk 00:00:51.701] And still some, but most of our listeners are podcast listeners.

Pat: That's correct. Yeah.

Scott: And talk about financial matters. If this is your first time joining us, we're gonna talk about financial matters. We're gonna get to in a moment, but I had a friend of mine I've known him... Actually, he did some work for us a number of years ago now I think about it, five years ago, some kind of a marketing thing. And he says to me, I got a text. "Hey, I listened to your show this weekend. You guys are actually really good." Then I saw him, must be around Thanksgiving. He's like, "I downloaded some of your podcasts. I'm really enjoying listening to you guys." And I'm thinking we've only been doing it 27 years, like just now got in? Okay.

Pat: Whatever.

Scott: That's all right.

Pat: I don't care.

Scott: We don't care.

Pat: Yeah, it doesn't. Listen or don't listen. As long as somebody is listening.

Scott: Yeah, whatever you want.

Pat: Well, someone has to listen. If you don't listen, we'll have to go off the air.

Scott: Yeah. And as you know, we talk about financial matters and try to help you make wise choices with your finances. And it is not easy being an investor.

Pat: Go on.

Scott: If you look at studies, most individual investors, their performance is far below what the markets do. Because it's hard to own things when they're out of favor, whether it's individual companies or it's the broad markets.

Pat: Or an asset class or...

Scott: Very difficult. And because there's typically...

Pat: Or own value stocks when growths were in favor. Even though value, were doing fine, growths were doing much better. So your perception is, oh, these value are terrible because that other one did better. They're like, well, we'd be happy with what we did there before if we weren't comparing it to something else.

Scott: And things just go in and out of favor at times. And it's really challenging, both for individual investors and frankly institutional investors. Professional investors struggle as well. I'll never forget in 1999, 1999 the NASDAQ was up 85% for the year. Eighty-five percent in 1999.

Pat: I remember it.

Scott: Yes. Phenomenal.

Pat: I hated going to the gym more than normal because...

Scott: More than normal.

Pat: More than normal. Because of everyone wanting to come up and talk to me about the dot com. Not everybody, people that I knew, like I'm Mark Wahlberg walking into the gym. Like Matt Damon and I are hanging out together. Not everybody, some people. Occasionally someone might come up and want to talk to me about their dot coms.

Scott: That was back in the day. Yeah.

Pat: Oh, yeah. '99 it just... And so the broad S&P 500, I'm trying to go up memory here, was up roughly 20%, but most of that 20% came from growth stocks and large growth stocks. So smaller companies and small value companies got hammered.

Pat: And what is a small value company, Scott?

Scott: It's a company that's got a clear business plan, they've got revenues, they've got a market.

Pat: They've got profitability.

Scott: Profitability. Investors would buy them because they're gonna continue to execute on this business plan. It's making money, it's gonna be good for me as opposed to...

Pat: And they'll get larger over time with consistent earnings.

Scott: Yes. With following their playbook. A growth company is one that maybe their earnings aren't much right now. Maybe they're nothing at all, but what they're working on can really be pretty spectacular in the future. And it might work out great. Might not, but it might be a home run. So, that's kind of the broad differences. But small cap values, those stocks were negative for the year. And I had a friend of mine at the time, he was the CEO...

Pat: This is 1999?

Scott: 1999, CEO of a publicly traded company. They were a small cap at the time. And I actually remember talking to him at the gym. This was, like, in December of '99. He says, he looked totally beat up. He says, "Don't ever go public."

Pat: I remember him, I remember him saying that.

Scott: And I said, "Why?" He says, "Every morning I'm on the phone at 5:30 answering calls from Fidelity, Vanguard.

Pat: Some of them investors, some of them analysts.

Scott: Yeah. But no, a lot of them were, he says, yeah, Vanguard owns a million shares of me. Through their [crosstalk 00:05:15.321] mutual funds. Through their mutual funds.

Pat: Yeah, yeah, yeah.

Scott: Owns a million shares of me. That's how he felt like. And he was just getting hammered. Like they wanted to know why his stock price was going down. And it's going down because investors were not excited with small cap stocks, they were selling those and buying the hot stocks of the day.

Pat: Yes. I didn't sell mine. I owned shares in that company.

Scott: As did I.

Pat: If you look at what happened over the subsequent year, 3 years, 5 years, 10 years, 22 years later.

Scott: Those investors who bailed out on the... And small cap stocks in general, as a whole category performed very well during that period of time. So I think my point is, it's really hard to own things that are out of favor, particularly when other things are doing really well. Right now is a little different times because everything kind of sucks.

Pat: Pretty much everything's out of favor. But no, but I'm gonna counter that, Scott. I listen to the radio all the time and there's the new bright and shiny that will fix your problem. The new bright and shiny that will fix your problem.

Scott: Which is what?

Pat: Well, it's gold.

Scott: But that hasn't worked.

Pat: Literally. But that's not how it's marketed.

Scott: But after a while, that story gets a little old, right?

Pat: It's not how it's marketed. It's gold. It's other active management where there are hedge strategies put in place in order to protect the downside. There is market timing, active, what they call it active multi-time...

Scott: This is tra...

Pat: But it's the bright and shiny. It's the bright and shiny. So there isn't a lot of alternatives to asset classes because most asset classes are doing poorly. But there is an alternative to the buy and hold strategy, which by the way, most pension funds employ the buy and hold strategy. The act of 60/40, 70/30, with other things mixed in.

Scott: Yeah, [crosstalk 00:07:16.457] buy and forget about it. You make some changes.

