Thoughts from the Desk of Bob Repass…
It’s hard to believe we are already in the third month of the year and the first quarter of the year is coming to an end! How has your year started off? Are you on track to hit the goals you set for 2019?
Something interesting happened to me the other day that I’d like to share. As I was updating our KPI Metric reports, I was adding a “year-to-date” column so we can not only track how we are doing on our Key Performance Indicators (KPI) on a weekly and monthly basis, but now it’s time to start tracking for the year.
I added the column and built the formulas and ran the calculations. When I went to review I noticed I had made a typo. Instead of the column header reading year-to-date it read “Year-to-Dare.”
Year to Dare now that struck me! I realized it was some time for self-evaluation. Are we stuck in the status quo? What are we doing here at Colonial and NoteSchool to explore and find new market opportunities? How can we boost revenue across all business lines? Are there expenses that are out of “whack” that we need to trim back? What are we daring to achieve? Which reminded me of the quote by Robert F. Kennedy “Only those who dare to fail great can ever achieve greatly.”
So, ask yourself, are you stuck in your comfort zone? What are you doing every day to grow your business and grow yourself? It is so easy to just keep going through the daily routines and before you know it, wake up and the year is halfway over and you have not grown at all.
In my opinion the month of March epitomizes the spirit of daring more than any other month. Why? Simply it’s March Madness. The NCAA Basketball Tournament captures the excitement of fans across the nation as their teams dare to dream big! Whether you’re a fan of a Number 1 seed or a Cinderella team in the tourney, everyone gets caught up in what could happen.
I attended NC State back in the early 80’s when the Wolfpack made their unlikely run to the National Championship behind Coach Jim Valvano! Talk about daring to dream big! So in the words of Coach V “Don’t give up, don’t ever give up.” Here’s to a year of daring to accomplish your goals!
How to Bridge the Gap Between A Rejected Deal and A Done Deal
by Eddie Speed
The other day I was plugging in a lamp and the nearest socket was several feet away. So I stretched the cord as far as it would go, but it was about six inches too short. I had to laugh, because all I needed was a six-inch extension cord!
That’s when the lightbulb went on. (In my head — not the one in the lamp.) That little six-inch extension cord that I needed to bridge the gap between the plug and the socket is a lot like how seller financing is all you need to connect a buyer with a seller that are really close on price so you can complete a real estate deal.
The vast majority of offers that real estate investors make to buy a property end up in the trashcan – especially in today’s market when sellers are holding out for every dime. On most deals today, the “asking” price has become the “insisting” price. Today’s rejection rate is around 95% because investors are bidding below the asking price. But just like my lamp cord, a whole bunch of those rejected offers fall just a tiny bit short of what the buyer is insisting on – usually by only a few thousand bucks.
Creative seller financing allows you to reach into your trashcan full of rejected offers and turn several handfuls into done deals.
Lots of sellers have a firm selling price cemented in their mind. If an offer doesn’t match their price, it goes straight into the trashcan. But even when a seller is stubborn as a mule on the asking price, they can be surprisingly flexible on how and when they get their money.
Never forget that seller financing is not just for when you’re the seller. Knowing how to creatively architect a deal in your favor when you’re the buyer is what separates the grown-ups from the rugrats in real estate investing.
Here’s an example. Kevin is one of my young NoteSchool students who lives in Seattle. He’s really a smart guy and he’s getting married soon to a really lucky lady. He had a really smart plan for buying a house to live in. He decided to buy a duplex, then live in one side and rent the other. That way his mortgage payment for the whole house would be covered by the rental income from the other half. (I wish I had been that smart at his age!)
So he wisely reviewed his financial picture and determined he can afford to pay $265K, then he and his fiancé start shopping for duplexes. They find the property they really like and he makes his $265K offer. But just like with most deals (and just like my lamp cord), there’s a gap between what he wants to pay and what the buyer will take. The seller was insisting on $325K and not a penny less. He floated the idea of seller financing to the seller, and they were open to the idea, but insisted the interest rate be 5%, which Kevin could live with. Even so, their full asking price was etched in stone.
He went through the numbers on paper. He could make a $5K down payment, then seller finance the other $260K at 5% for 30 years. But he’s still 60 grand short on meeting their $325K asking price. He was about to assign the deal to the trashcan and move on. But then he did another smart thing. He called me!
I told him to make one more suggestion to the seller to bridge their $60K problem. I told him, “It never hurts to ask, and they might say yes.” I told him to give them their full asking price, put 5 grand down, and finance the $260K at 5%; but to ask the seller if they would put the remaining $60K on a separate note from the first $260K. I told him to ask that the terms on this second note be 0%, with no payments until the full amount is due in 15 years. He said they’d never take it, but he’d ask. My last piece of advice was to keep a straight face when he made the offer, because it was so heavily in his favor.
