November 16, 2024 - Money Matters Podcast
Exploring speculative investments, key financial advice for listeners, and unpacking commercial real estate risks.
On this week's Money Matters, Scott and Pat dive into the dynamic world of speculative investments, including the volatile nature of Bitcoin and Tesla stocks. Then, they engage with callers to address pressing financial concerns, from managing mortgages and retirement planning to making informed decisions about real estate investments. Plus, they discuss the implications of interest rates, the potential pitfalls of commercial real estate, and the importance of diversification for long-term financial stability.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Transcript
Man: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, 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: Pat McClain. Thanks for being with us.
Scott: Yeah. Glad you are part of our program. Without you, we wouldn't exist. Both myself and my co-host, we're both financial advisors, certified financial planner, charter financial consultant. Been doing this stuff for 30 years?
Pat: Three decades.
Scott: Thirty years. The program about 30 years too. So it's good having you. If you want to be part of our program, we'd love taking your calls and answering your questions. Maybe you're working with an advisor now and you just want a second opinion. Maybe you do things on your own, you want to run an idea by us. Maybe someone's trying to sell you something and you're wondering if it makes the most sense for you. And anything that's related to finances or whatnot, send us an email at questions@moneymatters.com or give us a call at 833-99-WORTH and we will schedule time. We've got some good calls lined up for today.
Pat: Yes. And we are recording this show on Thursday, November 14th at 9:00 just because things change so fast.
Scott: Yeah. That way if something weird happens on Friday and the Dow's down 1,000 or up 1,000...
Pat: You're like, "What are these guys talking about?" But I wanted I wanted to talk a little bit about Bitcoin. Wake the kids, call the neighbors and Tesla stock. So Bitcoin.
Scott: How about Dogecoin? That was like a meme, a joke that Musk tweeted about it a few years back. And the thing shot up and that's what they're calling the Department of Government Efficiency, Doge, like the coin.
Pat: Oh, I didn't catch that.
Scott: Oh, yeah, that's exactly it.
Pat: Oh, that makes sense.
Scott: Elon's got a strange sense of humor. He thinks it's hilarious.
Pat: Everything is X with Elon. I started that book you told me about by Walter Isaacson. I read one other book, but this one's much better about Elon.
Scott: I would actually like to get Walter Isaacson's opinion on how much Elon should be involved in the government or not. Here's someone who spent two years with him.
Pat: Oh, he won't be involved very long. I'll give it six months before Trump attires of him. Before Trump just says, yeah, you're getting too much attention. The spotlight needs to be on me. Yeah, I think.
Scott: Yeah, I know. It'll be interesting to watch. Oh, the whole thing's going to be interesting.
Pat: But John Paulson bailed out. I don't remember what position they were talking to him. But he said, "Look, my financial interests are such that I can't do a job for the government because it conflicts." And I thought, "good for him."
Scott: This morning I was listening to an interview with Peter Thiel. He's the founder of PayPal, founder of Palantir.
Pat: Lots of things.
Scott: Yeah. And he had an interesting perspective on...he's pretty excited right now. And then I heard an interview the other day with Bill Ackman, big hedge fund manager who...
Pat: Contrary.
Scott: He's never been as excited about the U.S. economy.
Pat: Really?
Scott: He's like giddy. I mean, he really believes that Trump's going to make the government more efficient and the economy is going to take off and start having good growth and all that.
Pat: We'll see.
Scott: I know. He's got roughly 18 months...
Pat: Well, look, let's see.
Scott: ...until the next election cycles start to get too close.
Pat: Let's wait and see.
Scott: But what we've seen happen since that time...
Pat: Is...?
Scott: So Bitcoin, it's $90,000 a coin.
Pat: Crazy.
Scott: And it was what, $60,000...
Pat: A month ago?
Scott: ...a week ago or whatever it was.
Pat: Whatever Bitcoin is, right? Whatever that means.
Scott: It was $70,000.
Pat: Purely, it is the most speculative thing I think I've ever seen is Bitcoin above and beyond even gambling. But Tesla stock is what confuses [crosstalk 00:04:38].
Scott: On the Bitcoin, it's got a market cap of $1.7 trillion.
Pat: Crazy.
Scott: Just Bitcoin. You add the other coins and it's about $2.5 trillion.
Pat: Crazy.
Scott: So, something that...
Pat: Has no intrinsic value.
Scott: No intrinsic value. It's not physical whatsoever.
Pat: The price is only dependent upon...
Scott: What someone else is willing to pay.
Pat: Generates no income.
Scott: It does nothing.
Pat: It's crazy. It's crazy.
Scott: Investors have bid it up.
Pat: Speculators.
Scott: Thank you. They believe this Bitcoin is worth...
Pat: Yes. In this murky little...
Scott: And look, if you want to own some Bitcoin, fine.
Pat: Have at it, but just recognize what it is.
Scott: It's speculative.
Pat: Recognize what it is.
Scott: And if you owned it prior and sold it when it was down, I would highly discourage you from owning it again, right?
Pat: Correct. You may not have the emotional temperament to... I don't own any.
Scott: Whether it's emotional temperament or just... An investing path is not just the emotions. It's having a sound thesis.
Pat: Correct. An investment thesis. That's why I can't own it. I just can't get my head around the fact that it...
Scott: Me too.
Pat: And people that don't trust banks, like, you think about the whole digital with what's his name? Sam Bankman.
Scott: Sam Bankman-Fried.
Pat: They didn't trust banks, but they trusted each other. Come on. Really? You don't trust a bank, but you're going to trust Sam Bankman-Fried.
Scott: Well, who doesn't trust the bank?
Pat: Lots of people don't trust banks. That's why this digital currency. They don't trust the government's ability to track the currency. Let's put it that way.
Scott: All right. Okay.
Pat: Let's talk a little bit about Tesla.
Scott: Finish off in the [inaudible 00:06:36]. Here's how I view it. You know, Pat, being in this business long enough, invariably, people give you this idea and you really should do this. And they have a lot of opinions for how I should live my life. And like on Bitcoin, here's my view. I don't own it. Had I bought some at $5,000 a coin, would I be happy today? Of course. But I'm happy anyway and my life's fine with or without it. I've done good financial planning over the years. It's highly speculative. It is speculative, there's not even an opinion on that. It's highly speculative whether or not it's going to be worth $100,000, $1 million a coin 10 years out. Nobody knows.
Pat: No one knows.
Scott: It can just as easy go back down to nothing.
Pat: They could release more Bitcoin, right?
Scott: They got to mine it.
Pat: Says who?
Scott: Well, they can always come up with a new coin, which has happened as well.
Pat: Yeah, but they say they have to mine it. They have to mine it, but what happens if the guy that created it, what's his...? They don't even know who it is.
Scott: I don't think they know who it is.
Pat: Yeah. What happens if he just has like a whole store of this thing and he releases a ton into the market?
Scott: Or someone finds a way to...
Pat: Talk to Find Lost Wallets. I know my son had lost his wallet. He probably had 8 or 10 Bitcoin in it.
Scott: What, 8 or 10 Bitcoin?
Pat: Yes. He used it to buy a fake ID when he was a freshman in college.
Scott: My son did too. I don't know if it was Bitcoin or some other that we talked about a couple months ago.
Pat: Yes. Anyway...
Scott: But he would have had 10 Bitcoin right now?
Pat: What are you going to do? I mean, he did the transaction. He needed the Bitcoin to buy the fake ID. He told me this after the fact. And by the way, I wouldn't have had an opinion one way or the other. He's 19 at the time. So do what you want to do. I mean, buy a fake ID.
Scott: I remember having dinner in Boston with my son. He went to Boston College and we went out to a family dinner with his fake ID.
Pat: Like, what are you going to do?
Scott: My wife says, "Hey, I'm not going to lie if they ask me your age. So it's on you, son."
Pat: Actually, we were going into like a bar and they were IDing people at the door, and my son...
Scott: With some of those fake IDs, they get caught with the machines.
Pat: They took his ID and they said, "This is a fake ID." And I started laughing. I thought it was so funny. And then the guy hands it back to him. I go, why are you giving it back to him? He goes, "Well, you know, you're here." [crosstalk 00:09:23] But I thought it was so funny.
Scott: It's funny.
Pat: And my son was so mad at me. He's like, "What are you laughing at, dad?"
Scott: And young parents right now are thinking, what is wrong with those guys?
Pat: Wait.
Scott: Right. It's amazing the things you get comfortable with.
Pat: Wait, whatever. "I'm never going to let my kid do that."
Scott: They do their own thing.
Pat: Anyway, can we talk about Tesla next?
Scott: Yes.
Pat: So, Tesla stock way up which just confuses me. Because aren't they...the Trump administration is talking about taking away subsidies for electric vehicles and then supporting more, you know, gas-powered. And I'm thinking, "Well, shouldn't this Tesla stock actually be down?" But because it's all in the Trump orbit... And I'm not saying negative or positive about Trump. I mean, I don't...
Scott: So a month ago, it was roughly 220 bucks a share. Today, it's roughly 320 bucks a share.
Pat: Thirty five percent, 30%.
Scott: Fifty percent increase.
Pat: Okay. Thank you.
Scott: Yeah, 35%, that's where you start the number.
