#71 - 5 Creative Ways To Find Investment Cash

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

[00:00:29] Hey, welcome back to Passive Income Pilots everyone. Tait Duryea here with Ryan Gibson. Ryan, how are you doing? Oh, it's been a great summer. Excited to get into the show today. How have you been, Tait? I have been excellent.

[00:00:42] I just got back from a couple of weeks in Europe, which was fantastic. I think a congratulations is an order. A congratulations is an order. Yes, yes. Congratulations. Yeah. Got married to my beautiful bride, Lucy. And we had an absolutely amazing time.

[00:00:57] We chartered two catamarans and sailed around Greece for a week. Man, it was so much fun. It's been tough coming down from that amazing experience and the jet lag and everything, but we're getting back in the swing. Nice.

[00:01:09] Well, speaking of jets, I just had an awesome weekend watching the Blue Angels fly around Seattle. Nice. For three days straight. First day on Friday, I got to see them from Mercer Island at a friend's house. The air show was like right above us.

[00:01:24] And then on Saturday, we got to take a boat out, got to watch them from Lake Washington. And then today I got to go watch them from our club at the pool. So that was pretty cool. And it was just a great weekend.

[00:01:37] It was beautiful weather, awesome day for an awesome couple of days for the air show. And just love this time of year when the seafair happens and the Blue Angels are at town. That's fantastic. Yeah. I love it. Love it. Can't wait to see the Blue Angels.

[00:01:52] I haven't seen them in years. They are extraordinary. They certainly are. We have a few little market updates we wanted to talk about. We're recording this on Sunday, August 4th. This is airing as you're likely listening to it on Tuesday. But what's happening in the markets?

[00:02:09] There were some big moves in the debt market recently. The jobs report came out with 114,000 new jobs versus 175,000 that were expected. And that rocked the debt markets. We saw about a point interest rate swing. Ryan, what do you make of that?

[00:02:27] Yeah, unemployment has increased, I believe, by half a point, which is pretty big. And the Fed is signaling interest rate cuts and that there's a temporary meeting. All that really means interest rates could move off the Fed meeting.

[00:02:39] The Fed meeting in September is just going to be what the federal funds rate is, which is the overnight cost of borrowing from the banks. So the market has started to price in interest rate cuts. And we're seeing that in some of the rate quotes that we're getting.

[00:02:53] And we're seeing some of that fanny-Freddy loans that people are taking up all the family. I've seen come down into the high fives, which is good news for real estate investors, but kind of a signaling that we might get into more of a recessionary

[00:03:06] signs with increasing unemployment and the Fed finally starting to ratchet down those interest rates. Yeah, I've got a stat here that when the Fed began raising rates in March of 2022, the Fed funds rate was 0.125%. But the CPI, the inflation rate was at 8.5.

[00:03:25] So the real Fed funds rate when you adjusted for inflation was negative 8.375%. Incredible. Just incredibly simulative, right? And today, the Fed funds rate is at 5.375. And the CPI is at 3. So the real Fed funds rate when you adjusted for inflation

[00:03:43] is a very restrictive 2.375. So this means that the rise in the federal funds rate, the real federal funds rate, is nearly 11 percentage points. And that's actually more than when Paul Voerker was head of the Fed. So everybody talks about when Paul Voerker cranked up interest rates,

[00:04:02] what, to the high teens back in the 70s to break the back of inflation. Well, those real rates because inflation was so high weren't even this high right now. So it just shows how restricted that is. And it looks like it's working.

[00:04:16] Things are slowing down. You see that in the airline industry, airlines are starting to stop hiring even furlough. We just saw a report from Spirit that's going to be furloughing, I think 240 pilots. Yeah, downgrading 100 captains. Downgrading 100 captains, unbelievable. So I think that there's some turbulence ahead.

[00:04:34] Good news if you own real estate for your valuations. And I think we'll see transaction volume pick up in both the commercial real estate sector and the residential sector, which is good for real estate investors.

[00:04:47] That's what we're hearing from brokers is that this is going to be a busy fall. A lot of listings coming to market. So get out your checkbooks. Yeah. But be a buying opportunity. Absolutely. And when there's recessions, we love recession resistant real estate,

[00:05:01] such as stealth storage, multifamily, mobile home parks, that sort of thing. In any case, we're talking today about five ways to find cash to invest. Cash is obvious, right? Most investors, when they invest in real estate, either passively or actively, they're going to use cash.

