Changing investments

[calmloki]

We've been doing real estate loans for some time but have been cutting back - too much money sloshing around out there, interest rates too low, property values too high. Had a call yesterday from a longtime repeat borrower who is going to refi and pay us off in the next couple weeks. Real pleased to get the call - he's been paying a bunch of interest to us and hasn't been able to sell the house we hold the first on. Glad for him. Thing is, his payoff represents one tenth of our net worth, including homes and everything. After that payoff we will have 1/3 of our net worth in bank accounts and CDs. On the one hand that feels like a bit much. We still have a few contracts that will be paying for a few more years and the rentals are churning out substantially more than we need for our normal living expenses, though I'm slowly moving toward divesting of them - don't need the stress. But what to do?

We have about 16% of NW in various stocks/funds/ETFs and could add to those. Maybe house shop in a lower tax state, though if we shrink our income we won't have much for taxes to affect. We could do nothing and just spend from the pile but that doesn't feel normal for me - I like money to work. Wurra wurra.

Other than doing good in the world or giving to relatives do you have any useful suggestions for what to do with a surfeit? How would you spend/invest this?

 

[nancyfrank232]

I’m in the same spot. Personally I let the market tell me what to do. If nothing speaks to me, I’m ok holding cash

1. There’s no rush to deploy capital
2. Something always happens. Eventually

How about private lending in a real estate market that isn’t as crazy?

In the meantime, try using the Meetup or Eventbrite apps and search for real estate or investment groups that look interesting and sit in and listen

 

[pb4uski]

I recently heard of an investment type that I was not familiar with called BDCs (Business Development Companies). It looks like they are similar to a REIT but the underlying investments are medium and small business loans. Often managed by one of the major private equity firms like Apollo, Bain, et al.

I haven't decided but they sound interesting as a high-yield equity substitute. Yields are in the 6-12% range as like a REIT they must pass most income to investors. Also, they seem to be less correlated with equities so I'm thinking that they might provide some diversification benefit.

https://seekingalpha.com/article/4296982-battle-of-best-of-breed-bdcs

 

[aja8888]

I recently heard of an investment type that I was not familiar with called BDCs (Business Development Companies). It looks like they are similar to a REIT but the underlying investments are medium and small business loans. Often managed by one of the major private equity firms like Apollo, Bain, et al.

I haven't decided but they sound interesting as a high-yield equity substitute. Yields are in the 6-12% range as like a REIT they must pass most income to investors. Also, they seem to be less correlated with equities so I'm thinking that they might provide some diversification benefit.

https://seekingalpha.com/article/4296982-battle-of-best-of-breed-bdcs

Thanks, looks interesting.

 

[W2R]

Other than doing good in the world or giving to relatives do you have any useful suggestions for what to do with a surfeit? How would you spend/invest this?

Well, I have absolutely zero words of wisdom but I can definitely tell you what I would do with it, if it was me!

If it was me, I would just invest according to the AA in my written financial plan. Since I don't invest in real estate, it would go into equity, bond, and money market mutual funds at Vanguard according to my AA (42:58). I do not have other types of investment such as real estate.

I never heard of BDC's, so I would be a little leery of them until I had studied them carefully to the extent that I felt completely confident investing in them. For me that would take several years of study and I might never feel OK with them, who knows. Call me Chicken Little.

Do you want to continue investing in real estate to that same extent? If so, then I'd say that's where it needs to go. If you want to get out of real estate, then I guess put it where your other investments are?

 

[splitwdw]

I recently heard of an investment type that I was not familiar with called BDCs (Business Development Companies). It looks like they are similar to a REIT but the underlying investments are medium and small business loans. Often managed by one of the major private equity firms like Apollo, Bain, et al.

I haven't decided but they sound interesting as a high-yield equity substitute. Yields are in the 6-12% range as like a REIT they must pass most income to investors. Also, they seem to be less correlated with equities so I'm thinking that they might provide some diversification benefit.

https://seekingalpha.com/article/4296982-battle-of-best-of-breed-bdcs

Don't remember who it was on this site use to mention one of the companies on this list, Main Street Capital. Wonder if they are still holding.


edit: It was Dashman that mentioned BDC's

 

[Starsky]

What do you like to do for fun? You can certainly indulge your hobbies and get out more. It doesn't sound like you have found a worthwhile purpose for your good fortune beyond financial enrichment. I have one out-of-the-box suggestion to share that I'm testing right now. Full disclosure: I manage all our investments, and I am losing interest (and confidence) in retirement playing in the market with our liquid assets.