Pat: That's right.
Scott: Fifty sounds better. Fifty percent growth in a month.
Pat: Yes. Crazy.
Scott: Yeah, for a big company, right? It's like, little companies can go 50%. And I mean, just even the market cap's over a trillion dollars.
Pat: We had $350 of "value" from...?
Scott: Well, wherever, right.
Pat: This is where it starts getting into speculation. And when you think about the fundamentals for Tesla, should not that stock be down?
Scott: It's people that are betting on Musk.
Pat: Betting on him.
Scott: But he has all these different companies starting the AI... Like, what does he carve off?
Pat: Yeah. How does he take one from the other?
Scott: Yes.
Pat: Well, he did it. I mean, they bailed out Solar City. He merged it with Tesla because it was dying.
Scott: It was its cousin.
Pat: It was its cousin, yeah.
Scott: Anyway. Yeah. But now I have Tesla solar panels, though.
Pat: Do you?
Scott: Yeah, because I had SolarCity solar panels and now it's Tesla.
Pat: Oh, how do they work for you, do you know?
Scott: Fine, until you have to redo your roof. Then it was a real pain. Anyway, that's another story. It wasn't that easy to get a hold of anyone at Tesla either, for that matter.
Pat: I've heard that about people that own the Tesla car.
Scott: The car too? Everything's through the app and then it's...
Pat: Actually, I had a client that actually stood in the showroom because he couldn't get his car serviced. He stood in the middle of the showroom and told anyone looking for a Tesla car how bad the service was.
Scott: Are you kidding me?
Pat: No.
Scott: We're not saying negative or positive about Tesla.
Pat: But he couldn't get them to service it and they kept putting him off and putting him off. And he said, "I'm just going to come down to your dealership and stand in the lobby and tell everyone what bad service you guys provide when they come in to look for a car." And they took care of him.
Scott: Yeah, obviously. Let's take a couple of calls and then I want to chat about commercial real estate.
Pat: Oh, a little bit, yes.
Scott: Yeah.
Pat: I have a ton of opinions on that.
Scott: Anyway, let's take some calls. If you want to join us, you can send us an email, questions@moneymatters.com. And that's probably the simplest way, questions@moneymatters.com or call us at 833-99-WORTH. Let's talk with Eric. Eric, you're with "Allworth's Money Matters."
Eric: Hi, Scott, thanks for taking my call.
Scott: Yes, sir.
Eric: Got a question on additional mortgage payment. And then also, once I give you all the numbers, just general thoughts on kind of my wife and I's overall situation.
Scott: All right.
Eric: So, not really your typical client. Don't have a lot of money. I think we started really late in life. Other than a good military pension, I think we're behind, but we're making good choices now.
Pat: Wait, slow down, Eric. You weren't able to save a lot of money while you were in the military, am I hearing this right? You weren't making those fat stacks?
Eric: Yeah, a little hard to do.
Scott: No. Thank you for your service.
Pat: Thank you. Thank you. We get it. We get it.
Eric: Yeah. Sometimes it's hard to find some extra ends there.
Pat: No kidding.
Eric: But yeah, we overcame some bad decisions. We mostly agree about the future and how to budget our money currently. Like I said, I think I know your answer because I've heard you talk many times about additional mortgage payments to other listeners, other callers, but still just wanted your thoughts.
Scott: How old are you?
Eric: Wife and I are both 46. Oh, here we go. I'm going to try and impress you. I think I got all the numbers ready for you guys.
Pat: Okay. Perfect.
Scott: What's the house worth?
Eric: All right. Wife and I are 46. We have one adult kid out of the house.
Pat: Good for you.
Eric: House is worth 770. We have a 30-year fixed mortgage. Current remaining balance is 607. Mortgage payment is 3,300 a month.
Scott: What's the interest rate?
Eric: 2.125 interest rate.
Pat: 2.25?
Eric: 2.125.
Scott: Is that a 15-year mortgage?
Eric: Thirty-year VA.
Pat: Wow.
Scott: Okay. I was gonna say that's the lowest 30-year mortgage I've ever heard.
Pat: That's incredible. Don't pay a penny more on this thing. In fact, call them up and see if they'll extend it to 60-year mortgage. Unbelievable.
Eric: Okay. That's exactly what I thought you were going to say just because of the cost of money. And I really am only making over the course of these additional payments, one additional payment every year.
Scott: I wouldn't make any additional payments. It's 2.25%, 2.8%.
Pat: Yeah. Unbelievable.
Scott: I mean, if you could borrow more money, I'd say borrow more money at 2.8%. If I could borrow money at 2.8%, I'd do it all day long.
Pat: If I could borrow money at 2.8%, I'd retire.
Scott: Borrow a billion at 2.8%?
Pat: I'd borrow a billion at 2.8% and I'd lend almost like banks do. It's weird.
Scott: I mean, let's say you want to retire at 65 or whatever the number is, and you might calculate what the balance will be at that time and say, maybe we have a side fund that we set up, which this is a... You still wouldn't want to pay off the mortgage. So you've got the cash equivalent so you can...
Pat: Match maturities. Okay. Give us the rest of the financial situation. We'll give you a little tune-up there.
Eric: I appreciate it because that's what we're trying to do is be diverse and efficient so that we can really make headway smartly. So, salary is 187. My military retirement, 4,800 a month, and our health insurance comes out of that. I get additional VA disability of 2,100 a month. Both of those have cost-of-living adjustments annually.
Scott: Eric, you talked about how you're behind on the game. If you calculate the net present value of that roughly $7,000 a month pension and...
Pat: And part of it tax-free, it's worth millions.
Scott: Massive.
Pat: It's worth millions.
Eric: Yeah. I got 1.6 over the next 20 years.
Pat: Got it. You did the math. You did the math. Okay. So you get it. So when you say you're behind, you're not necessarily behind.
Eric: Well, if it wasn't for the retirement, I'd be freaking out right now, but...
Pat: But if I had eggs, I'd have bacon and eggs. If I had bacon, it is. It is there. Okay. So $84,000 in benefits, veterans' benefits, a portion of which is tax-free.
Eric: 401(k), 65k, I maxed the employer contributions. I mean, I maxed the 401(k) this year, but I didn't do it last year. But for the foreseeable future, I don't see any reason why we're not going to max out. I have a separate IRA with 18.5. I maxed it out last year and I'll max out this year. Separate brokerage account, $28,000. High interest savings account, money market account, I got $26,000 at 4.25%. I've been watching that one because it's already gone down 0.25%. So just maybe possibly move that to another higher one. I've got two life insurance policies. I'm only the sole income in the house. So, one through work and another one through insurance company, totaling $3.4 million. I've got two car payments. One of them will be paid off in January or I might just pay that off early, just depends. That'll clear up some additional money to put towards retirement savings. Anything outside of that in the budget, I'm putting in about $1,900 into emergency savings account.
Pat: And what's the outstanding balance on the car?
Eric: The one car is only about $1,300. The other one still has 4 years, it's about $45,000.
Scott: Have you been in this ballpark salary area for the last few years?
Eric: Yes. I retired three years ago and since then, it started a little bit less, but the last two years [crosstalk 00:19:10].
Scott: Okay. And what were you making before you retired?
Eric: Shoot, more like $90,000. [crosstalk 00:19:18]
Scott: So some of this, you're just catching up on some things, right?
Eric: Yeah. A lot of consumer debt out of the way.
Scott: You're perfect. You're not spending all the money that's coming in now. You have been catching up on some stuff?
Eric: Yeah. My wife likes to spend all the money that's coming in, but I got to make sure to reel that in.
Pat: So, what is the interest rate on the car?
Eric: The one that's left over, I think is 2.9%, the one I have 4 years left on. I said, I'm not worried about the one that only has $1,300 left. That's over in January.
Scott: If I were in your situation, I'd contribute the absolute maximum to the 401(k).
Pat: And then you would...?
Scott: Pay off the cars.
Pat: But it's 2.9%. It's fixed. So what's the point? He's earning higher than that. And then you would, what Scott? You'd convert that IRA to a Roth. And then you'd make a contribution to the IRA every year and you'd convert to a Roth.
Scott: A non-deductible... Well, he's got the 18,000.
Pat: I know, but he just put those in in the last couple of years. So what you want to do is...
Eric: [crosstalk 00:20:24] to say that because I'll probably be in a lower income bracket when I actually retire-retire.
Pat: No, no.
Scott: I don't think so.
Eric: I will talk to an advisor [inaudible 00:20:34] for sure. I'm writing that down.
Pat: So, what you want to do is you want to convert that existing IRA for both you and your spouse into a Roth IRA. And then you want to actually make that contribution every year and convert it the very next day. And the reason is you're in a 24% tax bracket right now. Actually, you're probably lower than that, you're 22%.
Scott: Well, some of the pension's tax-free.
Pat: Some of the pension's tax-free. So, you want to do that so that you can push as much away into savings as you can.
Scott: I mean, you are in such a different financial situation than you've been most of your life. You were married relatively young. You had a child. You've raised a child. Child's grown.
Pat: The child's a self-feeder now.
Scott: Yeah. So I mean, your wife wants to spend. Like, you can afford to spend some now, right? Like, you can afford to... Whatever you want to spend the money on, but as long as we're making sure that... Because you're going to get used to this lifestyle.