Pat: You're making, oh, I'm between the portfolios on a weekly basis in most cases.

Scott: There's these structured products they have out now Pat, that, well, you've seen these, they've got some sort of buffer, and as long as the thing is within this range, then something. But if the market falls below 20%, then suddenly now you're participating in losses, but you avoid them and that sort of thing.

Pat: And that's the bright and shiny.

Scott: That's the bright and shiny, those sort of things.

Pat: And our point is the cost associated with those.

Scott: They may make you feel good over the short period of time.

Pat: But the cost associated with those is tremendous. I mean, it's...

Scott: It's not just the internal fees, but it's what are you leaving to go into those strategies? What are you selling out of?

Pat: And do you...?

Scott: What are you giving up on? Are you giving up on the small cap stock equivalent of the 1999?

Pat: Actually, do you understand the protection that they're actually providing?

Scott: Most people don't.

Pat: They don't because they're not all-encompassing.

Scott: We're also seeing it in insurance products. Equity index annuities or however they're structured with money's locked up forever, you didn't really know what's going on. It's hard to get your money out.

Pat: Yeah. You don't participate in dividends.

Scott: Or most of the market increase. Most of it...

Pat: Markets go through big swings.

Scott: Correct, you can have 12-month periods where you can have the market up 30% and 12-month periods where it's down 20%.

Pat: Which is...

Scott: If you're capped at 8 or 10 or 12...

Pat: It obliterates the purpose of actually having a diversified portfolio.

Scott: Anyway, let's take a couple calls because we got people who would like to join us. If you wanna be part of the program. 833-99-WORTH is the number. 833-99-WORTH. We are in Florida talking with Chris. Chris, you're with "Allworth's Money Matters."

Chris: Listen, I love your show. I learn a lot and I'm making a really major decision with my life and my family. And I thought, man, let me bounce it off of you guys and see what you think.

Scott: All right. No pressure there.

Pat: No pressure there. I wish I would've slept more last...

Scott: It reminds me years ago, a couple came in, and I said, "How long you been married?" And they said, "Oh, we're not married. We've just been living together for 23 years." And I was just totally kidding. I turned to the husband, I said, "When are you gonna make her an honest woman?" And they came back in two weeks later with their wedding rings on. "We took your advice, Scott." I'm like, whoa, I don't know, I was just kidding. Like, I don't know you guys, I'm not gonna give that kind of advice.

Chris: Yeah, my wife wanted to be in the conference call. I said, no way, honey. You know you're not gonna be on the conference call.

Pat: Yeah. Don't involve her in the life decisions, Chris.

Chris: No. Right. I know, I know, I know, I know. She's in Miami where we live. I'm up in Cincinnati doing work.

Scott: Got it. What could we do for you?

Chris: So, well, this is what we wanna do. All right, I wanna buy a home and I don't need to buy a home, but the pandemic has showed me the downfall of living in a condominium in Miami. And so I was thinking, I think I have the money and the cash flow, but I wanted to bounce it off of you guys and see if I'm thinking right or I'm too emotional in my decision.

Scott: All right.

Chris: So basically... Okay, I was gonna take the money from a job that I'm gonna get later on in California. Some work I'm gonna do with with my work with the fire department, and then gonna pay the monthly the PITI and the expenses from my retirement accounts. I'm retired. I'm a retired firefighter for the last 10 years, but I have a small business training emergency responders and first responders.

Scott: So...

Chris: So it... Go ahead.

Scott: How much is your pension?

Pat: Yes. How much is your pension?

Chris: No, I took the payout.

Pat: Oh, the lump sum. How much is the lump sum?

Scott: That was 10 years ago.

Chris: The lump sum when I took...yeah, when I took it 15 years ago, it was like 1.2 million.

Pat: What is it now?

Chris: Well, with the SEP account from a little business and the IRAs and the 457, they all total up to about about 5.2 million.

Pat: Okay.

Scott: And how old are you?

Chris: I'm 64 years old.

Pat: And how much income are you taking off this $5.2 million in order to support yourself?

Chris: None. Nothing. Because I have rental real estate that almost equals the amount of my monthly... My monthly expenses are about...

Scott: Okay. And how much will a single-family residence cost you?

Chris: I'm looking at an area where, you know, Miami where I'm looking, it's expensive. It's about a million dollars.

Pat: And would you sell your condo, or would you convert it to a rental?

Chris: No, I would keep the condo because that's where we wanna retire. And I'm glad you said that because we're just gonna keep the house, my plans are, you know, everything subject to change, would be for 10 years and then go back to a condo because it's an easier living when I'm in my 70s.

Pat: Got it. Listen, I really like you. Tell me the net. I assume you owe no one in the world money. Is that correct?

Chris: Yep. My rental real estates are paid off. I have them, you know, in Florida and in Montana and my apartment's paid off. Yeah.

Pat: And what's the value of all that?

Chris: Kind of net worth if I add it all up?

Pat: Yeah, yeah.

Chris: About about 8.5, 8.6 million.

Pat: All right. Go ahead. Buy away. Enjoy.

Scott: Yeah.

Pat: Yeah.

Chris: Even, yeah. [crosstalk 00:12:56.257] first.

Scott: You know, here's what's hard, Chris. You have this much money because you've always lived below your means.

Chris: Yes.

Scott: Right? My guess is your condo in Miami is not in the fanciest tower, nor at the top.

Chris: No, no, no. It's on the water, but no. Right, it's a smaller, you know, 1400 square foot with a, you know, it's not the penthouse.