Regarding financial enrichment, I would consider taking some of your money and finding a very reputable Financial Advisory/CPA firm to work with. I'm learning that the combination of investment, wealth management, tax and accounting are much more powerful working together than they are individually. I am testing it out myself with our IRAs to find alternative investments for our retirement funds, and for the future proceeds from the sale of our rental properties. (i.e. private equity, first trust deeds, etc.). There are numerous investments that higher net worth investors can execute that are not universally available to all. Like you, we hold a lot of rental real estate that provides our income. We just happen to live in a very high COL area, so our ROI is important. I need the cash flow. There is a massive difference in our income between a 4% and 7% overall return, and taxes (and good advice) can have a lot to do with it. As a LL, you know how your ROI can change with the property values, and how frustratingly good or bad that can be...

As an example, when it comes to selling rental real estate, I'm in exactly the same boat with several rental homes to sell at some TBD future time. They provide a great income, but the ROI is diminishing and they are paid off. There are numerous ways to structure that deal to defer and possibly avoid paying taxes on the profit. It requires the coordination of all of the above specialties to pull off - and then some. I know of at least two different ways my friends have structured those kinds of deals - through third-party intermediaries, and similarly via a Delaware Corporate Trust (don't ask me the details, I'm still learning). One of my friends avoided paying any taxes at all when the clerks mis-filed his paperwork and the transaction just disappeared from their records! It was too complicated.

Sometimes good advisors are worth their weight in gold - it's something that's been told to me many times, and that I've confirmed over the years by watching the experiences of others. (They can also really help you with your legacy...) FWIW, I'm testing this with a trusted financial advisor who moved over to Squar Milner a few years ago.

 

[Another Reader]

I can't remember if you have kids and if so, how interested they are in keeping the real estate. With the step up basis at your passing, that makes the portfolio a nice, stable income stream with no cost or effort to assemble it. Keeping at it for them might make sense.

At this point, I have enough real estate to support any spending I might want to do. I have kind of lost interest in chasing yield on current value and am primarily interested in paying off the remaining debt. It would take a huge opportunity like 2009 for me to load up on acquisitions. At this point, the portfolio is mostly on autopilot, with me directing the managers that I hired for most of the properties. Yes, there are inefficiencies and frictional losses, but I can avoid a lot of that by paying attention.

In your shoes, I would probably simplify for ease of management by getting out of lending but I would not not sell the properties and pay the taxes. Take unused profits and the redeemed loan money and put them in the paper asset markets. I would probably hold some cash for the next buying opportunity and to cover any problems I might not notice immediately.

 

[calmloki]

We are kid free, but have siblings who are close to our ages and some nieces and nephews and friends. While passing on the rentals at a stepped up basis makes the most financial sense as far as income and taxes paid out it also means continuing to care for the rentals as I get less able and enthused. Also means passing on a huge learning curve/hassle - and it would be pretty rude to our tenants. One friend/pseudo-kid we hooked up with some rentals a while go, but he is getting tired of managing real fast. Nobody else with the desires or skills or character to be a decent landlord. What I should do is move and 1031 the rentals into a lower income tax state. See if we can't find something newer and managed, even if that means less income. Then sell and leave money.

Local lending has been pretty easy, but that was when the big factors were - can we make a good interest rate and if we have to foreclose can we rent or sell the property at a decent profit. What do you mean by paper asset markets? Buying someone else's loans?

We're debt free and I'm sure we'll keep a pretty substantial amount of cash on hand for opportunities or emergencies, but right now we are well up into the stupid range. Need to reduce the stupid. Moving into unknown areas - BDCs or for fee financial advisory groups is scary - shoot, I'm still real wary about investing in the market and can't figure what, other than mood, moves it up and down. Yet millions of people are invested and we've done just fine with the money we put in, so what do I know.

Heck with it. We're off to Guatemala on Thursday for a 10 day stretch with Caravan tours. Who know what will be when we get back?

 

[Another Reader]

By paper assets I meant stocks and bonds.

It's a tough time to buy real estate as all classes of property are pretty much overbought. Exchanging into another market means a learning curve for you and the returns may not be as good. If you want to move south where it's warmer and more tax friendly, maybe put your properties with a manager while you feel out the new market? Then when you understand that market, start exchanging into it.

Not sure what the total tax benefits are when you exchange out of your high tax state. You may not avoid the capital gain tax in your old state if you sell. California follows you so they can collect if you sell before you die.

 

[BeachOrCity]

I think your question is really one of AA.