[00:05:21] But we wanted to explore some different ways that you can access capital to make some wise investments. So Ryan, do you want to kick us off with the first one? Yeah. So I think you nailed it, Tate. I think when people get started off with investing, they think,

[00:05:38] hey, the only way that I can invest is with cash. And I have to save a bunch of money and I have to get the cash in the bank before I could start making my first indication investment or start making investments elsewhere.

[00:05:52] And I think that's a good thought. But I think it's really important to understand how to level up your ability to invest by getting other methods in your tool belt. And one of those things is by using a HELOC.

[00:06:12] So Home Equity, Line of Credit could be one of those ways that you can find cash to invest and you could really kind of leverage the equity that's been built in your home over the years to do that.

[00:06:23] So that's one way and we're going to dive into each way. I just want to give you the five right off the bat. So you're not waiting. The second thing is using a self-directed IRA. And we actually have an entire episode on self-directed IRA investing.

[00:06:37] And this is number 36. Episode number 36, exactly. So if you're at a regional or you just transition to a major or maybe used to work for a former employer in a medical profession or something like that and you've got this old 401k just sitting there,

[00:06:51] you have a dirty thing with it. Consider rolling that into an SDIRA or using an SDIRA to invest self-directed IRA. Now you may be thinking, okay, well, can I just use my SDIRA to invest that it's in now? No, you can't. It's usually the answer.

[00:07:04] You have to put it with a custodia that actually allows non-traditional or alternatives real estate investing. The next way is leveraging a taxable stock account. So if you have extra cash that you're kind of putting away in a taxable account,

[00:07:22] meaning that these are tax funds not in a retired account, you can actually go and leverage against it. Which is really cool about this is that you can stay vested in the stock market, but then you can borrow against those funds to go invest in and diversify.

[00:07:38] And so your money stays in the market working part for you. You do pay an interest rate. So you'll want to check that out what that interest rate is. And then you can actually go out and invest and kind of split your bet basically on investing

[00:07:52] with by putting some money in non-traditional real estate assets. And then also have your traditional portfolio. Now, what's different than that actually completely different than that is borrowing against your 401k and you can borrow up to 50k, which just happens to be the minimums on most indications.

[00:08:14] And we did an episode number 23 and we actually dove into exactly how you can use, you can borrow against your 401k. And what's interesting about that is it's different than leveraging it against a taxable stock count.

[00:08:27] When you borrow against your 401k, you actually take your money out of the market. So the money is no longer in the stock market. It's just doing the investing. But you can leverage it in a way that diversifies your portfolio and the interest

[00:08:43] that you pay back to your 401k loan actually goes into your plan. So if you're looking for a way to stuff more money into your 401k, the 401k loan could actually be very attractive because the interest you pay on that actually goes right back to you, the investor.

[00:08:59] And the interest rate is usually a prime rate. So that's sort of the disclaimer on that is making sure that the prime rate is about 8.5% right now. So you want to make sure that you can actually make those

[00:09:09] payments that were going to come out of all your paychecks in a 401k loan. And if you want to go deep into how for a like what K-Load works, the good, the bad, the ugly. Again, episode 23 we dive into that. Absolutely.

[00:09:22] And the next way to invest is through whole life insurance plans, which is a whole new strategy that we actually introduced at episode 70, which is one of the last episodes we had. And also what was the other one tape that we had about?

[00:09:36] 47 was the first one with the Money Insights guys that came on. You were out of office that day. It was just me hosting that episode. 47 was a great one, but they came back on episode 70 to talk about the strategy. And honestly, we've been pretty blown away by it.

[00:09:52] So we're going to talk more about that. Yeah. So it's really important I think just overall to understand that cash is not the only way to invest in alternatives or really invest in any type of real estate or other transaction. You've got other things at your disposal.

[00:10:08] And one of the things that we've got to do on the show is just kind of talk deep about those different strategies and to make sure that you're taking advantage. Because sometimes it's really important to understand too,

[00:10:19] when you have these different sources of income or the sources of resourcing to invest, sometimes it's more strategic to use a different bucket. And I want to talk about that importance too. For example, if you're over leveraged in the stock market,

[00:10:35] you have a lot of stock spots and mutual funds and you haven't used your 401k loan, you're looking to put more money into your 401k. But you're also looking for a diversification strategy that borrowing against your 401k loan may be very attractive.

