Being Debt-Free Might Enslave You - Stephanie Riley (PART 2)

Transcript

Mike Pine: So when you have an investor, someone who's running businesses or investing in investments, when you have them working solely and individually with each of their strategists in the different areas of strategy. It's up to them to download all the information from those individual strategists and then propagate it, share it with the other strategists.

And that's not always their cup of tea or their area of specialty. It's usually not. So if you can have all that team working together, they don't have to play the middle man. And I know a lot of our clients, they're like, "Well, I don't wanna have to pay an attorney and a CPA and maybe a financial advisor and an equity strategist all at the same time".

I'd rather just meet with them time by time. But I think we found, and I'll ask you, when you asked our shared clients that we've worked together, did they find it was actually cheaper or more expensive to have the whole strategy team work together? What do you think?

Stephanie Riley: Oh, it's a million times cheaper. Yes, they love it Because[00:01:00] as an investor and kind of the role of the client, sometime you don't know what questions to ask. And so in some ways you're bringing to the table, here's where I'm trying to get to. Here's my problem, here's my concerns, here's my opportunities.

And then you're almost like, Sitting as a fly on the wall and watching the tax strategist and the asset protection and the lender all kind of brainstorm and go, well, for taxes they should do this. Yeah. But for lendability, they should do this. For asset protection, I'd recommend this. And it's okay, well what if we did it like this?

And it's an, it's a collaborative process of being there. The client understands why they're making some move in the manner in which they're making it. So it's important for everyone to have that understanding and it's very difficult for any I won't [00:02:00] even say for the client. It's difficult for the client, but it's even difficult for me as a equity strategist and a lender, and I'm sure difficult for you as a CPA to advise a client like, well, "I need to talk to your lender", or "I need to talk to your CPA". If I have someone reach out and tell me their story and say, what should I do for lending? It's like, can I talk to your tax strategist because I don't know what they're trying to do here, and if I tell you this, it might mess up what they're trying to

Mike Pine: accomplish

Yeah. And one size doesn't fit all either. It's individualized for each person, each potential investor or borrower or taxpayer. I've had clients when I said, Hey, we need to go meet with an equity strategist and your financial advisor all at the same time. If you've done this before, can't you just tell me what works for everyone?

I'm like, "No! You're different". Everyone's different. Everyone has different risk tolerance. Everyone has different investment intentions and desires and it's just it's funny how each one of those strategy team meetings we do together, we come up [00:03:00] with different prescriptions for every single one.

I don't think ones turn out the same.

Stephanie Riley: Yes, exactly.

and it

should be that way. And we discover things too. We discover new strategies because we've got a new, unique

Mike Pine: situation. Right.

Kevin Schneider: It gets a, gives us a chance to be creative too, cuz the tax code, if you're not being creative in our field, if we're not being creative in the tax code and everything's black and white, copy and paste, then we're not optimizing our strategies. So that's, having these professionals work together is just an absolute value adding, and to your point of being, it's so cheaper to work together in another way that it frustrates professionals is I can work in my silo and get your taxes to zero. But I might be counteracting your asset protection. I might be counteracting liability in a way. And so it's so valuable that I don't sit down, calculate a tax plan or prepare a tax return, send that off, send it to the attorney, or a proposed tax plan to an attorney.

[00:04:00] Wait three or four days, they have to wait three or four days to look at it, send it back, and then I gotta wait a day or two to pick it up. It takes weeks, months to get all on the same page when we could just say, Hey. How about an hour and a half, two hour meeting, all of us get in the same room and hash it out?

And then I have my marching orders when I leave. Everyone has their marching orders and we go about our day, but it's conquered in two hours and then we're all on the same page. So, communication is so vital and working in these team environments too.

Mike Pine: It increases efficiency Big time. So like you said, two hours for everyone's time versus everyone spending many hours trying to get it done. So it's key.

Kevin Schneider: Yep.

Mike Pine: So here's a personal story real quick.

I grew up, especially early on in my profession, I was a huge Dave Ramsey fan, debt free. I used to get chills down my spine every time I heard someone call into his show and say, I'm debt free.