Scott: Right. But you could buy the penthouse if you wanted, but you don't.

Chris: Yeah. I mean, I drive... My car's 10 years old.

Pat: Yes.

Scott: Right. That's why you have these dollars. Right? So, sometimes it's hard because a million bucks, like that's a lot of money. Right? It is a lot of money. Still a lot of money. And you think, you remember back in days how hard you worked and how much you made a year. And even at the job you've got now, like how much you made, like that is a lot of money. But on the other part, it's like you now have $8 million net worth. It's not like you're talking about spending it on something frivolous. You're investing in a house and my guess, a million bucks for a house in Miami is probably not... It's not the Scarface mansion.

Pat: And we're not actually talking about the full million dollars. We're talking about the delta between the value of the condominium and the house itself. Because...

Scott: You're gonna turn that into an investment.

Pat: You're gonna turn that into an investment.

Scott: How much is the condo worth?

Chris: 700.

Pat: See, you've got nothing, 300 grand, it' getting easier and easier. This is getting easy.

Chris: Yeah. And I was gonna pay the down payment, which is 20%, the 200,000 from selling one of my rental real estate.

Scott: Great. Perfect. Good. I like it.

Pat: Beautiful.

Scott: You do it. Enjoy it.

Pat: Enjoy it. Start taking money out of that IRA if you need to make the payments to spend it a little, if you're not making enough. I'll give you my cell number because if your wife has any questions, she can call me. I'll tell her to go.

Chris: Yeah. Yeah. You can become the marriage counselor.

Pat: Oh yeah. That'll work out perfect. A mean marriage counselor.

Chris: Yeah, it's just, you know, a lot of my buddies in the service, you know, they've been, you know, they passed away man. And I sit there and I said, man, I don't really wanna die with all this money. Let's enjoy it. And I'm buying the house because we have grandkids now. And it's difficult in a small apartment.

Scott: Yeah, now's the time. You worked hard, you know, seriously, you worked hard to save these dollars. You've made lots of sacrifices over the years for these dollars, you were a firefighter.

Pat: You don't have to justify or apologize to anyone for your success. Just buy the house, enjoy it, next 10 years. Hopefully you get to spend the whole amount of time there. Hopefully you get to go back to the condo and get to spend another 10 or 20 years there.

Scott: But you never know.

Pat: But you never know. And you got plenty of money, you've achieved the objective. Enjoy it. And I like the way you're doing it.

Scott: Yep, totally agree.

Pat: And you're financing it.

Chris: And then I can pay for the expenses of the house from taking out like 2% to 3% from my tax deferred account.

Pat: That's what exactly what I just said. That's what it's for. Start taking money out of that IRA.

Scott: You saved for the future. The future's here. Great idea.

Pat: By the way, you should worry more than anything about required minimum distributions on that IRA at age 72.

Scott: I wouldn't say worry more than anything. Plan for.

Pat: Well, more than anything I'd be highly concerned about my required minimum distributions on that IRA at 72. So I might wanna address that earlier rather than later.

Scott: But he is in Florida, his primary residence.

Pat: There's still federal taxes.

Scott: I understand.

Pat: They're not its own nation.

Scott: Not yet.

Pat: Not yet.

Scott: I appreciate the call.

Chris: So then instead of converting to a Roth, just use it to enjoy the home with my family.

Pat: Yes, yes, yes. And maybe even a little bit more. And maybe even a little more.

Chris: Yeah. Oh goodness, I love you guys. You told me exactly what I wanted to hear.

Pat: Well, that's...

Scott: Thank you. Chris.

Chris: I'm calling my wife right now.

Scott: It doesn't sound like you're from Miami originally, by the way.

Chris: Yeah, I was born... No man, I'm an immigrant. I came here from Cuba. [crosstalk 00:16:50.562]. Yeah.

Pat: Good for you. Good for you. God bless you.

Chris: My father was in the Bay of Pigs.

Scott: How old were you when you came to the United States?

Chris: Under two years old.

Scott: Good for you.

Chris: Under two years old. Because my father fought in World War II. And then after the Bay of Pigs the government let us in because he fought, you know, with the Merchant Marine in the United States. But yeah, we fled communism.

Pat: Wow.

Scott: Good for you. You probably have a different perspective than others, knowing the trajectory your life could have easily taken. As opposed to... I was born in the United States and I feel extremely blessed. I love this country. I'm so grateful I could have been born in Cuba.

Pat: And you may have a scarcity gene that causes you to to save like you do. And what we're trying to do is say it's okay to actually start enjoying it now. Spending a little bit more.

Scott: And he's only talking about 300,000. The difference is $300'000.

Pat: I know, it was little. It was little.

Chris: Listen, I bleed gratitude for this country.

Pat: Yeah, me too.

Scott: Well, thank you.

Chris: Yeah, thanks a lot.

Scott: Thanks guys. Appreciate it. Let's now go to Michigan, and talk with Steve. Steve, you're with "Allworth's Money Matters."

Steve: Hey guys, thanks for taking my call.

Scott: Sure.

Steve: Also, Scott, I just ordered your book. I'm pretty excited to read that.

Scott: Oh good, you won't be able to sleep. It's just...

Pat: What can we do for you Steve.

Steve: So, my wife and I have just moved into our first house. We've been here for about a year and a half now. And it's a small farm property. 37 acres 32 of which is farmed. And we were just approached by this company in person that they deal in... So we were approached by them because of our proximity to a power substation, and what they do is they buy power off of that station, store it, and then sell it back. And what they want to do...