[00:10:49] Now you also have to ask yourself, will the payments that come out, can I cover that with my income? And can I afford to make those 401k payments? So it's a very important thing to ask yourself. And likewise, if you're going to use a subtracted IRA,

[00:11:05] it may become with some tax consequences that you may need to consider before using your SDIRA to invest. So let's dive into each one of these one by one. So we started with HELOC and I do want to take a moment to say that this is not

[00:11:20] investment advice. And if you're looking for that last $50,000 to scrounge up somewhere, it may not be the best idea. Right? We don't want to be stretching yourself too thin. And if you don't have the cash to invest, looking under your mattress and leveraging your house

[00:11:40] in order to take money out to invest over somewhere else, is not the most prudent strategy. So that's certainly not what Ryan and I are proposing here. What we're trying to unlock is the thought process of thinking.

[00:11:55] We touched base on this before we hit record, Ryan, was instead of thinking one dimensionally, which is I need to save a dollar so that then I can go invest it, to think multi-dimensionally

[00:12:07] and think of all the ways that you can pool your resources and how you can leverage your resources in order to be smarter with your money and make return in two places at once.

[00:12:20] So when we talk about the HELOC, a lot of times when unsophisticated investors are thinking about what to do with an investment property that they own that maybe has appreciated highly, the first thing they think is, well, I should sell it because it's not making all that much

[00:12:37] cash flow. Well, the wealthy usually don't sell assets they borrow against them. Elon Musk doesn't sell stock to go and buy stuff with, he borrows against it. And that's how the wealthy play the game is they borrow against their assets in order to invest in more assets.

[00:12:58] So when you're looking at, say, your home or an investment property that's highly appreciated, if the loan gets paid down over time, you build that equity and it appreciates. And that's what I like to call lazy equity. It's equity that's just sitting there and it's not doing anything.

[00:13:13] It's not producing anything. So if you did sell it, let's say you bought a property for $500,000, it's now worth $600,000 and the loan has been paid down to four. You've got $300,000 of equity sitting there and it may only be producing a small amount of cash

[00:13:28] flow every year and you're thinking to yourself, well, if I just sold this thing and put it in the S&P, I'd be doing better. Well, you can still access that without selling it. And of course, that's tax free because it's a loan.

[00:13:39] It's not going to trigger a game. So, Ryan, do you have any thoughts on that? Yeah, I do. And I think that HELOC right now, you've got to really think about what interests you're going

[00:13:52] to pay on the money they use at HELOC because three years ago, a HELOC was a no-brainer. You could get one for 3%, 4%, whatever it was and then you can go make 8% or 9% in an alternative investment just in the cash flow. The market has changed.

[00:14:08] I mean, now the HELOC is going to be 8.5%, 9% and you're probably going to only cash flow 5% or 6% on an equity deal. So, you want to be thinking about interest rate arbitrage. I mean, obviously tax benefits to there that you've got to consider factoring in

[00:14:23] and there's also long-term appreciation and inflation hedge in real estate. But it's become a less attractive option if interest rates have gone up. So, it's something to think about strategically. Maybe that's something that you have in your emergency reserve.

[00:14:38] You've got a HELOC set aside and you don't have to draw on it. You just have it there for just kind of an adjusted case. So, it might not become your first line of defense. And again, as Dave mentioned earlier, we're not providing any tax-related

[00:14:52] law investment advice because we don't know your situation. We don't know what your financial income is like. We don't know your whole portfolio. We couldn't possibly film this podcast and just generically say, hey, this is a good idea or a bad idea.

[00:15:07] We're just giving you some thoughts to think about. You know, think about how high that interest rate is and think about where you're putting that money. And if it makes sense to actually invest with HELOC funds into something else.

[00:15:17] I mean, obviously, if something's paid 12% and you can borrow at 9%, you know, that interest rate arbitrage 3% is a good thing potentially, right? But if you're borrowing at 8% and you're only getting 4%, well, maybe that's not the most lucrative thing to use to invest.

[00:15:35] So just think about just the different scenarios and kind of think about, you know, your whole financial picture and what you're going into something like that. Let's move on to IRAs and 401Ks. So we've talked a lot about this on the show.