And they played that little music thing and I love that. And Kevin and I as CPAs, we're very [00:05:00] conservative in some way. Well, in a lot of ways. And the whole idea of debt, just we, he and I both had to kind of evolve out of our debt freeness. And when, what happened to me is in the mid to late nineties when I was in college, I started Day trading.

And this was right as a .com boom was starting to happen and I was doing great in day trading and my broker said, if you'd margin, if you borrow on these stocks, you can buy a lot more in volume and you can grow it. And I started doing that and the returns were skyrocketing. It was incredible.

And I was thinking, this is awesome. I'm not even outta college and I'm gonna have a nice nest egg by the time I get out. At the same time, there was a Wall Street Journal article. I remember reading, I'm pretty sure it was a Wall Street Journal where they trained a monkey to throw darts on the Wall Street Journal stock page, to pick to pick stocks.

And they built a basket portfolio out of the ones that the monkey literally hit with the dart. And they compared that to S and P. They compared that to Hedge funds and the return was great and that monkey [00:06:00] was doing better than I was doing. I still thought I was brilliant at this though, but it's cuz every stock was going up at the time.

And then I got my first internship at Pricewaterhouse and I was working a 110, 120 hour weeks and I could not track my portfolio anymore, so I just made it more, instead of day trades I put it in longer term trades, but I still was leveraged a margin to the HIL because that was great. It had been worked great so far.

Well, that's when the.com boom busted. I was there in Silicon Valley working on these venture capital funds, and I had no idea what was going on with my portfolio, and I got a call from my broker at the time. Hey, did I ever tell you about what a margin call is? I was like what is that? And suddenly this huge nest egg I had in a matter of three days evaporated. It was gone.

So that kind of conditioned me to be very anti-debt early on in my career. It was a painful lesson. And it took a while to get out of it, but as you brought up earlier on, there is so much hidden money in people's real estate portfolios or overall investment [00:07:00] portfolios if they leverage. And again, you have to manage the risk.

But I'd say in the last decade, Kevin and I have definitely evolved in recognizing some debt is good, responsible debt is great. And it really can in your scenario, which is truly not unheard of, it quintupled someone's return in one year on their investment.

Stephanie Riley: It's interesting that you brought up the margin calls because that is one of the things that makes real estate safer, if I can use that word to use debt, is there is no such thing as a margin call. It doesn't exist in real estate financing. So you buy a house for a hundred thousand dollars, use $80,000 a debt, and the house goes down to being only worth $80,000. You don't have to bring.. The lender doesn't call you and say, "margin call". You're not at the loan to value [00:08:00] that we agreed to lend you at. You need to pony up some cash to bring your loan to value back up to 80% on your new reduced value. It doesn't happen in real estate as long as. The only time they give you a phone call, or you get in trouble is when you can't make the payment.

And so that comes back to that risk management of cash flow management and liquidity. Because sometimes even if your numbers seem to be working right, but you have Covid hit and some of your tenants aren't paying or you have turnover and somebody trashes your property and you gotta fix it up to even get back to getting Rental income.

Those things happen. And so having the cash reserves to weather that storm is important. It comes back to that cash and that cash flow, but that's yeah, the margin call is a nice thing that doesn't exist with real estate financing.

Mike Pine: Therefore I will never [00:09:00] margin stock again, but very much may will do so in real estate.

Stephanie Riley: And the thing when you using debt, it's funny because we have this belief that we can opt out of debt and unfortunately I don't think it's right, but we live in a financial system that if we don't choose to in debt ourselves, the government will choose to in debt us, on our behalf. And so that quote, inflation tax that we all bear the burden of is really us bearing the burden of a government that is indebting us. And then as they print money to pay the debts that they've committed us to we are paying interest on debt in the form of inflation. Even if we have [00:10:00] zero personal debt, if you will, that we've signed up for, and so it, it's, it should work in a way where we win, when we save and we win when we stay outta debt.

Unfortunately, the system is rigged and corrupted to the point where the savers get taken from, and those who don't use leverage get left behind. And that gap between the disadvantaged that are heading down, the tighter and tighter squeezed path and the gap to the wealthy who are leveraging the tax code and the lending and inflation and all of those things leveraging to their benefit.

Yeah, it's not right, but unfortunately it's the system we're stuck in.