Scott: How do they store the power?

Steve: Well, when I looked up the company, they do a lot in solar. So I think that they have this battery technology that they wanna put to use elsewhere. So they store in batteries. So they wanna lease four to eight acres of our property out back and for $1000 a year and...

Pat: Wait. How much?

Steve: $1000 a year per acre.

Pat: Okay.

Steve: And normally we would make about 125 per acre. But the catch is that this is a 25 to 30-year lease, and they're gonna develop it. So that's not really, you know, with farming it's year-to-year where this is gonna be a developed you know, four to eight acres in the back of our property. So initially we told them no because we didn't wanna lease out eight of our acres. You know, that's quite a bit of land for only eight grand a year. So then they came back to us and they said, well what about four acres? And they would be willing to work with us on the price. And then I started thinking about it more seriously because I'm not one to pass up a good passive income opportunity. But I'm just having trouble coming up with how much I would be willing. Like, I wanna look back there and I wanna be happy with it, with my choice.

Pat: Okay. So, these are the questions I would ask before I got to the money side of it. And by the way, one of my neighbors actually does this. They build solar arrays.

Scott: Really?

Pat: Yes. they build solar arrays and then they do the battery backup with this. And he said, in fact, there's more money in the battery backup than there is in the solar arrays. So obviously they're going to an energy plant and saying, Hey, you know, this non-peak time you can generate energy. It makes it cheaper to store it. So when they say develop this, what does this mean? Will it ruin the reason you moved to the farm would be the first question I would ask. And if it is, if you don't do it, will one of your neighbors do it and ruin the farm anyway?

Steve: Right. Yeah. And I've talked to the neighbors too, like my neighbor directly adjacent to me and they've said that they're not gonna do it. My land is closest to the substation, so any other property that would accept this offer, I wouldn't be able to see it.

Pat: Got it. You would not be able to. And so is it right in front of the sub, would it ruin your view? That's the first thing. Would it ruin the reason you bought the property? Are they gonna put like a huge cement bunker in there?

Steve: So the thing that they're gonna put in there, they're about shipping container sizes. So it's not like tall, you know, like you'd see like a classic substation. It's not like that. It's more like a lower profile thing. And they did tell me that they would be able to landscape it and put trees up and everything. And to be honest, I'm already looking at those big power towers in the very back of our property. So I would think it may need...

Pat: So, it might actually help.

Steve: Right. Yeah. I was thinking that.

Pat: And so environmental, they're gonna give you some environmental reassurances that they're not gonna ruin the groundwater or the property as a whole?

Steve: Yeah, I'd have to look through their contract. I'd probably take a contract to a lawyer if I got really serious about it.

Pat: So those are the questions. So the question then is what's the price?

Scott: Whatever you negotiate, whatever you can get.

Steve: When I'm dealing with a farmer, you know, I know how much he's roughly making, whereas I don't know if these guys are just taking me to the bank or like, I don't know how much they're making a month.

Pat: What they're making doesn't really matter to you.

Scott: Well, it means he knows how much there's margin there.

Pat: Yeah, how much room there is. And is there an accelerator on this so that it increases by 5% a year or 7% a year?

Steve: Yeah. I'm not sure on that one. Again, I thought about that because I would wanna make sure that we're connected to that.

Scott: I would have a pretty good accelerator because I mean the management, whoever's setting up the structure today, t they're not thinking past five years.

Pat: That's right. That's right. So you put like a 8% accelerator on the thing.

Scott: Year 12, you start getting paid a fortune on it.

Pat: Yeah. So you would actually take a lower amount for a higher accelerator. But if you had a perfect world, you'd take a high amount with a high accelerator.

Steve: Well do you think instead of using an accelerator, if I was to ask them for a percentage of their profits, do you think that's a good idea?

Pat: Oh, I think that they would have a hard time actually allocating that.

Scott: Yeah.

Pat: I doubt that they would be interested.

Steve: I was thinking that is the only way because they wouldn't tell me how much they're making.

Scott: It's too small of a deal. I mean, I can't imagine.

Pat: Yeah, it is a pretty small deal for them. So I would just go back to them and, you know, if they said 1000, I'd say 2000. And if they said 3% accelerator, I'd say 6% compounded. You wanna make sure that you use the word compounded.

Scott: Because even if you agree on it's gonna be...

Pat: Pretty straight line.

Scott: Yeah. Simple straight line. Those are the two terms they use.

Pat: Yeah. Yeah. Yeah, so make sure that, you know, whatever they, they come in, double it and see what they say and then make sure that you put a huge accelerator on their compounded, not simple or straight line. All righty?

Steve: Okay.

Pat: All right.

Steve: That sounds good. Appreciate.

Pat: Appreciate your call.

Scott: I gotta tell you Pat, we've been doing this a long time. Never had a call quite like that one.

Pat: That's interesting.

Scott: Yeah, I know.

Pat: Yeah, yeah.

Scott: So, I mean cell towers, those [inaudible 00:24:38.593] people, cell towers.

Pat: Oh yeah. I have clients that lease cell towers. But this energy backup, my neighbor was telling me, I knew he was in solar, but now he's in this battery backup and he said they're building these massive, massive solar farms with battery backup. Massive.

Scott: I wonder what it takes to build these batteries. I mean, there's obviously environmental cost to that, right?

Pat: That's right.

Scott: Probably pretty significant.

Pat: Yeah. Yeah.

Scott: And some petroleum products too, my guess.

Pat: And rare earth materials.