[00:15:48] I don't want to spend too much time on this, but episode 36 with Derek Long was an excellent one. Talks about what a self-directed IRA is and how to roll an old dusty 401K into it. Lots and lots of money in IRAs.

[00:16:03] You can have as many IRAs as you want. You don't have to take all of your money and put it into an SDIRA, but if you open up a self-directed IRA account with a custodian that allows for alternative investments, you can participate in non-market securities

[00:16:21] such as passive real estate deals or even buy a rental property with your SDIRA. Yeah, and you know, I think the thing that scares everybody off is that UDFI, and we could probably have an hour-long conversation about UDFI and what it means and what it doesn't mean, but...

[00:16:39] Unrelated debt financed income. Exactly. Yeah, and see if you can get a straight answer from somebody at one of that applies and doesn't apply at a syndication. You'll get a different answer every single time you ask somebody that's really frustrating,

[00:16:52] but at the end of the day, talk to your CPA. If you're investing in something that has leverage, generally that means that you might pay a tax on the income that's produced based on the pro-rata amount of leverage on the asset.

[00:17:08] So, generally if you're using a self-directed IRA, if the investment has debt on it, then it might not be as attractive. Now, using your SDIRA to invest in private notes or private debt or lend to somebody, you don't have any UDFI,

[00:17:25] and that might be the most advantageous way to use those funds. So if you're looking at, hey, Ryan, should I use the cash in my savings account to invest in this deal or my SDIRA?

[00:17:38] If you might have to first ask, well, does the investment have any leverage on it? If it does, maybe the cash investment would be more appropriate, and if you're also looking for tax benefits like depreciation, you don't really get the depreciation benefits from using an SDIRA

[00:17:54] because it's kind of trapped within your retirement account. So when you think about, hey, do I really need the tax break? You might want to use cash versus using a self-directed IRA. So those are some considerations for when you're like,

[00:18:09] which bucket of money should I draw on to make an investment? You might want to think about some of those factors. Yeah, I'll jump in here real quick because that's a really great point. Something I always think of when I'm thinking,

[00:18:22] what sort of deals do I want in my SDIRAs or and what sort of deals do I want in cash? For example, a mobile home park deal that has really high amounts of depreciation benefits

[00:18:35] in year one, mobile home parks, because the nature of the fact that all of the property is less than 20-year lifespan, it's all bonusable. You can see 80, 90, 100% year one bonus depreciation, meaning if you invested $100,000, you'd be getting 80 cents, 90 cents, 100 cents on the dollar in that first year K1.

[00:18:56] Well, I don't want to put that in an IRA because then that doesn't benefit me. I don't see that depreciation and sort of lost. Now, it can be used to offset that UDFI that you talked about. If that deal is leveraged,

[00:19:12] that depreciation can wipe out some of that UDFI. Another thing is cash flow. If something is cash flowing on a monthly basis or a quarterly basis, it's nice to have that cash flow coming into my bank account that I can spend

[00:19:25] versus going into my IRA because as I get a few hundred dollars a month that's trickling into an IRA, I don't have anywhere to put that cash until I'm back up at the minimum. Again, this is personal opinion, but I prefer deals that have no cash flow,

[00:19:47] things like development deals and higher potential returns because I'm not going to have a capital gains tax yet within the IRA. Anyway, just a few thoughts. Yeah, I agree 100%. Cash flow, appreciation deals are huge. If you

[00:20:03] have a five-year-old swing for the fences, best IRA to return you could possibly find, your IRA might be a great place for that because you don't really care what the cash flow is along

[00:20:13] the way because you're not really benefiting it. You can't pay cash flow distribution from your IRA unless if you're 59 and a half, then you might be able to start drawing on those mandatory distributions. That might be different. Again, every single person's situation is different.

[00:20:28] We could possibly analyze every single scenario show, but if you're older and you could start taking those meds or you could start taking those withdrawal spirit or retirement account, that it might make more sense to have it in your IRA. So really just depend on the situation.