Eric: That's what I'm afraid of. I'd rather save it than spend it.
Scott: It'd probably be helpful to do some real planning and saying, if we want to retire at 60 or 65 or whatever the number is...
Pat: This is what we need to do.
Scott: Yeah. And that'll say, all right, in addition to maximizing the 401(k), do we need to save much more? How much more? But given the fact that it's...
Pat: Your new job, will it have a pension when you retire?
Eric: No. I've got the 401(k) and that's it. No other pensions through the new employer.
Pat: Okay. Yeah. So you want to maximize the 401(k) and then you want to make the IRA contributions non-deductible and convert them. Go ahead and convert that IRAs, both you and your spouse, immediately into a Roth. And you want to be as aggressive as you possibly can.
Scott: And you probably want to be saving some more. Otherwise, I think really running some numbers to get it...
Pat: He knows exactly...this guy's super-disciplined. He's beating himself up...
Scott: Yeah. Don't beat yourself up.
Pat: ...because he was living a little bit above your means while you were making this salary, but you're not living above your means now.
Scott: Maximize your 401(k), build up that emergency reserve, call us in a year.
Eric: Yeah. Awesome.
Pat: All right. You're great.
Scott: I wouldn't worry about a thing. And you've got tons of life insurance. If something happens, you're taken more than good care of.
Pat: Good job. And make the IRA contributions, convert it to a Roth and call us in a year, 18 months.
Eric: All right. Sounds good, guys. Appreciate the call.
Pat: Appreciate the call.
Scott: Let's talk now with Patricia. Patricia, you're with "Allworth's Money Matters."
Patricia: Yes. Hi. Good afternoon. Thanks for taking my call.
Scott: Hi.
Patricia: I'm 62 years old. I have a rental property and I have my primary residence and I have an Airbnb. The rental property is really just breaking even over the last 10 years. By the time I pay taxes, insurance, property management fees, HOA, I've just really been breaking even over the last six years. I have my primary residence with a mortgage balance of $180,000.
Scott: And what's it worth?
Patricia: A million.
Pat: Okay. What's the interest rate?
Patricia: Two-and-a-half percent.
Scott: Wow. A 30-year or 15-year?
Patricia: Fifteen.
Scott: Fifteen.
Patricia: And then I have the rental property. The interest on that is 7% and I have a balance of $110,000. And the property is worth $330,000. So I kind of looked...
Pat: What did you pay for it?
Patricia: Two-hundred thousand.
Pat: How long have you owned it?
Patricia: [crosstalk 00:24:14] $180,000.
Pat: How long have you owned it?
Patricia: Since 2010, so, 12 years.
Pat: All right. Tell us about the Airbnb.
Patricia: The Airbnb takes care of itself and then some. So the Airbnb, I owe $54,000 on, but the interest on that is also 7%. But it's profitable. I'm turning a profit on it. I'm making about $1,000 a month after all expenses.
Pat: And what's the value of the property?
Patricia: That's worth about maybe 250,000.
Pat: And what did you pay for it?
Patricia: One-hundred sixty-five thousand.
Pat: Okay. What's your question for us?
Patricia: So I had the rental property, the tenants just left and I'm trying to decide... I also have a vacant land that I purchased that I want to build another Airbnb on. So, I'm trying to decide if I should sell the rental property since I'm really not making any money. It's just there building equity. But recently, the area that it's in has become like, saturated with lots of new homes and rental properties. So, I'm trying to decide if I should sell it and use the money because when I did all the numbers, at the end, I'm going to walk away with 296k if I get the asking price. And once I pay off the mortgage out of it, then I'll have 180,000 less, which I can use to pay off my existing mortgage.
Scott: But then you've got your silent partner, the tax man.
Patricia: Yes. Yes. So I have no write-off to my tax except for the rental property. My children have grown and I have no deductibles.
Pat: What's the rest of your financial situation look like?
Scott: Are you working, retired?
Patricia: I'm working. I have no plans to retire. My job, I'm going to work as long as I can and maybe not full time. But I already estimated I need about $60,000 a year to live and I make about somewhere between $150,000 and $180,000 a year.
Pat: And how much money do you have in savings, brokerage, IRAs, that sort of thing?
Scott: 401(k)?
Patricia: Yeah. All of that, I have about 700,000.
Scott: Have you thought about doing a tax-free exchange with a better rental that you can Airbnb?
Patricia: I'm sorry. A tax exchange?
Pat: A tax-free exchange.
Patricia: And what is that? I don't know what that is. Sorry.
Scott: Well, I always get confused between 1031...
Pat: 1031.
Scott: For whatever reason, I cannot [crosstalk 00:27:05]. Thirty-some years in this business and I can never remember which one's 1031, which one's 1035. It's called a 1031 tax-free exchange. And this enables you to sell that property. And as long as you buy something similar, like kind property, within I believe, it's six months on both the front and the back, you can defer all of that gain. So you pay no capital gain tax.
Patricia: But I will eventually have to pay the capital gains, right?
Scott: Yeah. But if you can defer the capital gains, you have more capital working for you. So if the strategy is just to sell the rental and you net, let's call it 200,000, you're going to have to pay, it's a no-brainer, almost 30% for capital gain tax.
Patricia: Right.
Pat: And so when you said this vacant land, I don't know if it would be there or not there, but I would explore the 1031.
Patricia: So the vacant land is actually out of the country.
Pat: Okay. So, a 1031 into an Airbnb. Brilliant.
Scott: The Airbnb is not out of the country, is that right?
Patricia: Yes, they are. They both are. Two different...they're both out of the country.
Pat: Wait, wait, wait. Where's the Airbnb?
Patricia: One is in Jamaica and the other one, the vacant land is in Costa Rica.
Pat: All right. Well, go fish. I have no idea how it would work there.
Patricia: But if I paid it...
Scott: I don't think you can do an exchange out of the U.S., so...
Patricia: But if I sold it and used the money to pay off my existing mortgage of the house I live in, I would still have to pay capital gains?
Pat: Oh, yes.
Scott: Yes.
Patricia: But if I bought a another like property with it, I wouldn't have to...
Scott: In the U.S.
Pat: In the U.S.
Scott: If you follow the rules and use an intermediary to do the 1031 exchange. They're not that complicated. I've done it personally and have advised many clients over this.
Pat: Yeah. But the problem is you'd have to buy an Airbnb in the U.S. The rental property is in the U.S.
Patricia: Okay. But let's say I'm going to do that, then I wouldn't end up paying off the mortgage because I was thinking I could be debt-free.
Scott: You can't pay off the mortgage. You've got probably $50,000, $60,000 in capital gain tax, maybe more.
Patricia: [crosstalk 00:29:33] I was thinking like, if I took the money out of my savings...
Scott: Maybe not that. What did you pay $150,000? And the depreciation, $40,000 to $50,000 in capital gain tax between Feds and...
Patricia: Yeah. Because my interest rate is so low on my present mortgage, I just thought like, why don't I take the money out of the [crosstalk 00:29:44]?
Scott: Yeah. I would not pay off that primary mortgage.
Pat: Yeah. Don't pay off the primary.
Patricia: Oh, okay. All right.
Pat: All righty?
Patricia: Yes. Okay. Thank you very much.
Pat: All right. Appreciate it. I was getting confused there. Thank you for tracking.
Scott: I could not imagine having a rental property outside of the United States. Having one in the same town, it could be challenging enough.
Pat: Yeah. And she wants an Airbnb outside of the U.S. And by the way, the Airbnb, it's popular for many investments. Look, when my family and I travel, we stay in VRBOs, which are...
Scott: Same things.
Pat: Similar. Airbnb, someone could be living in the house.
Scott: Okay. But when you're traveling with your family, you're not looking for a room. You're renting the whole house.
Pat: Correct.
Scott: Because sometimes you see the same property listed on both. I've done the same and I'll look for VRBO and Airbnb and rent wherever is cheaper, because oftentimes they're listed on both.
Pat: That's right. And oftentimes, they're actually listed on... You and I owned a weekly rental for years and years and it would list on all of the things. But oftentimes, if it's a condo, let's say in a Marriott, it will be listed on the Marriott's website as well.
Scott: Yeah. What's your point?
Pat: My point being is that what you should worry about in these particular Airbnbs is the local legislation around them. So, in South Lake Tahoe, which we are very familiar...
Scott: Because it's in our backyard.
Pat: Yes. They put a moratorium on new Airbnbs or VRBOs.
Scott: And took away the permits for many existing ones. And there's another vote going on now.
Pat: Called an occupancy tax, which means they want to tax you if someone's not in the property.
Scott: You own a vacation home...
Pat: And it's not used at least half of the time.
Scott: I heard about that the other day. It doesn't sound constitutional. So if you want to own a vacation home there, they won't let you rent it. And if you don't live in it half the time, they're going to pay an extra tax.
Pat: And the reason behind that is to actually push down property values in order that the workers that live there can actually afford to live there.
Scott: I mean, I can understand the principle behind it.
Pat: But the Airbnbs and the VRBOs, they have lots and lots of risk in them. You read these articles about people and then you read another article three days later where people are like, dying in these.