Scott: Yes, all that stuff.

Pat: All that stuff. Who knows?

Scott: All right, we're gonna take a quick break. We'll have some calls again after we come back, but, I wanna spend a little time talking about non-traded real estate trust.

Pat: Because we're actually seeing things take place in that marketplace that we haven't seen for some time.

Scott: But one would expect commercial properties. Some are really predicting dramatic declines in commercial property, office buildings in major cities.

Pat: Oh yes. Oh absolutely. I've read a statistic recently that I'll share after the break about vacancy. Shadow vacancies. Shadow vacancies in large cities.

Scott: Oh, a lot of, yeah. Anyway, stick around. We'll be back for more, this is "Allworth's Money Matters."

Announcer: Can't get enough of "Allworth's Money Matters?" Visit allworthsfinancial.com/radio to listen to the "Money Matters" podcast.

Scott: Welcome back to "Allworth's Money Matters." Scott Hanson.

Pat: And Pat McClain.

Scott: I'm gonna talk before we have calls here about non-traded real estate investment trusts. And historically these were sold by brokers, commissioned brokers. There are some products now that are also sold by individual investment advisors or investment advisory firms where there's fee-based advisors, where there's a commission waived on it or something, but they're marketed in such a way, it's, oh, this is a way that we're gonna get real estate exposure typically in office buildings or shopping centers or senior homes, and you're gonna pool your money with other investors. There'll be a professional manager managing the property. You don't have to do anything and they're non-traded, so you don't have to worry about the price going up and down on a regular basis, and you're gonna get a dividend that's gonna pay a dividend every month or every quarter depending how it's structured.

Pat: And all of that is good other than the fact that at points in time, it's hard to actually figure out the price, especially with the smaller sponsors. So we're gonna talk about Blackstone right now, which by the way is a huge sponsor of non-traded REITs. I'm less worried about the pricing visibility on Blackstone than I am in the smaller ones.

Scott: Yes, these are huge.

Pat: Because they're massive and it's a well respected company. And there's nothing wrong with buying a non-traded REIT at a large institution like Blackstone where you have trust in their processes, audited financials where, you know, they have a track record. This isn't the only asset class that they work in. Where you see these small sponsors sometimes that only do non-traded REITs. They have, you know, Bill Smith's accounting firm is their auditor. It's just like, ah. But the problem with non-traded REITs, and maybe it's not a problem.

Scott: If you understand them.

Pat: You understand that they lack liquidity. And even when you buy it, it may have liquidity, but it may lack liquidity in the future. What does that mean? Lacking liquidity? It's the ability to turn your shares into cash at a moment's notice. That's what liquidity is, and many of the sponsors will say, don't worry about it. We've always turned them into cash. But when you read the the offering, it will actually tell you that they can apply restrictions at any time. So hope for the best, prepare for the worst.

Scott: Yeah. And the way this Blackstone, which is one of the largest, I think it is the largest REIT, they called it non-traded... Massive non-traded REIT, their redemptions, they limited it to 2% per month or 5% per quarter of the value, not your value, of the total value. So if someone else was first to the door they got it.

So what ends up happening is each quarter as they have redemption requests come in, they make a decision at that time of how much money they can distribute. So if they've got people saying, we want enough withdrawals where they have to liquidate 10% of the portfolio, they go back to everybody and say, "Hey, I know you wanted to be sell out. You wanted your 100 grand out. We're only gonna give you 50 grand because we're only gonna allow for 5% of the portfolio be liquidated on any particular quarter." This is what they put these restrictions on.

Pat: And by the way, on a big firm like Blackstone, large sponsor, well-respected in the industry. It's okay. Just as long as you knew it going in that there were points in time but... And it could be for six months, could be it for a year. It could be for five years, it could be for 10 years, it could be for an extended period of time. Part of the problems with these REITs, Scott, quite frankly, is that the cost of borrowing goes up significantly, which puts pressure on cash flow, which means that they don't actually have the cash to redeem their own shares like they once did.

Yeah, because money's more expensive. And so it's not good or bad, it's just what it is. But here's the danger.

Scott: Well, it might be bad.

I mean, I don't know anything about this BREIT. I'm not speaking to whether it's a great investment or not a good investment.

Pat: Well, it's most certainly, and and by the way, you can own publicly traded real estate investment trust that you can liquidate anytime you want. And you could own an index of publicly traded real estate investment trusts.

So non-traded is not the only option, but here's what the danger is. The danger in the marketplace right now is shadow inventory. So what does that mean? What is shadow inventory?

Scott: I could show you, Pat, let's walk across the hall right now after the studio [crosstalk 00:31:15.282].

Pat: In our own building. In our own office.

Scott: So, our main office is in Folsom, California, suburb of Sacramento. Johnny Cash Folsom Prison, that Folsom. Our office building, we signed a lease to take over some new space the the week of the lockdowns. Right. So we didn't...

Pat: We didn't see the lockdowns coming.

Scott: No, we didn't. For whatever reason, we didn't see the lockdowns come. We missed that one. So, we had planned, looked at the space and right before we signed the lease, I remember we were already thinking, I wonder if we're gonna have enough space for everybody because the way we're growing, like, we might not have enough space. But fortunately in the building, there's more...

Pat: There was empty space around us. We can...

Scott: If need be. Then lockdown happens. We all know the story now.

Pat: We go back before we do the buildout, we tell the owner of the building, "Hey, we're gonna postpone everything by six months, but we're not bailing on the building."