Mike Pine: And just like the tax code, we can, sorry! Just like the tax code, we could choose [00:11:00] to be a victim to the system or the tax code, or we could choose to understand it and strategize and use it toward advantage.

Kevin Schneider: Yeah.

Stephanie Riley: Right! If these are the rules of the game, whether we agree with them or not, we're in the game. Whether we opt in or not, we might as well play the game.

Kevin Schneider: And I liked how you put that, real estate being a little bit safer. I think that's a very true statement, cuz generally real estate is more secure to where it.. I almost see it as, you get the best of both worlds as you were putting it where if you get into debt, then you're locking in your rate. So, they can't push your rate up anymore, but you have the option of going down. So there's one win for you. Even if the rates are 6%, you can lock in at six and make that decision a few years later if rates go back to those historical lows. But also, to your point, if the value of the house drops, there's not gonna be a call on it.

But if the value goes up, you have the ability to go back and call your equity. [00:12:00] So it's it's this beautiful dance. I see and Mike and I were always so anti-debt. I'm anti-consumer debt. I think that's silly with the interest rates there. It's providing no wealth. If you just go buy some TVs you can't afford, that's a way different thing than investing into real estate growing and net worth portfolio on an appreciating asset. So consumer debt definitely needs to be tackled, but. When we're talking this real estate and leveraging real estate it's a little safer and a lot more secure, and it sits a little bit easier with my risk tolerance as well.

I would never get to the crossroad on investing on margin. That makes my, literally, I have butterflies in my stomach when you said that. It just, that hurts. That just, that's some risk. But that's your risk tolerance is a lot different than mine, Mike.

That's,

Stephanie Riley: Well, it was or Cause I mean, Exactly. I was gonna say, it's not just you, Mike, we've all gone through,[00:13:00]

Really, it's not even risk, it's naivety, right? It's not a risk tolerance. It's not like we're going in going, "Wow, I have a high risk tolerance". We're going in going, "Whoa, this is great. There's no risk at all. They make all this money"

It's really, I don't think it's that it's a high risk tolerance. It's just awareness of what the risks are. And I think, you guys bring up a good point with real estate. There are risks.

There are risks in real estate, if you buy real estate for cash. There are risks in real estate, if you use leverage. There are, but it's coming at it and trying to understand and put those risks out on the table and have your strategies in place. If this happens, I have the reserves. If this happens, the cash flow is there. If this happens, another one, like you said, Kevin, all those things are on the table, but risk-wise, a lot of times when you need money most is when you're most likely to not qualify for it. Right? When you lose your [00:14:00] job, when your business is down, when you need the money, it's almost too late to grab it because the banks like when recession hit, banks tighten their guidelines. They don't wanna lend to anybody who's not solid. All of those things happen when the hard times hit.

And so getting in advance of that and saying, you know what, I'm not guaranteed to qualify for a cash out refi, a year or two from now on. It's not guaranteed that lenders are gonna be lending at these same LTVs or whatever it is. So in advance of hard times hitting, making sure you're always stepping up and securing your cash position and your cash flow, because some people would say, oh it's risky to be leveraged, but has your net worth or your balance sheet really changed at all? If you shift a hundred thousand dollars from equity in your house to a hundred thousand dollars cash in the bank.

Mike Pine: It's diversification.

Stephanie Riley: [00:15:00] Exactly. Your balance sheet has not changed in terms of your net worth. All you've done is you've taken something that was illiquid. If you gotten to hard times, you probably couldn't get to it without selling. If you had to sell and everybody else is in hard times, you'd probably have to give a big price cut.

You're taking something and you're shifting it from that exposure. Asset protection is a whole nother layer to that, but you're shifting it and now you're taking it and putting it someplace where it's liquid if you need it. It's on tap where you don't have to worry about if you qualify to use it, cuz it's right there.

And so risk is something that's one person sees as risky, maybe another person sees differently. Not having that debt is one thing that can make someone feel secure, but having a little debt and having cash in the bank could make another person feel more secure.[00:16:00]

Mike Pine: ​Great points.

So Stephanie, for those that are listening and thinking, Hey, maybe I haven't leveraged my portfolio and found that hidden money in my portfolio, especially real estate portfolio, but it applies to others where would you think they should start? What is the 101 on trying to determine, do I need to do this?