Scott: I had an acquaintance that was renting his house out, didn't have a permit, wasn't allowed to do it. He finally got busted on it.
Pat: Did he?
Scott: And he's telling me about all the money he's making on this place in Southern California. And I'm looking and I'm like, "Well, you're not allowed to do..." I'm thinking, "How long do you think that's going to go on for?"
Pat: Of course you're doing well.
Scott: It's illegal. There's lots of different things we could talk about that are illegal where you might make some money.
Pat: Yes, of course you're doing well. I robbed these banks. Listen, it worked perfect until the 13th one.
Scott: I want to talk about commercial real estate. And it is amazing the degradation of value that we've seen in particularly large inner city towers over the last five years.
Pat: Amazing.
Scott: Just 60%, 70%, 80%, 90% decline in value.
Pat: And this affects not only the real estate holders, but many life insurance companies.
Scott: Yeah, they're big investors in these.
Pat: Yeah. And other financial institutions are big investors. Pension funds, big investors in commercial real estate. Insurance companies actually are direct investors and they lend money to these sorts of enterprises.
Scott: And there's a couple challenges. One is most of these have loans. So even if someone was going to be conservative, there's $100 million building, we're going to get a 50% loan on it. Investors pool together. Maybe there's a pension fund invested some. Maybe there's a life insurance company and a couple developers. It's oftentimes how these [crosstalk 00:34:06].
Pat: So, loan-to-value at the time that the loan was issued was 50%?
Scott: Yeah. Just like if you put 50% down on your house.
Pat: Which is super-conservative, by the way.
Scott: Correct.
Pat: I mean, that would be a very conservative.
Scott: Nice conservative, 50% debt, no problem. What could go wrong here?
Pat: What could go wrong?
Scott: So there's a couple things that happen. It's not just if you're current on your payments.
Pat: That's one thing.
Scott: So like, when you buy a house, you get a mortgage. Fannie Mae, Freddie Mac, nobody cares what's going on in your personal life. As long as you're making the payments, they don't really care what your home is worth. And I'm betting there's nothing they could do about it.
Pat: They're not asking you what your income is. After the loan is made, as long as you're making the payment, they don't care if you're employed or unemployed or what your other assets are.
Scott: Commercial property, on the other hand, they do ask what you're in.
Pat: They want to know what the revenue is and what the leases look like.
Scott: Exactly.
Pat: And going to run a formula to value that building.
Scott: And if you breach that covenant, whatever you agreed to, you're agreeing to make the payments, plus, you're agreeing to having a certain amount of property leased at a certain price per lease. You're also agreeing that the amount of equity there is never going to go below a certain percent. So if the value declines, you've got to put more capital in.
Pat: And they determine the value is they actually look at your rent roll. So, Scott and I own a commercial building together. And I do the management of it and we have a small loan on it. And once a year, we have to give them our rent rolls with the underlying leases. They want to know what are you renting? How many free months did you give? How long are the leases for? What's the credit worthiness of the tenants? And then they put a value on the building to determine whether the loan-to-value is in their ratio.
Scott: That's right. And if it's not...
Pat: And if it's not, they can call the loan.
Scott: That's the only debt I have in my entire life is that one particular building.
Pat: Yes. And we don't have a lot a debt.
Scott: No. It's 20%.
Pat: Loan-to-value.
Scott: And it's not a $100 million building. [crosstalk 00:36:20]
Pat: We used to have an office there.
Scott: Yeah. It's not a big, huge fancy building. So what ends up happening now are these owners of these commercial properties are finding themselves in trouble. So we're in the Sacramento region. If you're in the Sacramento region, the Darth Vader building, they call it the Darth Vader. It's this 36, 40-story office tower in Sacramento that traded. And the numbers are off a bit.
Pat: It traded at 25% of what its maximum value was.
Scott: Roughly of what someone paid for it.
Pat: Seven or eight years ago. Yes, 25% of what they paid for it is what it just traded at.
Scott: And so here's the snowball effect that happens, right? This is in every city. So what happens is this building was 36% leased or something like that, maybe less. Most the majority was empty, tall office tower, empty cells. I don't know what this loan situation. It could have been a short sale, right?
Pat: Yeah, most likely.
Scott: Most likely there was debt on it worth more than that was. I don't know that much about it, but it's irrelevant. But the challenge is this. Now, the new owners, instead of paying $80 million, they paid $25 million or whatever.
Pat: So, the new owners can actually lease the space for a lot less.
Scott: A lot less.
Pat: A lot less. Which does what?
Scott: Well, if you're a law firm or whatever business you've got, the tower next door...
Pat: You move into this one because your rent is half what it is.
Scott: Or you negotiate with your existing landlord when your lease is coming up saying...
Pat: Can you push down the rent?
Scott: ...I'm no longer paying you 100 grand a year. I'm going to pay you 80 grand a year.
Pat: And it's snowballs down, right. Much as rents snowball up, right, where a building owner will charge more of [crosstalk 00:38:05]. Yes, they snowball down as well. But the hardest part is they talk about converting these things to residential. The problem with that is how the floors are configured, the plumbing, the electricity and the fact that the windows don't open. Or that you won't have a window. And by code in most areas, if you have a bedroom, you must have a window. If you have a bedroom, you must have a window. Whether it opens or not, you have to have a window, which is kind of crazy.
Scott: I mean, obviously a lot of our housing shortage is the fact that we have all these rules.
Pat: That's right.
Scott: Instead of say, go have at it, build yourself a shack and we don't care what you do.
Pat: Yes. Yes. I mean, 100 years ago, you would have been happy to sleep indoors.
Scott: That's right.
Pat: Forget a window, right? So this you read about and you hear about this conversion to housing and how this is going to fix, but the rules won't allow for it. But this is, you know, this is a play. This just tells you about investing. This was a play that big institutional investors were lending money and buying these properties because nothing could go wrong.
Scott: That's right. What could go wrong?
Pat: What could go wrong?
Scott: Super-conservative, really low interest rates.
Pat: Super-low interest rates.
Scott: Really low interest rates.
Pat: Which help drive the values.
Scott: I read an article this week in "The Wall Street Journal" about these New York families that have owned buildings. One family, it was over 100 years they've had office towers.
Pat: They never sell.
Scott: Never sell. But...?
Pat: My grandfather said, "We never sell anything."
Scott: This one family, there was 50 beneficiaries that were all part owners of this.
Pat: Holy smokes.
Scott: Fifty.
Pat: And they all get along fine.
Scott: They're all super-quality people too. Because they don't have to work so much, they're really giving their time to serve their...
Pat: Fellow man.
Scott: Serving the community. Who knows? I can only imagine what their fame... Anyway. So, but they said that they moved from making distributions, which is what it's called in a partnership when you get a dividend essentially, move from making distributions to having capital calls.
Pat: And a capital call is?
Scott: We need money to do this renovation or we need money because we don't have enough rent. And you need to take some of your savings and send it to us.
Pat: And if you don't...
Scott: We're going to buy your interest out at pennies.
Pat: Pennies. Because we can.
Scott: And I've been fascinated watching what's happening in this space primarily because it's such a great reminder of you really never know what's going to happen in the future. And if all your investments has been in commercial property, I don't think anyone would ever have seen something quite like this...
Pat: That's correct.
Scott: ...with the pandemic, the lockdowns, the remote workers.
Pat: And Scott, you know, I know people that are in commercial real estate and they would tell you, "There's nothing. I won't invest in anything but commercial real estate."
Scott: Correct.
Pat: They would just flat out tell you.
Scott: I'm thinking of a friend of mine, he's done very well. I think he had 8 or 10 good-sized commercial properties.
Pat: Like, you can't go wrong.
Scott: I haven't talked to him about his personal finances in a while, but I know that one of them, a big tenant moved out. It's been vacant for a few years.
Pat: Yes. What's surprising is actually how well retail has been doing, you know? But everything has its day in the sun. Every investment. And this just gets back to diversification.
Scott: That's right, particularly if you are at a stage in life where you're more concerned about becoming poor than you are about becoming wealthier.
Pat: Think about that. What are most people's objectives in retirement?
Scott: Maintain my standard of living. If I have more, that'd be great.
Pat: But...?
Scott: If I can fly first class and stay in nice hotels, great. But I don't want to have to leave my house.
Pat: People get confused. They think that they want to get rich and what they really want is to not be poor. To maintain their standard of living in retirement. That's the goal. If you're not flying first class by the time you retire, unless you've got a big windfall coming in, I got news for you, you may not be flying first class forever unless you decide that you're going to change...
Scott: I don't think most people care about flying first. But that's just kind of one example of...
Pat: I guess most people don't. I don't.
Scott: I mean, you look at the plane, obviously most people don't because there's a handful of first class and almost everybody is at the back of the plane.
Pat: Good point.
Scott: Anyway, but it's just a good reminder, particularly if you're moving towards retirement age or getting close to that...
Pat: Diversify.
Scott: Diversify, for sure. Anyway, hey, we're about out of time here. I want to let people know we have a weekly email that goes out, I don't know, it's Tuesdays or Wednesdays, with lots of good information. It will tend to have a little video on something. Anyway, it's topics that are relevant to our listeners of this podcast. And if you don't receive that, I'd encourage you to go to our website, allworthfinancial.com and sign up for the newsletter. It would be helpful for you. Anyway, that's all the time we have. We'll see you next week. This has been "Allworth's Money Matters."