Scott: Yeah. Anyway, fast-forward till today, a lot of people, particularly professionals work some sort of hybrid environment.

Pat: Thirty percent, 40%, 50% of their time from home.

Scott: Correct. And some are on teams at their home. Maybe their teams scattered in different parts of the country. They have very little need to come into the office.

Pat: And some we hired during the pandemic that will never see our office. So we have in our own building our own space, we have shadow inventory, which is we are on the hook for a long period of time on a lease.

Scott: Yes.

Pat: And we are not using all the space. We'll probably grow into the space over the next...

Scott: Well, we some days we do, but...

Pat: Yeah.

Scott: But on Mondays and Fridays it's quite...

Pat: But New York City, they think that analysts think that some 40% of the space is not being used at all in these office buildings. At all. Zero. We've seen this in the Salesforce Tower in downtown San Francisco. We have seen this across the country that shadow inventory will come onto the market and it will come...

Scott: I don't think hybrid working is gonna change. I think it's here for good.

Pat: I couldn't agree more, Scott.

Scott: Whether you like it or don't like it, that's...

Pat: Whether you think it's productive or not productive,

Scott: It's a different question.

Pat: Yes. Whether it's what the employees demand and quite frankly, we enjoy it. Right. They enjoy it. So this shadow inventory will hit the market at some point in time. It is very, very difficult to actually convert office into residential. Extremely difficult.

Scott: Yeah. Piping and everything else.

Pat: The piping, actually window lines,

Scott: All that.

Pat: HVAC, it's very, very difficult. So, this will put pressure on it. Some of it's being converted over to mini storage, much easier to do. To mini storage. There's only so much mini storage you can actually put, there's only so many garages you need to put your garbage in. But these REITs will continue. Medical REITs should probably do okay. Recreation REITs have, you know, not done well. They probably won't do well. That's bowling alleys, that sort of thing. Some of the recreation leases depending upon what they are. And then the other are, you know, they've got mini storage or storage leasing. So there's lots of different types of...

Scott: Yeah, but you can also overpay. I mean, someone can make an argument that some of these areas could be overvalued or undervalued to them.

Pat: Oh, correct. A multi-family.

Scott: You're not sitting there saying that.

Pat: No, no.

Scott: Making a recommendation of what's kind of...

Pat: There's lots of different types of [crosstalk 00:35:06.624].

Scott: Yeah.

Pat: Yes.

Scott: But back to these non-traded REITs, they come out with an, and we've talked about this in the past. They come out typically with a net asset value share price, 10 bucks a share, and who decides each quarter what the share should be worth?

Pat: First of all. And if they're sold, a commission is paid on them.

Scott: Yeah.

Pat: And sometimes it's four or five... But Scott, if you come out with $10 a share and pay a 50 cent commission to someone for each share, and the price is still $10 a share, where did that 50 cents come from? So, day one, they're mispriced.

Scott: I think the FCC has tried to tighten up some of this stuff [crosstalk 00:35:48.632]. But the challenge with these, when something's non-traded, nobody knows the price. What's your home worth? I don't know. You had an idea what it could have been worth last week or last month maybe, but it's only worth, you would only know what your home's truly worth if you sold the house, then you know. As a buyer and a seller, that's when you know the value. So these companies, they're doing their best estimate. They have to use the best estimate. They are estimates. And when it's the declining environment like commercial properties, nobody knows what tomorrow brings, but certainly feels like there's a decline in prices. The question is on some of these smaller ones, Pat, that are being audited by Joe Smith's Auditing Company. Like how aggressive are they on making sure that they have the correct price?

Pat: What, auditors?

Scott: Or they...

Pat: You mean auditors? Enron? MCR world comp, that sort of thing?

Scott: You're not saying Blackstone's that. That you're [crosstalk 00:36:50.252].

Pat: Absolutely not. I'm just saying that...

Scott: So, before you get into something, understand how you can get out. If it's not a publicly traded investment, what happens worst-case scenario, how do you get out? How do you unwind this? What's it worth? How's it priced? Those things are important.

All right, let's take some calls here. Let's talk with Carla [SP]. Carla, you're with "Allworth's Money Matters."

Carla: Hi guys. Love your show.

Scott: Thank you.

Carla: Listen to it every Saturday.

Scott: Awesome.

Carla: So, my question is, actually I'm speaking on behalf of my husband. It's regarding IULs and what do you guys think about them. Good, bad.

Scott: What's an IUL.

Pat: Index Universal Lifestyle.

Carla: Index Universal, yeah.

Pat: Like an IA is an Index Annuity, this is an IUL.

Scott: I've never recommended them. I don't own one.

Pat: I would not purchase one.

Carla: You would not purchase one?

Pat: No. No.

Scott: No.

Carla: And what would the reason, like, what are the reasons why you would say that?

Scott: Well, I think they're gimmicky.

Pat: First of all, the first question you should ask yourself is do you need permanent insurance or not permanent insurance? Right. Let's not even talk about whether it's IUL or UL or whole life or Variable Universal Life, VUL, we'll leave that all behind. Let's just say it was the greatest product. It was a permanent product, it was the greatest product in the world. The first question you ask is, do I need permanent life insurance? Which means do I need life insurance for my whole entire life? Do I need it for 20 years, 30 years, 40 years? You need that. So what are you trying to insure against? Do you have children at home?

Carla: No, they're all adults.

Pat: Okay. And so are you retired or close to retirement age?

Carla: My husband just retired from his main job and he's working like a part-time job now. So one of our friends, or family friend, was talking to him about maybe thinking about doing an IUL just for saving on taxes when he starts to withdraw some money.