Always remember: The art of architecting a deal is not knowing how to run the math – it’s knowing how to dictate the terms.
He took my advice, and asked the seller to finance the second $60K note at 0%. But he lost a little of his nerve and said it would be due in 10 years instead of 15. But hey, I’ll still let him hang out with me.
How’d it all shake out? They said OK, so now it’s a done deal rescued from the trashcan. He’s living in his new duplex and renting out the other half to cover his monthly payment.
Creativity. You gotta love it!
Capital Markets Update
A Look at Tax Planning and Financial Independence
By: Ryan Parson
After years of saving and planning for your financial independence years (i.e. retirement), many people nearing retirement fail to consider the tax burden they may face on income they receive after they stop working. While you will likely see a reduction in the amount of taxes you owe after the age of 65, you still need to plan ahead if you want to minimize your tax bill from the IRS.
Social Security Benefits
Depending upon your total income and marital status, a portion of your Social Security benefits may be taxable. For a rough estimate of your potential tax liability, add half of your Social Security benefits to your projected income from all other sources. This figure is your adjusted gross income (AGI), plus any tax-free interest income from municipal bonds or foreign-earned income. Up to half of Social Security benefits are taxable if this sum, which is called your provisional income, exceeds $25,000 for singles or $32,000 for married couples filing jointly. However, up to 85% of Social Security benefits are taxable if your provisional income is above $34,000 for single filers or $44,000 for married couples filing jointly.
Use the Social Security Benefits Worksheet in the instructions for IRS Form 1040 to calculate the exact amount of taxes owed. Rather than writing a large check once a year, you can arrange to have taxes withheld from your Social Security benefits checks by completing Form W-4V and filing it with the Social Security Administration.
Other Income Sources
In addition to collecting Social Security benefits, most retirees receive their income from a variety of sources, including distributions from 401(k) accounts and individual retirement accounts (IRAs); payouts from company pensions and annuities; and earnings from investments.
Contributions and earnings growth are tax deferred on 401(k)s and traditional IRAs; however, distributions from these accounts are fully taxable, but have no penalties if withdrawals are made after age 59½. If you have savings in 401(k) accounts or traditional IRAs, you must begin making withdrawals from these accounts—and paying taxes on the distributions—by April 1 of the year following the year in which you reach age 70½. If you are at least 59½ years old and have owned a Roth IRA or Roth 401(k) for at least five years, withdrawals are completely tax free. There are no minimum distribution requirements for Roth accounts
Strategies to Minimize Taxes
Most retirees with nest eggs or pension income of any size will pay at least some taxes on their retirement income, but there are strategies to reduce the amount owed. While it usually makes sense to delay taking taxable distributions from retirement accounts until the funds are needed, or until distributions are required, you may want to withdraw more funds in tax years when claiming a large number of deductions temporarily lowers your tax rate. You may, for example, choose to take advantage of itemized deductions, such as the breaks for medical expenses or charitable gifts, in certain years, while taking the standard deduction in other years.
A desire to leave a portion of your assets to your family may also influence how you handle withdrawals from tax-deferred accounts. Keep in mind that, if you leave behind funds in a traditional IRA, the rules for inheritance can be complex. To avoid these issues and make it easier to pass on your estate to family members, consider converting traditional IRAs to Roth IRAs. While you will have to pay taxes on the funds converted, moving to a Roth IRA eliminates future tax liabilities, regardless of whether you use the funds in retirement or pass the money on to your heirs. Alternatively, you may wish to consider cashing in your traditional IRAs and using the funds to purchase tax-free bonds or a life insurance policy that will provide your heirs with a tax-free inheritance.
Inherited Roth IRA
Given the tremendous advantages a Roth IRA brings, it is a very powerful component to a multi-generational wealth strategy. It is especially impactful when combined with a specialized IRA beneficiary trust. This structure provides additional management and support functions to the beneficiaries in order to preserve and even continue to grow the assets inside of the Roth.
By integrating a beneficiary trust with your Roth, it allows for additional creditor protections as well as elongated distribution periods. Additionally, this can provide additional time for some types of non-liquid, alternative assets to come to full fruition while still affording necessary oversight the trust can provide, especially for a very young beneficiary.
As with any unique or creative strategy you may choose to employ, having a well-organized, holistic dashboard of your wealth is the first starting point. It’s hard, if not impossible, to see the future implications of today’s decisions, especially when it comes to income taxes and IRA beneficiaries.
If you are planning to retire soon, consider the tax implications of your income to avoid an unexpected bill from the IRS. For more information, consult your tax professional.
To your financial success!
In The Spotlight
Save the Date: 3rd Annual Seller Finance Coalition Fly-in
Quote of the Month
“First, think. Second, dream. Third, believe. And finally dare.” – Walt Disney