Man: 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 a state planning attorney to conduct your own due diligence.
Scott: Welcome to "Allworth's Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for being with us.
Scott: Yeah. Glad you are part of our program. Without you, we wouldn't exist. Both myself and my co-host, we're both financial advisors, certified financial planner, charter financial consultant. Been doing this stuff for 30 years?
Pat: Three decades.
Scott: Thirty years. The program about 30 years too. So it's good having you. If you want to be part of our program, we'd love taking your calls and answering your questions. Maybe you're working with an advisor now and you just want a second opinion. Maybe you do things on your own, you want to run an idea by us. Maybe someone's trying to sell you something and you're wondering if it makes the most sense for you. And anything that's related to finances or whatnot, send us an email at questions@moneymatters.com or give us a call at 833-99-WORTH and we will schedule time. We've got some good calls lined up for today.
Pat: Yes. And we are recording this show on Thursday, November 14th at 9:00 just because things change so fast.
Scott: Yeah. That way if something weird happens on Friday and the Dow's down 1,000 or up 1,000...
Pat: You're like, "What are these guys talking about?" But I wanted I wanted to talk a little bit about Bitcoin. Wake the kids, call the neighbors and Tesla stock. So Bitcoin.
Scott: How about Dogecoin? That was like a meme, a joke that Musk tweeted about it a few years back. And the thing shot up and that's what they're calling the Department of Government Efficiency, Doge, like the coin.
Pat: Oh, I didn't catch that.
Scott: Oh, yeah, that's exactly it.
Pat: Oh, that makes sense.
Scott: Elon's got a strange sense of humor. He thinks it's hilarious.
Pat: Everything is X with Elon. I started that book you told me about by Walter Isaacson. I read one other book, but this one's much better about Elon.
Scott: I would actually like to get Walter Isaacson's opinion on how much Elon should be involved in the government or not. Here's someone who spent two years with him.
Pat: Oh, he won't be involved very long. I'll give it six months before Trump attires of him. Before Trump just says, yeah, you're getting too much attention. The spotlight needs to be on me. Yeah, I think.
Scott: Yeah, I know. It'll be interesting to watch. Oh, the whole thing's going to be interesting.
Pat: But John Paulson bailed out. I don't remember what position they were talking to him. But he said, "Look, my financial interests are such that I can't do a job for the government because it conflicts." And I thought, "good for him."
Scott: This morning I was listening to an interview with Peter Thiel. He's the founder of PayPal, founder of Palantir.
Pat: Lots of things.
Scott: Yeah. And he had an interesting perspective on...he's pretty excited right now. And then I heard an interview the other day with Bill Ackman, big hedge fund manager who...
Pat: Contrary.
Scott: He's never been as excited about the U.S. economy.
Pat: Really?
Scott: He's like giddy. I mean, he really believes that Trump's going to make the government more efficient and the economy is going to take off and start having good growth and all that.
Pat: We'll see.
Scott: I know. He's got roughly 18 months...
Pat: Well, look, let's see.
Scott: ...until the next election cycles start to get too close.
Pat: Let's wait and see.
Scott: But what we've seen happen since that time...
Pat: Is...?
Scott: So Bitcoin, it's $90,000 a coin.
Pat: Crazy.
Scott: And it was what, $60,000...
Pat: A month ago?
Scott: ...a week ago or whatever it was.
Pat: Whatever Bitcoin is, right? Whatever that means.
Scott: It was $70,000.
Pat: Purely, it is the most speculative thing I think I've ever seen is Bitcoin above and beyond even gambling. But Tesla stock is what confuses [crosstalk 00:04:38].
Scott: On the Bitcoin, it's got a market cap of $1.7 trillion.
Pat: Crazy.
Scott: Just Bitcoin. You add the other coins and it's about $2.5 trillion.
Pat: Crazy.
Scott: So, something that...
Pat: Has no intrinsic value.
Scott: No intrinsic value. It's not physical whatsoever.
Pat: The price is only dependent upon...
Scott: What someone else is willing to pay.
Pat: Generates no income.
Scott: It does nothing.
Pat: It's crazy. It's crazy.
Scott: Investors have bid it up.
Pat: Speculators.
Scott: Thank you. They believe this Bitcoin is worth...
Pat: Yes. In this murky little...
Scott: And look, if you want to own some Bitcoin, fine.
Pat: Have at it, but just recognize what it is.
Scott: It's speculative.
Pat: Recognize what it is.
Scott: And if you owned it prior and sold it when it was down, I would highly discourage you from owning it again, right?
Pat: Correct. You may not have the emotional temperament to... I don't own any.
Scott: Whether it's emotional temperament or just... An investing path is not just the emotions. It's having a sound thesis.
Pat: Correct. An investment thesis. That's why I can't own it. I just can't get my head around the fact that it...
Scott: Me too.
Pat: And people that don't trust banks, like, you think about the whole digital with what's his name? Sam Bankman.
Scott: Sam Bankman-Fried.
Pat: They didn't trust banks, but they trusted each other. Come on. Really? You don't trust a bank, but you're going to trust Sam Bankman-Fried.
Scott: Well, who doesn't trust the bank?
Pat: Lots of people don't trust banks. That's why this digital currency. They don't trust the government's ability to track the currency. Let's put it that way.
Scott: All right. Okay.
Pat: Let's talk a little bit about Tesla.
Scott: Finish off in the [inaudible 00:06:36]. Here's how I view it. You know, Pat, being in this business long enough, invariably, people give you this idea and you really should do this. And they have a lot of opinions for how I should live my life. And like on Bitcoin, here's my view. I don't own it. Had I bought some at $5,000 a coin, would I be happy today? Of course. But I'm happy anyway and my life's fine with or without it. I've done good financial planning over the years. It's highly speculative. It is speculative, there's not even an opinion on that. It's highly speculative whether or not it's going to be worth $100,000, $1 million a coin 10 years out. Nobody knows.
Pat: No one knows.
Scott: It can just as easy go back down to nothing.
Pat: They could release more Bitcoin, right?
Scott: They got to mine it.
Pat: Says who?
Scott: Well, they can always come up with a new coin, which has happened as well.
Pat: Yeah, but they say they have to mine it. They have to mine it, but what happens if the guy that created it, what's his...? They don't even know who it is.
Scott: I don't think they know who it is.
Pat: Yeah. What happens if he just has like a whole store of this thing and he releases a ton into the market?
Scott: Or someone finds a way to...
Pat: Talk to Find Lost Wallets. I know my son had lost his wallet. He probably had 8 or 10 Bitcoin in it.
Scott: What, 8 or 10 Bitcoin?
Pat: Yes. He used it to buy a fake ID when he was a freshman in college.
Scott: My son did too. I don't know if it was Bitcoin or some other that we talked about a couple months ago.
Pat: Yes. Anyway...
Scott: But he would have had 10 Bitcoin right now?
Pat: What are you going to do? I mean, he did the transaction. He needed the Bitcoin to buy the fake ID. He told me this after the fact. And by the way, I wouldn't have had an opinion one way or the other. He's 19 at the time. So do what you want to do. I mean, buy a fake ID.
Scott: I remember having dinner in Boston with my son. He went to Boston College and we went out to a family dinner with his fake ID.
Pat: Like, what are you going to do?
Scott: My wife says, "Hey, I'm not going to lie if they ask me your age. So it's on you, son."
Pat: Actually, we were going into like a bar and they were IDing people at the door, and my son...
Scott: With some of those fake IDs, they get caught with the machines.
Pat: They took his ID and they said, "This is a fake ID." And I started laughing. I thought it was so funny. And then the guy hands it back to him. I go, why are you giving it back to him? He goes, "Well, you know, you're here." [crosstalk 00:09:23] But I thought it was so funny.
Scott: It's funny.
Pat: And my son was so mad at me. He's like, "What are you laughing at, dad?"
Scott: And young parents right now are thinking, what is wrong with those guys?
Pat: Wait.
Scott: Right. It's amazing the things you get comfortable with.
Pat: Wait, whatever. "I'm never going to let my kid do that."
Scott: They do their own thing.
Pat: Anyway, can we talk about Tesla next?
Scott: Yes.
Pat: So, Tesla stock way up which just confuses me. Because aren't they...the Trump administration is talking about taking away subsidies for electric vehicles and then supporting more, you know, gas-powered. And I'm thinking, "Well, shouldn't this Tesla stock actually be down?" But because it's all in the Trump orbit... And I'm not saying negative or positive about Trump. I mean, I don't...
Scott: So a month ago, it was roughly 220 bucks a share. Today, it's roughly 320 bucks a share.
Pat: Thirty five percent, 30%.
Scott: Fifty percent increase.
Pat: Okay. Thank you.
Scott: Yeah, 35%, that's where you start the number.
Pat: That's right.
Scott: Fifty sounds better. Fifty percent growth in a month.
Pat: Yes. Crazy.
Scott: Yeah, for a big company, right? It's like, little companies can go 50%. And I mean, just even the market cap's over a trillion dollars.