Pat: Okay. And so here's the pitch behind this, is this IUL...

Scott: Let me back up. So, what ends up happening, there's a lot of people, it doesn't take much to get an insurance license at all. You could do a week class, Carla, and you go down and you take the test and you're an insurance license. And now you can go out and go to your friends and say, Hey, I've got this great product. Let me tell you all the wonderful things it's gonna do. Which they believe.

Pat: Yes.

Scott: But what they don't know are the other 99 other products that exist out there that maybe are even better because they haven't really been trained on that.

Pat: Like the alternatives.

Scott: Like a Roth IRA first.

Pat: Or a S&P 500 fund. Right. So that's why you start with the premise of do you need insurance at all? And if you do need insurance, how long do you need it for? So in your situation, the kids are out of the house. Your husband's retired. Did he retire with a pension?

Carla: Yes.

Pat: Okay.

Scott: Is there other survivor benefits on the pension?

Pat: So that if he passes away, some money goes to you?

Scott: If you said no, then we're like, well...

Carla: He... I'm sorry. He actually took a lump sum and has rolled it over into an IRA.

Scott: There you go.

Carla: So [inaudible 00:40:19.647] is a beneficiary on the IRA.

Pat: There you go. Right. So all that money has been earned. You...

Scott: He didn't invest with the friends who's selling him the equity index annuity.

Carla: No. No, but they're pitch is that he can withdraw that money tax free if he puts it in the IUL and, you know...

Scott: But you gotta pay tax to get it out of the IRA.

Pat: Yeah, yeah. You would never use money from an IRA and put it into a...

Scott: You can't.

Pat: I guess you could. You could pull it all out, pay taxes on it and put it in there. But that would just be...

Scott: Idiotic.

Pat: Worse, maybe worse than that.

Scott: Yeah, malpractice.

Pat: Yeah. So, there's no conceivable world that I live in financially where you would even try to make that argument. So...

Carla: Okay.

Scott: And I could see time when a variable life insurance might make some sense or a fixed life insurance, but the indexed makes no sense to me.

Pat: Well that's because of...

Scott: I understand the mathematics, I understand how it all works behind the curtain.

Pat: The market cycles, the whole bit. So, what they're selling, Carla, to you is how life insurance policies are structured, which is they go in FIFO and they come out FIFO, which is first in, first out, which means that you put your deposits in, you draw those out, then any amount remaining there, you can borrow against the policy contract. As long as the contract's in place on the day of death, then it's magic. It's all tax free.

Scott: How about the cost of insurance along the way?

Pat: If you've lived in a world without cost right, then...

Carla: It would make sense.

Pat: Then it would make... Much like, it would make sense for us all to fly travel private jet if it wasn't for the cost. Is that a bad analogy?

Scott: Yes, I think it is.

Pat: Okay.

Carla: I get it though. I get the point.

Pat: Yeah. Yeah. You, have no need for this. Not only is most people not flown in a private, most people don't know anyone who flies private unless they have a little Cessna or something.

Carla: Okay.

Scott: You're watching too much Netflix.

Pat: I watch the Showtime's "Billions."

Scott: You watch Billionaires.

Pat: And you would never use the money in the IRA. Never ever. So your husband's portfolio should probably be 60% equities, 40% bonds and cash, and then a monthly distribution set up so you could retire comfortably. That's all you need to know.

Carla: Perfect.

Pat: All righty.

Carla: Thank you. That was my question.

Scott: All right. Glad you called.

Pat: Take care.

Scott: You know, it's funny, Pat, I was thinking this... Was it earlier today? I don't know why I'm thinking about these silly products. The insurance company comes up, insurance industry. Like in this situation, if having like an index on the securities market works so well, why wouldn't the insurance company do that with their own portfolio? You think they're taking any of their portfolio and say, we're gonna spend this on options in case the markets do well?

Pat: No, no.

Scott: Because long term it says you're not gonna make money that way.

Pat: That's an excellent point. And it and ignores dividends that are paid in the underlying index.

Scott: Well the way they're structured, they'll return.

Pat: Well, actually the fact that they create their own indexes now, which is really amazing.

Scott: But I'm just thinking if that strategy, I understand how they go and invest for that pool, but if it works so well, why wouldn't they do it in their own...

Pat: In their own pool?

Scott: Yeah.

Pat: It's the risk.

Scott: Right. I understand all that stuff.

Pat: Yeah. Well, you do, but I think you're doing that for the benefit of the listeners. But just how that was pitched that you take your money out of an IRA, pay taxes and put it into an Index Universal Life just shows... What it shows is lack of experience of the person trying to sell the product.

Scott: I remember as a college student, I went to A.L. Williams.

Pat: Did you? Was it the coach?

Scott: Yeah, it was multi-level marketing. It was my pastor from our church had somehow left the church and became a multi-level marketing guy with A.L. Williams. And I went and they said basically how you can be a part-time financial advisor. And I think it was a gardener was sitting next to me and somebody else, and they were pitching me on being a financial planner.

Pat: And you decided to finish college instead.

Scott: Yeah, yeah, yeah. And it was all on a part-time basis, but I remember the pastor looked at me and he's trying to get us all pumped up. And he says, "Scott, if you could drive any kind of car, what kind of car would you drive?" And I remember looking at him like, you're like my pastor. You're supposed to help me stop thinking about those things. Those come naturally. Like come on buddy. The lust of the eyes of [inaudible 00:45:18.765] and all that stuff. I don't need help with that.