Most here think of AA as stocks vs bonds. I think of it more like a stool.

How many legs does a nice stool have? Usually 4.

So your RE properties and or loans are one very nice leg. Your cash is another leg. Your equities are a 3rd leg but is a bit shorter than it should or could be.

Perhaps a forth leg could be annuitized income. This could be social security or a pension plus some SPIA. Yea rates suck right now for buying those.

My point of the stool analogy is to get where you have things holding you up that are fairly non correlated and if one fails it is not disastrous.

 

[calmloki]

By paper assets I meant stocks and bonds.

It's a tough time to buy real estate as all classes of property are pretty much overbought. Exchanging into another market means a learning curve for you and the returns may not be as good. If you want to move south where it's warmer and more tax friendly, maybe put your properties with a manager while you feel out the new market? Then when you understand that market, start exchanging into it.

Not sure what the total tax benefits are when you exchange out of your high tax state. You may not avoid the capital gain tax in your old state if you sell. California follows you so they can collect if you sell before you die.

Yuck - Oregon (where our rentals are located) also does clawback on out of state 1031s. We could avoid that by doing a 1031 into, say, Nevada, running the new property as a rental, and then converting it to a primary residence. A lot of machinations and running a very high dollar SFR as a rental for 2-3 years, then having way more house than we need or want with the money tied up in it - not really optimal. I suspect we're going to end up paying a bunch to Oregon and the feds. At least I like Oregon.

 

[Another Reader]

Somewhat lower tax states include Arizona and Colorado. Northern Arizona and the higher elevations in Southern Arizona have more temperate climates than does Phoenix. Denver has four seasons. Might be worth a look.

 

[Montecfo]

I recently heard of an investment type that I was not familiar with called BDCs (Business Development Companies). It looks like they are similar to a REIT but the underlying investments are medium and small business loans. Often managed by one of the major private equity firms like Apollo, Bain, et al.

I haven't decided but they sound interesting as a high-yield equity substitute. Yields are in the 6-12% range as like a REIT they must pass most income to investors. Also, they seem to be less correlated with equities so I'm thinking that they might provide some diversification benefit.

https://seekingalpha.com/article/4296982-battle-of-best-of-breed-bdcs

BDCs are venture type lenders. You have heard of venture capital? This is venture debt. They lend to companies which cannot qualify for typical bank loans. These are usually higher-risk
small private business borrowers which is why the yield on them is higher-it reflects risk as always.

I have owned them but not long term. As a CFO I have banked them. They would be economically sensitive I would expect. These are lesser credits than junk bonds as these borrowers do not have access to capital markets and there is not ready market for the securities the BDC issues.

FYI

 

[calmloki]

BDCs are venture type lenders. You have heard of venture capital? This is venture debt. They lend to companies which cannot qualify for typical bank loans. These are usually higher-risk
small private business borrowers which is why the yield on them is higher-it reflects risk as always.

I have owned them but not long term. As a CFO I have banked them. They would be economically sensitive I would expect. These are lesser credits than junk bonds as these borrowers do not have access to capital markets and there is not ready market for the securities the BDC issues.

FYI

Thanks to both you and Pb4uski for this suggestion.Wonder if marijuana companies are serviced by BDC? I'd imagine getting bank loans for a plantation is kinda tough. The large hard money loan that is paying off soon was at 12% - sticking it in the bank at 2-2.75% represents a big decrease in return. 5-6% would be more palatable, especially if the investment could be converted to cash quickly.
What will really sting will be selling the rentals and taking a 30-40% haircut on the sale proceeds for fees, commissions, taxes and depreciation recapture.

 

[Another Reader]

Thanks to both you and Pb4uski for this suggestion.Wonder if marijuana companies are serviced by BDC? I'd imagine getting bank loans for a plantation is kinda tough. The large hard money loan that is paying off soon was at 12% - sticking it in the bank at 2-2.75% represents a big decrease in return. 5-6% would be more palatable, especially if the investment could be converted to cash quickly.
What will really sting will be selling the rentals and taking a 30-40% haircut on the sale proceeds for fees, commissions, taxes and depreciation recapture.

I would not accept those losses and I would not reinvest in high risk deals that traditional lenders and debt markets won't consider. Better to accept the cost and frictional losses of turning the rentals over to property management.

 

[calmloki]

Was just thinking about Martha, who sold a neat old brick building and bought into a large multi in Arizona. Turns out that was just over 10 years ago. She was a smart one.

http://www.early-retirement.org/forums/f28/i-sold-because-i-wanted-to-47316-2.html