Pat: We had $350 of "value" from...?
Scott: Well, wherever, right.
Pat: This is where it starts getting into speculation. And when you think about the fundamentals for Tesla, should not that stock be down?
Scott: It's people that are betting on Musk.
Pat: Betting on him.
Scott: But he has all these different companies starting the AI... Like, what does he carve off?
Pat: Yeah. How does he take one from the other?
Scott: Yes.
Pat: Well, he did it. I mean, they bailed out Solar City. He merged it with Tesla because it was dying.
Scott: It was its cousin.
Pat: It was its cousin, yeah.
Scott: Anyway. Yeah. But now I have Tesla solar panels, though.
Pat: Do you?
Scott: Yeah, because I had SolarCity solar panels and now it's Tesla.
Pat: Oh, how do they work for you, do you know?
Scott: Fine, until you have to redo your roof. Then it was a real pain. Anyway, that's another story. It wasn't that easy to get a hold of anyone at Tesla either, for that matter.
Pat: I've heard that about people that own the Tesla car.
Scott: The car too? Everything's through the app and then it's...
Pat: Actually, I had a client that actually stood in the showroom because he couldn't get his car serviced. He stood in the middle of the showroom and told anyone looking for a Tesla car how bad the service was.
Scott: Are you kidding me?
Pat: No.
Scott: We're not saying negative or positive about Tesla.
Pat: But he couldn't get them to service it and they kept putting him off and putting him off. And he said, "I'm just going to come down to your dealership and stand in the lobby and tell everyone what bad service you guys provide when they come in to look for a car." And they took care of him.
Scott: Yeah, obviously. Let's take a couple of calls and then I want to chat about commercial real estate.
Pat: Oh, a little bit, yes.
Scott: Yeah.
Pat: I have a ton of opinions on that.
Scott: Anyway, let's take some calls. If you want to join us, you can send us an email, questions@moneymatters.com. And that's probably the simplest way, questions@moneymatters.com or call us at 833-99-WORTH. Let's talk with Eric. Eric, you're with "Allworth's Money Matters."
Eric: Hi, Scott, thanks for taking my call.
Scott: Yes, sir.
Eric: Got a question on additional mortgage payment. And then also, once I give you all the numbers, just general thoughts on kind of my wife and I's overall situation.
Scott: All right.
Eric: So, not really your typical client. Don't have a lot of money. I think we started really late in life. Other than a good military pension, I think we're behind, but we're making good choices now.
Pat: Wait, slow down, Eric. You weren't able to save a lot of money while you were in the military, am I hearing this right? You weren't making those fat stacks?
Eric: Yeah, a little hard to do.
Scott: No. Thank you for your service.
Pat: Thank you. Thank you. We get it. We get it.
Eric: Yeah. Sometimes it's hard to find some extra ends there.
Pat: No kidding.
Eric: But yeah, we overcame some bad decisions. We mostly agree about the future and how to budget our money currently. Like I said, I think I know your answer because I've heard you talk many times about additional mortgage payments to other listeners, other callers, but still just wanted your thoughts.
Scott: How old are you?
Eric: Wife and I are both 46. Oh, here we go. I'm going to try and impress you. I think I got all the numbers ready for you guys.
Pat: Okay. Perfect.
Scott: What's the house worth?
Eric: All right. Wife and I are 46. We have one adult kid out of the house.
Pat: Good for you.
Eric: House is worth 770. We have a 30-year fixed mortgage. Current remaining balance is 607. Mortgage payment is 3,300 a month.
Scott: What's the interest rate?
Eric: 2.125 interest rate.
Pat: 2.25?
Eric: 2.125.
Scott: Is that a 15-year mortgage?
Eric: Thirty-year VA.
Pat: Wow.
Scott: Okay. I was gonna say that's the lowest 30-year mortgage I've ever heard.
Pat: That's incredible. Don't pay a penny more on this thing. In fact, call them up and see if they'll extend it to 60-year mortgage. Unbelievable.
Eric: Okay. That's exactly what I thought you were going to say just because of the cost of money. And I really am only making over the course of these additional payments, one additional payment every year.
Scott: I wouldn't make any additional payments. It's 2.25%, 2.8%.
Pat: Yeah. Unbelievable.
Scott: I mean, if you could borrow more money, I'd say borrow more money at 2.8%. If I could borrow money at 2.8%, I'd do it all day long.
Pat: If I could borrow money at 2.8%, I'd retire.
Scott: Borrow a billion at 2.8%?
Pat: I'd borrow a billion at 2.8% and I'd lend almost like banks do. It's weird.
Scott: I mean, let's say you want to retire at 65 or whatever the number is, and you might calculate what the balance will be at that time and say, maybe we have a side fund that we set up, which this is a... You still wouldn't want to pay off the mortgage. So you've got the cash equivalent so you can...
Pat: Match maturities. Okay. Give us the rest of the financial situation. We'll give you a little tune-up there.
Eric: I appreciate it because that's what we're trying to do is be diverse and efficient so that we can really make headway smartly. So, salary is 187. My military retirement, 4,800 a month, and our health insurance comes out of that. I get additional VA disability of 2,100 a month. Both of those have cost-of-living adjustments annually.
Scott: Eric, you talked about how you're behind on the game. If you calculate the net present value of that roughly $7,000 a month pension and...
Pat: And part of it tax-free, it's worth millions.
Scott: Massive.
Pat: It's worth millions.
Eric: Yeah. I got 1.6 over the next 20 years.
Pat: Got it. You did the math. You did the math. Okay. So you get it. So when you say you're behind, you're not necessarily behind.
Eric: Well, if it wasn't for the retirement, I'd be freaking out right now, but...
Pat: But if I had eggs, I'd have bacon and eggs. If I had bacon, it is. It is there. Okay. So $84,000 in benefits, veterans' benefits, a portion of which is tax-free.
Eric: 401(k), 65k, I maxed the employer contributions. I mean, I maxed the 401(k) this year, but I didn't do it last year. But for the foreseeable future, I don't see any reason why we're not going to max out. I have a separate IRA with 18.5. I maxed it out last year and I'll max out this year. Separate brokerage account, $28,000. High interest savings account, money market account, I got $26,000 at 4.25%. I've been watching that one because it's already gone down 0.25%. So just maybe possibly move that to another higher one. I've got two life insurance policies. I'm only the sole income in the house. So, one through work and another one through insurance company, totaling $3.4 million. I've got two car payments. One of them will be paid off in January or I might just pay that off early, just depends. That'll clear up some additional money to put towards retirement savings. Anything outside of that in the budget, I'm putting in about $1,900 into emergency savings account.
Pat: And what's the outstanding balance on the car?
Eric: The one car is only about $1,300. The other one still has 4 years, it's about $45,000.
Scott: Have you been in this ballpark salary area for the last few years?
Eric: Yes. I retired three years ago and since then, it started a little bit less, but the last two years [crosstalk 00:19:10].
Scott: Okay. And what were you making before you retired?
Eric: Shoot, more like $90,000. [crosstalk 00:19:18]
Scott: So some of this, you're just catching up on some things, right?
Eric: Yeah. A lot of consumer debt out of the way.
Scott: You're perfect. You're not spending all the money that's coming in now. You have been catching up on some stuff?
Eric: Yeah. My wife likes to spend all the money that's coming in, but I got to make sure to reel that in.
Pat: So, what is the interest rate on the car?
Eric: The one that's left over, I think is 2.9%, the one I have 4 years left on. I said, I'm not worried about the one that only has $1,300 left. That's over in January.
Scott: If I were in your situation, I'd contribute the absolute maximum to the 401(k).
Pat: And then you would...?
Scott: Pay off the cars.
Pat: But it's 2.9%. It's fixed. So what's the point? He's earning higher than that. And then you would, what Scott? You'd convert that IRA to a Roth. And then you'd make a contribution to the IRA every year and you'd convert to a Roth.
Scott: A non-deductible... Well, he's got the 18,000.
Pat: I know, but he just put those in in the last couple of years. So what you want to do is...
Eric: [crosstalk 00:20:24] to say that because I'll probably be in a lower income bracket when I actually retire-retire.
Pat: No, no.
Scott: I don't think so.
Eric: I will talk to an advisor [inaudible 00:20:34] for sure. I'm writing that down.
Pat: So, what you want to do is you want to convert that existing IRA for both you and your spouse into a Roth IRA. And then you want to actually make that contribution every year and convert it the very next day. And the reason is you're in a 24% tax bracket right now. Actually, you're probably lower than that, you're 22%.
Scott: Well, some of the pension's tax-free.
Pat: Some of the pension's tax-free. So, you want to do that so that you can push as much away into savings as you can.
Scott: I mean, you are in such a different financial situation than you've been most of your life. You were married relatively young. You had a child. You've raised a child. Child's grown.
Pat: The child's a self-feeder now.
Scott: Yeah. So I mean, your wife wants to spend. Like, you can afford to spend some now, right? Like, you can afford to... Whatever you want to spend the money on, but as long as we're making sure that... Because you're going to get used to this lifestyle.
Eric: That's what I'm afraid of. I'd rather save it than spend it.
Scott: It'd probably be helpful to do some real planning and saying, if we want to retire at 60 or 65 or whatever the number is...