Pat: I know that.

Scott: I was born with that. That's my first thought.

Pat: So I'm guessing you didn't sign up.

Scott: No, I didn't sign up. No. Let's head to Virginia now. We're gonna talk with Jeff. Jeff, you're "Allworth's Money Matters."

Jeff: Hey thank you so much for taking my call. I really really enjoy the show. Thank you so much.

Scott: Thank you.

Pat: Well, thank you.

Jeff: Hey I had a plan in place for a semi early retirement and then some things changed, and so I think I have a new plan. I wanna run it past you and see if you have any things that might be missing, other ideas or anything I might overlooked.

Pat: Happy to help.

Jeff: So we were on a path to have our mortgage paid off when I hit age 56 and a half. I'm a federal employee, so that would be my minimum retirement age where I could start drawing a reduced pension. Then we, about two years ago, right before COVID, we bought a 28-acre property with a old farmhouse on it. And to do that, we took 176,000 a new mortgage, took cash out, 176,000. So my mortgage is now 337, so there's no way I'm gonna pay it off in the next couple years. I'm 54 and a half now. So what I'm considering is when I look at from from the federal pension, at age 56 and a half, I can start immediately and it'll be reduced by 5% per year. So 25%. And I was thinking, oh, that's too much. And then I did an analysis just showing like total payments I would get if I start at 56 and a half versus waiting to 62. And the break even point's like 75 years old. So that was far enough out for me to say, well, kind of a wash.

Pat: Well okay. But it ignores a net present value calculation, but keep going.

Jeff: Okay. So, we've got our last kid and our second kid in college, he graduated, so, you know, car payments will be done, auto insurance down, you know, we're doing some prepay on the mortgage, things like that. So anyway, when I look at my fixed expenses I think I'm about $1,500 short per month of what I spend now. That's for car maintenance, farm stuff, tractors, whatever. So what I'm thinking about is taking that balance that $1,500 a month from my thrift savings plan over the course of five years to get me to age 62, that'd be withdrawing like $90,000. So, and then at that point, you know, social security would be kicking in and then that would make [crosstalk 00:48:08.415].

Pat: How much do you have in your thrift savings plan?

Jeff: It's 450, and then I have about 100 in a traditional IRA.

Scott: All right. And so do...

Pat: Wait, hold on. What's your annual income now?

Jeff: Well, it's like 270-ish counting everything. That's my federal retirement, my wife's job...I'm sorry, my military retirement, wife's job and my job.

Scott: But you own two properties now, right? You own this farm and your primary residence.

Jeff: Yes, we have our home in Northern Virginia and the farmhouse. And, you know, we're not sure what we wanna do long term down there, but for right now, we wanna keep the house we have right now.

Pat: Let's say 56 and a half you retire, between your military pension and your pension from your employer, what's the annual income there? Just those.

Jeff: It'd be around 80, 85, something like that. And I'm still making the mortgage payment here. So that's where, you know, bulk of the money, that's about 3000 a month. That's where the bulk is.

Pat: What's wrong with working a few more years?

Jeff: Well, I certainly could. Certainly I have a good job. I could do that. Right now, I'm spending a lot of time down at the property trying to improve it and work on the house and work on the land and, you know, there might be some things we want to do down there with perhaps some farming or some other business opportunities down there.

Pat: The problem is when we're talking about $1,500 a month, we're talking about two different properties in this income of 220 back significantly. You're cutting it really, you're looking for little zigs and zags when you should be giving yourself large margins of error. And that's what scares me. So, if you were sitting down with a financial...

Scott: Yeah, that's exactly what I was thinking. I mean, like, it's still gonna be a little tight to make all this stuff work. I'm not worried about you being destitute, you got great income coming in there.

Pat: No, you'll be fine. You just might not have the lifestyle you want. Whereas you might [crosstalk 00:50:14.604] decide that I can work another two years and we could fix all this. You need a full [crosstalk 00:50:22.947] financial plan. That's what you need.

Jeff: Okay.

Pat: You need, you need someone to actually sit down with on a screen and you can do what if scenarios.

Scott: Yep.

Jeff: Now, when I get to 62, I draw social security and all that, and I've got, you know, I have my military, VA, and federal and my wife will have a teacher's retirement from the state and the county. So, when we hit 62, I hit 62, 64, we won't need the thrift savings or the IRA.

Pat: That's right.

Jeff: We should have enough current income coming in at that point, we won't need to draw anything.

Pat: But you've cut it pretty close. So, what happens is by delaying retirement even a year or 18 months or two years, you're cutting that gap. So what you're trying to do is look at that thrift savings plan as a way to make up a gap in income...

Scott: A social security bridge.

Pat: Yeah, we call it a social security bridge.

Scott: I mean, it might be the appropriate thing. I fully agree with Pat, like, you really need to use some good financial planning software and do some different what if scenarios. And you might say, look, it's worth it for me, I'm 56 and a half, I'm out of here, period. And then like, okay, well what's that look like and what's that your probability of outcome in the future? And it might say maybe if I take it another year or two

Pat: And you could do it with your own financial software or you can go and hire an advisor that can walk you through it, but you're cutting it really close. And that's why we would suggest you actually just do some more in-depth planning to make sure that that social security bridge is really gonna work.

I appreciate the call, Jeff.

Scott: Yeah. I wish you well, Jeff. Unfortunately, that is all the time we have. As always, great being with you. We will see you next week. This has been "Allworth Financial's, Money Matters."

Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.