Does it work for me? And how do I get going if it does?

Stephanie Riley: Yeah, great question. I think the best place to start is with your personal financial statements. Just taking a look. It's so common for us to not even know what we're paying in tax or where all our assets are or, we might have dabbled in different things and forgot we had some retirement account invested in something.

So it's important to grab all those personal financial statements, take a look at where everything's at, and then we sit down and we do a personal strategy session with folks and we asked them [00:17:00] to come prepared with those data points about their portfolio so that we can look at the equity, the cash flow, the credit, and analyze with them what opportunities there are to move pieces around to get more out of what they already have going.

So I think it starts with just knowing where you're at right now, and then there's stories to it. Everybody has their story about if had people, in-laws are moving in, we need to build additions or move, not sure which way to go or whatever, wife's pregnant and now she's gonna stop working and we're losing that income.

How do we replace that? There's all kinds of stories in our personal lives about what we're trying to accomplish. So it's really starting with making sure you've got a good handle on your personal financials, and then bringing that and your story to begin having those conversations with the advisors.

After you've [00:18:00] identified, here's where we're at, here's where we wanna go. Your team can start to help you identify the best way to optimize. And then it's a matter of, can you and we do a borrowing power analysis to determine that, where we actually collect, the tax returns, the W2s, whatever the qualifying income info is and look at how would an underwriter look at this and what could you do?

If you want to do all these wonderful things, what actually can you do and incorporate the other advisors, the tax strategists, the asset protection attorney, retirement custodians, whoever those people are that are starting to be a part of you building your financial plan, getting that integration and conversations going, and it really takes on a life of its own from there and goes the direction that it needs to, depending on the whole picture.

Kevin Schneider: The picture is very important and I love how you take these personal stories and these personal [00:19:00] situations and develop a plan for somebody. Cuz as we've discussed several times, it's not black and white. And so if someone wants to get in contact with you and they're like, okay, I want a personalized plan, even if I just need some more information on what my options would even be.

How do they get in contact? What's the best way to get them to you and next steps for you?

Stephanie Riley: Yeah. I put out a newsletter every once in a while. It's not spammy. Just my thoughts on what's going on in the real estate world. That's a great way to just get tips and things. And then we do those personal strategy sessions, which are complimentary. Someone can take advantage of that whenever it's convenient for them and then get a feel for what that planning looks like, and then decide if they wanna keep going down that path and execute on anything we come up with.

And so either of those things someone can find on our website, which is [00:20:00] equitystrategiesteam.com, equity strategies team.com, and they can sign up for the newsletter or book a strategy session. Or for folks who are just, looking to buy their first home and wanna know what they qualify for, they can book a borrowing power analysis on the website as well.

Kevin Schneider: And you can serve anybody across America, or are you restricted by a geographical location?

Stephanie Riley: Yeah, so I work with USA Mortgage and they cover everywhere except New York. So any other state we do one to four residential financing and it can be, primary residents, first time home buyers, real straightforward like that. And we bring our kind of flavor, our strategies to it, our thinking to that VA loans, that kind of thing. And then we do vacation homes, second homes, and then all your investment properties from single family to [00:21:00] duplex, triplex, or fourplex. That's really our focus. And then outside of that, where it's needed, we have the unique ability to not only direct lend or correspondent lend for those products as well as jumbo loans, but we also can broker to niche lenders.

So in a situation where we just can't work with the tax returns for a business owner, we can broker two different lenders that offer these unique bank statement loans or P and L loans or different types of niche products like that. Or for a borrower that needs a debt coverage ratio loan for their investment property because they have too many financed properties for a Fanny or Freddy loan.

We can broker those loans as well.

Mike Pine: Well, there you have it, Stephanie Riley from equity strategies team.com. Thank you so much for your time, Stephanie. It's always a pleasure to talk with you and learn from you

Kevin Schneider: Thank you Stephanie!

Stephanie Riley: Thank you both likewise.

Mike Pine: We reserve the [00:22:00] right to have you back on again if you'll take it. So thank you, Stephanie.

Stephanie Riley: Sounds good. Absolutely. Anytime.

Mike Pine: Okay. All right.

Kevin Schneider: All right.

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