Pat: This is what we need to do.
Scott: Yeah. And that'll say, all right, in addition to maximizing the 401(k), do we need to save much more? How much more? But given the fact that it's...
Pat: Your new job, will it have a pension when you retire?
Eric: No. I've got the 401(k) and that's it. No other pensions through the new employer.
Pat: Okay. Yeah. So you want to maximize the 401(k) and then you want to make the IRA contributions non-deductible and convert them. Go ahead and convert that IRAs, both you and your spouse, immediately into a Roth. And you want to be as aggressive as you possibly can.
Scott: And you probably want to be saving some more. Otherwise, I think really running some numbers to get it...
Pat: He knows exactly...this guy's super-disciplined. He's beating himself up...
Scott: Yeah. Don't beat yourself up.
Pat: ...because he was living a little bit above your means while you were making this salary, but you're not living above your means now.
Scott: Maximize your 401(k), build up that emergency reserve, call us in a year.
Eric: Yeah. Awesome.
Pat: All right. You're great.
Scott: I wouldn't worry about a thing. And you've got tons of life insurance. If something happens, you're taken more than good care of.
Pat: Good job. And make the IRA contributions, convert it to a Roth and call us in a year, 18 months.
Eric: All right. Sounds good, guys. Appreciate the call.
Pat: Appreciate the call.
Scott: Let's talk now with Patricia. Patricia, you're with "Allworth's Money Matters."
Patricia: Yes. Hi. Good afternoon. Thanks for taking my call.
Scott: Hi.
Patricia: I'm 62 years old. I have a rental property and I have my primary residence and I have an Airbnb. The rental property is really just breaking even over the last 10 years. By the time I pay taxes, insurance, property management fees, HOA, I've just really been breaking even over the last six years. I have my primary residence with a mortgage balance of $180,000.
Scott: And what's it worth?
Patricia: A million.
Pat: Okay. What's the interest rate?
Patricia: Two-and-a-half percent.
Scott: Wow. A 30-year or 15-year?
Patricia: Fifteen.
Scott: Fifteen.
Patricia: And then I have the rental property. The interest on that is 7% and I have a balance of $110,000. And the property is worth $330,000. So I kind of looked...
Pat: What did you pay for it?
Patricia: Two-hundred thousand.
Pat: How long have you owned it?
Patricia: [crosstalk 00:24:14] $180,000.
Pat: How long have you owned it?
Patricia: Since 2010, so, 12 years.
Pat: All right. Tell us about the Airbnb.
Patricia: The Airbnb takes care of itself and then some. So the Airbnb, I owe $54,000 on, but the interest on that is also 7%. But it's profitable. I'm turning a profit on it. I'm making about $1,000 a month after all expenses.
Pat: And what's the value of the property?
Patricia: That's worth about maybe 250,000.
Pat: And what did you pay for it?
Patricia: One-hundred sixty-five thousand.
Pat: Okay. What's your question for us?
Patricia: So I had the rental property, the tenants just left and I'm trying to decide... I also have a vacant land that I purchased that I want to build another Airbnb on. So, I'm trying to decide if I should sell the rental property since I'm really not making any money. It's just there building equity. But recently, the area that it's in has become like, saturated with lots of new homes and rental properties. So, I'm trying to decide if I should sell it and use the money because when I did all the numbers, at the end, I'm going to walk away with 296k if I get the asking price. And once I pay off the mortgage out of it, then I'll have 180,000 less, which I can use to pay off my existing mortgage.
Scott: But then you've got your silent partner, the tax man.
Patricia: Yes. Yes. So I have no write-off to my tax except for the rental property. My children have grown and I have no deductibles.
Pat: What's the rest of your financial situation look like?
Scott: Are you working, retired?
Patricia: I'm working. I have no plans to retire. My job, I'm going to work as long as I can and maybe not full time. But I already estimated I need about $60,000 a year to live and I make about somewhere between $150,000 and $180,000 a year.
Pat: And how much money do you have in savings, brokerage, IRAs, that sort of thing?
Scott: 401(k)?
Patricia: Yeah. All of that, I have about 700,000.
Scott: Have you thought about doing a tax-free exchange with a better rental that you can Airbnb?
Patricia: I'm sorry. A tax exchange?
Pat: A tax-free exchange.
Patricia: And what is that? I don't know what that is. Sorry.
Scott: Well, I always get confused between 1031...
Pat: 1031.
Scott: For whatever reason, I cannot [crosstalk 00:27:05]. Thirty-some years in this business and I can never remember which one's 1031, which one's 1035. It's called a 1031 tax-free exchange. And this enables you to sell that property. And as long as you buy something similar, like kind property, within I believe, it's six months on both the front and the back, you can defer all of that gain. So you pay no capital gain tax.
Patricia: But I will eventually have to pay the capital gains, right?
Scott: Yeah. But if you can defer the capital gains, you have more capital working for you. So if the strategy is just to sell the rental and you net, let's call it 200,000, you're going to have to pay, it's a no-brainer, almost 30% for capital gain tax.
Patricia: Right.
Pat: And so when you said this vacant land, I don't know if it would be there or not there, but I would explore the 1031.
Patricia: So the vacant land is actually out of the country.
Pat: Okay. So, a 1031 into an Airbnb. Brilliant.
Scott: The Airbnb is not out of the country, is that right?
Patricia: Yes, they are. They both are. Two different...they're both out of the country.
Pat: Wait, wait, wait. Where's the Airbnb?
Patricia: One is in Jamaica and the other one, the vacant land is in Costa Rica.
Pat: All right. Well, go fish. I have no idea how it would work there.
Patricia: But if I paid it...
Scott: I don't think you can do an exchange out of the U.S., so...
Patricia: But if I sold it and used the money to pay off my existing mortgage of the house I live in, I would still have to pay capital gains?
Pat: Oh, yes.
Scott: Yes.
Patricia: But if I bought a another like property with it, I wouldn't have to...
Scott: In the U.S.
Pat: In the U.S.
Scott: If you follow the rules and use an intermediary to do the 1031 exchange. They're not that complicated. I've done it personally and have advised many clients over this.
Pat: Yeah. But the problem is you'd have to buy an Airbnb in the U.S. The rental property is in the U.S.
Patricia: Okay. But let's say I'm going to do that, then I wouldn't end up paying off the mortgage because I was thinking I could be debt-free.
Scott: You can't pay off the mortgage. You've got probably $50,000, $60,000 in capital gain tax, maybe more.
Patricia: [crosstalk 00:29:33] I was thinking like, if I took the money out of my savings...
Scott: Maybe not that. What did you pay $150,000? And the depreciation, $40,000 to $50,000 in capital gain tax between Feds and...
Patricia: Yeah. Because my interest rate is so low on my present mortgage, I just thought like, why don't I take the money out of the [crosstalk 00:29:44]?
Scott: Yeah. I would not pay off that primary mortgage.
Pat: Yeah. Don't pay off the primary.
Patricia: Oh, okay. All right.
Pat: All righty?
Patricia: Yes. Okay. Thank you very much.
Pat: All right. Appreciate it. I was getting confused there. Thank you for tracking.
Scott: I could not imagine having a rental property outside of the United States. Having one in the same town, it could be challenging enough.
Pat: Yeah. And she wants an Airbnb outside of the U.S. And by the way, the Airbnb, it's popular for many investments. Look, when my family and I travel, we stay in VRBOs, which are...
Scott: Same things.
Pat: Similar. Airbnb, someone could be living in the house.
Scott: Okay. But when you're traveling with your family, you're not looking for a room. You're renting the whole house.
Pat: Correct.
Scott: Because sometimes you see the same property listed on both. I've done the same and I'll look for VRBO and Airbnb and rent wherever is cheaper, because oftentimes they're listed on both.
Pat: That's right. And oftentimes, they're actually listed on... You and I owned a weekly rental for years and years and it would list on all of the things. But oftentimes, if it's a condo, let's say in a Marriott, it will be listed on the Marriott's website as well.
Scott: Yeah. What's your point?
Pat: My point being is that what you should worry about in these particular Airbnbs is the local legislation around them. So, in South Lake Tahoe, which we are very familiar...
Scott: Because it's in our backyard.
Pat: Yes. They put a moratorium on new Airbnbs or VRBOs.
Scott: And took away the permits for many existing ones. And there's another vote going on now.
Pat: Called an occupancy tax, which means they want to tax you if someone's not in the property.
Scott: You own a vacation home...
Pat: And it's not used at least half of the time.
Scott: I heard about that the other day. It doesn't sound constitutional. So if you want to own a vacation home there, they won't let you rent it. And if you don't live in it half the time, they're going to pay an extra tax.
Pat: And the reason behind that is to actually push down property values in order that the workers that live there can actually afford to live there.
Scott: I mean, I can understand the principle behind it.
Pat: But the Airbnbs and the VRBOs, they have lots and lots of risk in them. You read these articles about people and then you read another article three days later where people are like, dying in these.
Scott: I had an acquaintance that was renting his house out, didn't have a permit, wasn't allowed to do it. He finally got busted on it.
Pat: Did he?
Scott: And he's telling me about all the money he's making on this place in Southern California. And I'm looking and I'm like, "Well, you're not allowed to do..." I'm thinking, "How long do you think that's going to go on for?"