[00:20:43] Let's talk about leveraged stock accounts. We haven't done an episode on this yet. We likely will at some point, but let's talk about that, Ryan. You know, it's interesting. I think this could be tricky, right? Especially as the

[00:20:59] market crashed just last week. What's a margin call? Let's talk about what a margin call is. I mean, the simplest way to put it is you can borrow, let's say you have 100 bucks in your

[00:21:14] taxable stock account. So you go out, you open up an account with a TD or Ameritrade or something like that, and you have $100 of the stock in there. And just for the sake of example,

[00:21:25] the custodian might allow you to borrow say 50% of that. Well, 50% of the value, right? So you could have a $50 loan against your stocks and you're going to pay interest on that. If your stock price on that $100 goes down to $50, well now they're going to only allow

[00:21:44] you to have $25 out, right? And they're going to do something called a margin call, which you got to pay back that money, $25 because you're going to say you owe us $25. Exactly. So if you really got to be careful and certainly don't over leverage that,

[00:21:59] especially if you don't have some dollars in the bank that back that up. So yeah, margin calls are real and they can happen. But again, this is just another tool, but it comes with some good. It's a bad. The good side is lightly it gets dead and you

[00:22:14] don't leverage it out to the backs. You could do some really neat things like you could borrow against your retirement account, you could stay diversified and leveraged to that account. And then you could

[00:22:24] put money to work in alternatives and you can sort of be investing in two different things at the same time effectively with the same money, right? So, right. And when the market's on the way up,

[00:22:35] it's wonderful, right? Because you're still invested in the market. You haven't taken the money out of the market like you would with a 401k loan where you're actually liquidating assets in order to convert it to cash and then take it outside of the plan. You're literally just

[00:22:48] taking a loan and using those stocks as collateral. So if they're on the climb, if you own a bunch of Nvidia and you borrowed against it, you're not missing out on any of that gain while you take that, those loan proceeds and invest somewhere else. So

[00:23:04] Be careful about Nvidia. That market cap's coming down. So you got a video on your maybe it's a good time to think about it. Exactly. Yeah, so leveraged stock accounts work wonderfully when markets are on the upswing, when there's volatility,

[00:23:18] you want to be careful about those margin calls. Yeah. Well, probably I think we pretty much covered the four and the fifth one is this strategy of using a whole life insurance plan. And we're actually going to have our first webinar, our first passive income pilot

[00:23:35] webinar coming up this Wednesday tomorrow. Tomorrow. Yep. Yep, tomorrow. And we are going to invite listeners of the show to come in, ask questions, talk with us live, and we're going to have the whole life insurance experts from Money Insights come on to the webinar. They're

[00:23:56] going to tell us they're going to do a deep dive. Tate, you want to tell us a little bit more about what we're doing tomorrow? Yeah. So if you listened to our last episode,

[00:24:04] number 70 with Blake and Rod, this strategy is for a long time, I didn't understand it. And it's a difficult vehicle to understand because there's a lot of nuances. There's high commissions. There's high fees associated with them. So it's a difficult product to wrap

[00:24:24] your head around and they can be built to suit the client. It's not a one size fits all. And there's a lot of, I think, smoke and mirrors in the industry. And so it took me a very long time

[00:24:39] to really understand these things. But now that I understand them, it's an unbelievably powerful vehicle to supplement your investing strategy. So what I'm excited about in the webinar is to see the mathematics behind it because this show is purely audio unless you're watching on YouTube.

[00:24:58] Really, you're only getting to see our lovely faces. On this webinar, we're going to have slides. You're going to be able to see the mathematics behind these things and really see how they can affect your investing strategies going forward. So I'm really looking forward to it. It's not

[00:25:19] going to be super long, 20, 30 minutes, and then we're going to reserve time for Q&A. And you can throw tomatoes and ask any questions you want. And Rod and Blake will be there to

[00:25:31] field those. So if you want to join us tomorrow on the webinar, it's going to be at 12 Pacific Three East. And we're going to invite people to come onto the webinar, ask any questions that we

[00:25:42] have that they have. And we can go over a real live face study or who have somebody who's set up their whole life insurance policy and used it to invest in real property and really benefit it

[00:25:54] with from the advantage we're going to go through the exact math behind that. So really looking forward to having folks on the show for that. Registration link is in the show notes right

[00:26:03] below. Check it out. We'd love to see there. And if you're listening to this after the fact, we'll have a recording link there instead of the registration link, of course. Absolutely. Yeah. So those are the five ways just getting everyone's brains thinking about

[00:26:17] okay, how can I leverage my assets to buy more assets? And that's the key to wealth building, right? That's it. Thanks everybody for coming on the show and our listening. Thanks everybody

[00:26:28] for listening to the show and we hope to see you tomorrow. Thanks everyone. We'll see you on the next episode.