Pat: Of course you're doing well.
Scott: It's illegal. There's lots of different things we could talk about that are illegal where you might make some money.
Pat: Yes, of course you're doing well. I robbed these banks. Listen, it worked perfect until the 13th one.
Scott: I want to talk about commercial real estate. And it is amazing the degradation of value that we've seen in particularly large inner city towers over the last five years.
Pat: Amazing.
Scott: Just 60%, 70%, 80%, 90% decline in value.
Pat: And this affects not only the real estate holders, but many life insurance companies.
Scott: Yeah, they're big investors in these.
Pat: Yeah. And other financial institutions are big investors. Pension funds, big investors in commercial real estate. Insurance companies actually are direct investors and they lend money to these sorts of enterprises.
Scott: And there's a couple challenges. One is most of these have loans. So even if someone was going to be conservative, there's $100 million building, we're going to get a 50% loan on it. Investors pool together. Maybe there's a pension fund invested some. Maybe there's a life insurance company and a couple developers. It's oftentimes how these [crosstalk 00:34:06].
Pat: So, loan-to-value at the time that the loan was issued was 50%?
Scott: Yeah. Just like if you put 50% down on your house.
Pat: Which is super-conservative, by the way.
Scott: Correct.
Pat: I mean, that would be a very conservative.
Scott: Nice conservative, 50% debt, no problem. What could go wrong here?
Pat: What could go wrong?
Scott: So there's a couple things that happen. It's not just if you're current on your payments.
Pat: That's one thing.
Scott: So like, when you buy a house, you get a mortgage. Fannie Mae, Freddie Mac, nobody cares what's going on in your personal life. As long as you're making the payments, they don't really care what your home is worth. And I'm betting there's nothing they could do about it.
Pat: They're not asking you what your income is. After the loan is made, as long as you're making the payment, they don't care if you're employed or unemployed or what your other assets are.
Scott: Commercial property, on the other hand, they do ask what you're in.
Pat: They want to know what the revenue is and what the leases look like.
Scott: Exactly.
Pat: And going to run a formula to value that building.
Scott: And if you breach that covenant, whatever you agreed to, you're agreeing to make the payments, plus, you're agreeing to having a certain amount of property leased at a certain price per lease. You're also agreeing that the amount of equity there is never going to go below a certain percent. So if the value declines, you've got to put more capital in.
Pat: And they determine the value is they actually look at your rent roll. So, Scott and I own a commercial building together. And I do the management of it and we have a small loan on it. And once a year, we have to give them our rent rolls with the underlying leases. They want to know what are you renting? How many free months did you give? How long are the leases for? What's the credit worthiness of the tenants? And then they put a value on the building to determine whether the loan-to-value is in their ratio.
Scott: That's right. And if it's not...
Pat: And if it's not, they can call the loan.
Scott: That's the only debt I have in my entire life is that one particular building.
Pat: Yes. And we don't have a lot a debt.
Scott: No. It's 20%.
Pat: Loan-to-value.
Scott: And it's not a $100 million building. [crosstalk 00:36:20]
Pat: We used to have an office there.
Scott: Yeah. It's not a big, huge fancy building. So what ends up happening now are these owners of these commercial properties are finding themselves in trouble. So we're in the Sacramento region. If you're in the Sacramento region, the Darth Vader building, they call it the Darth Vader. It's this 36, 40-story office tower in Sacramento that traded. And the numbers are off a bit.
Pat: It traded at 25% of what its maximum value was.
Scott: Roughly of what someone paid for it.
Pat: Seven or eight years ago. Yes, 25% of what they paid for it is what it just traded at.
Scott: And so here's the snowball effect that happens, right? This is in every city. So what happens is this building was 36% leased or something like that, maybe less. Most the majority was empty, tall office tower, empty cells. I don't know what this loan situation. It could have been a short sale, right?
Pat: Yeah, most likely.
Scott: Most likely there was debt on it worth more than that was. I don't know that much about it, but it's irrelevant. But the challenge is this. Now, the new owners, instead of paying $80 million, they paid $25 million or whatever.
Pat: So, the new owners can actually lease the space for a lot less.
Scott: A lot less.
Pat: A lot less. Which does what?
Scott: Well, if you're a law firm or whatever business you've got, the tower next door...
Pat: You move into this one because your rent is half what it is.
Scott: Or you negotiate with your existing landlord when your lease is coming up saying...
Pat: Can you push down the rent?
Scott: ...I'm no longer paying you 100 grand a year. I'm going to pay you 80 grand a year.
Pat: And it's snowballs down, right. Much as rents snowball up, right, where a building owner will charge more of [crosstalk 00:38:05]. Yes, they snowball down as well. But the hardest part is they talk about converting these things to residential. The problem with that is how the floors are configured, the plumbing, the electricity and the fact that the windows don't open. Or that you won't have a window. And by code in most areas, if you have a bedroom, you must have a window. If you have a bedroom, you must have a window. Whether it opens or not, you have to have a window, which is kind of crazy.
Scott: I mean, obviously a lot of our housing shortage is the fact that we have all these rules.
Pat: That's right.
Scott: Instead of say, go have at it, build yourself a shack and we don't care what you do.
Pat: Yes. Yes. I mean, 100 years ago, you would have been happy to sleep indoors.
Scott: That's right.
Pat: Forget a window, right? So this you read about and you hear about this conversion to housing and how this is going to fix, but the rules won't allow for it. But this is, you know, this is a play. This just tells you about investing. This was a play that big institutional investors were lending money and buying these properties because nothing could go wrong.
Scott: That's right. What could go wrong?
Pat: What could go wrong?
Scott: Super-conservative, really low interest rates.
Pat: Super-low interest rates.
Scott: Really low interest rates.
Pat: Which help drive the values.
Scott: I read an article this week in "The Wall Street Journal" about these New York families that have owned buildings. One family, it was over 100 years they've had office towers.
Pat: They never sell.
Scott: Never sell. But...?
Pat: My grandfather said, "We never sell anything."
Scott: This one family, there was 50 beneficiaries that were all part owners of this.
Pat: Holy smokes.
Scott: Fifty.
Pat: And they all get along fine.
Scott: They're all super-quality people too. Because they don't have to work so much, they're really giving their time to serve their...
Pat: Fellow man.
Scott: Serving the community. Who knows? I can only imagine what their fame... Anyway. So, but they said that they moved from making distributions, which is what it's called in a partnership when you get a dividend essentially, move from making distributions to having capital calls.
Pat: And a capital call is?
Scott: We need money to do this renovation or we need money because we don't have enough rent. And you need to take some of your savings and send it to us.
Pat: And if you don't...
Scott: We're going to buy your interest out at pennies.
Pat: Pennies. Because we can.
Scott: And I've been fascinated watching what's happening in this space primarily because it's such a great reminder of you really never know what's going to happen in the future. And if all your investments has been in commercial property, I don't think anyone would ever have seen something quite like this...
Pat: That's correct.
Scott: ...with the pandemic, the lockdowns, the remote workers.
Pat: And Scott, you know, I know people that are in commercial real estate and they would tell you, "There's nothing. I won't invest in anything but commercial real estate."
Scott: Correct.
Pat: They would just flat out tell you.
Scott: I'm thinking of a friend of mine, he's done very well. I think he had 8 or 10 good-sized commercial properties.
Pat: Like, you can't go wrong.
Scott: I haven't talked to him about his personal finances in a while, but I know that one of them, a big tenant moved out. It's been vacant for a few years.
Pat: Yes. What's surprising is actually how well retail has been doing, you know? But everything has its day in the sun. Every investment. And this just gets back to diversification.
Scott: That's right, particularly if you are at a stage in life where you're more concerned about becoming poor than you are about becoming wealthier.
Pat: Think about that. What are most people's objectives in retirement?
Scott: Maintain my standard of living. If I have more, that'd be great.
Pat: But...?
Scott: If I can fly first class and stay in nice hotels, great. But I don't want to have to leave my house.
Pat: People get confused. They think that they want to get rich and what they really want is to not be poor. To maintain their standard of living in retirement. That's the goal. If you're not flying first class by the time you retire, unless you've got a big windfall coming in, I got news for you, you may not be flying first class forever unless you decide that you're going to change...
Scott: I don't think most people care about flying first. But that's just kind of one example of...
Pat: I guess most people don't. I don't.
Scott: I mean, you look at the plane, obviously most people don't because there's a handful of first class and almost everybody is at the back of the plane.
Pat: Good point.
Scott: Anyway, but it's just a good reminder, particularly if you're moving towards retirement age or getting close to that...
Pat: Diversify.
Scott: Diversify, for sure. Anyway, hey, we're about out of time here. I want to let people know we have a weekly email that goes out, I don't know, it's Tuesdays or Wednesdays, with lots of good information. It will tend to have a little video on something. Anyway, it's topics that are relevant to our listeners of this podcast. And if you don't receive that, I'd encourage you to go to our website, allworthfinancial.com and sign up for the newsletter. It would be helpful for you. Anyway, that's all the time we have. We'll see you next week. This has been "Allworth's Money Matters."
Man: 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 a state planning attorney to conduct your own due diligence.
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