Do Faith, Risk and Debt Go Together? - The Scott Florida Story (PART 2)

TRANSCRIPT

Mike Pine: [00:00:00] So, not at risk of getting, maybe, too theological here, but you're referring to what I call normally, the parable of the talents, which is a great parable, but then Proverbs is also pretty darn clear about not speculating. Do not speculate, you'll lose everything, right? And it's also clear about debt- bad debt, I think it's talking about, but there's another parable that says- Hey, don't go into debt with someone else because then, they own you. Alright, Mike's non-pastoral paraphrase. How do you correlate between those and this risk concept you're talking about?

Scott Florida: Yeah. That's a great question.

I came across a book by a guy named Chad Brand and it was a primer on, I think it was, he called it- A Baptist Primer on Economics... or something along those lines, and he had a section in there talking about Martin Luther and John Calvin, and how during the Reformation period, both of them had very specific opinions on debt, and [00:01:00] Martin Luther- German, old school, was very opposed to debt, didn't want any part of it. Calvin looked at it as the future of economic development in which the lender is a partner to the borrower, and in my mind, that makes sense from the standpoint of, in the time of the biblical writing, debt would be particularly dangerous in that your whole world was at risk, including debt prison and the consequences were really dire in our world.

So, it's quite a bit different. There are some that say we don't even have a capitalistic system anymore. We have a credit-ism system, and so, managing credit also factors in. And again, I'm going to slip away from the Biblical side and come back to it, but there's the current structure of our government is to reduce the value of money [00:02:00] by 2% annually, and so, that is the stated goal of the Fed, and so, if that's the case, then money that's borrowed actually protects you if it's fixed rate debt. Over a long period of time, that actually protects you against that devaluing of the money, and so, what that goes back to is you understand the times and know what to do- I think was the men of Issachar that were described that way They understood the times and knew what to do.

And so, there's, I think, wisdom, and Biblical wisdom is the skillful negotiation- that was my seminary professor's definition of wisdom, And so wisdom has to be applied in the context of the culture in order for it to make the most difference. And again, I'm not suggesting somebody who's anti-debt become pro-debt.

I'm just saying that there is a piece to understanding how these things affect your day [00:03:00] to day living, and when we're dealing with inflation at the levels that we're dealing with right now, those that have that fixed interest rate debt aren't doing too badly, if they've got good, solid homes that they're invested in, and are providing good care for their residents.

So, I think that you have to take the whole of scripture in as you think through these things, and to a degree, it's not sin to have debt. It's not opposed to the ways of God to have debt. I believe that with my whole heart, otherwise I wouldn't be doing it, but again, debt is very much like a chainsaw.

You can cut down a tree with a regular saw and it'll take the amount of time that it takes to cut down a tree with the regular saw, and it's pretty safe, but you fire up a chainsaw, you can take limbs off a tree really, really fast, but you can also take limbs off your body really, really fast, right?

So, you have to be super careful with how you're [00:04:00] using it. It's very powerful and very effective, but it also has to be managed very, very carefully and used very wisely.

Kevin Schneider: Yeah. And what smart debt is not is a lot of people think that- Oh, I want to veer away from it. The type of debt we're talking about is not credit card debt. I mean, credit card debt is, I think that could be...

universally, Yeah, that could be universally just agreed that that's not going to grow your wealth.

That chainsaw is coming after you to where you are. You're spending money in an area that you can't afford and your interest rates are so high that you want to stay away from that. And there's always two camps to credit card debt- it's like- Yeah, I use my credit card wisely and I get my points.

Well, that's good. You're using the chainsaw to cut the limbs, but if you're not keeping up with your monthly payment, you're getting behind... that is debt that's coming after you, and you're going to get in over your head real quick. So, the debt that we're talking about here is not the consumer debt as much.

It's more so the debt associated to an appreciating asset [00:05:00] such as real estate, which is deemed relatively safe so long as the real estate market holds, and there's always times when the market drops with interest rates, and the Fed, all of that comes into play, but if you own an asset worth $200,000 and you owe $130,000 on it, that's relatively going to be a lot of space there to where the market can have a pretty large decline and you're still net positive ahead of your debt.

So, that's the leverage we're talking about.

Scott Florida: Yeah. And I would say too, you're looking at a couple of different pieces there that are really important. The consumer debt, I would even suggest to you... I'm not so concerned about making the payments, I'm concerned about paying it off every month. So, it's just that you're not carrying because you're paying way too much interest if you're carrying debt on that.

And then also, when it comes, like you said, to the investment in real estate, in 2008... so we owned property during the downturn. So, during that time period, the value of our property dropped pretty significantly, [00:06:00] but what didn't change was we were in a good market that had strong job growth, and our tenants- we continued to have residents come into our properties. Leading up to 2008,

people would move into our properties for a short period of time so they could build their home, and then after 2008, people lost their credit score. They were sent from their homes because they couldn't make the payments, and the homes were foreclosed on, and then you had people that actually had good jobs, but had zero credit that needed a good place to live as well,

and so, we were able to provide housing for them after the downturn, and so, we maintained those properties and we were able to hold those properties. Even though the values dropped, that didn't really make a difference to what we were doing, which is long term buy and hold investing, and so, for us, it didn't really matter.

And so again, as we invest going forward, we're looking to do the same thing. We're looking for the kind of properties that people can earn their way up into, and lose their way down into, and so they've got that steady, what [00:07:00] we call workforce housing, that we consistently seek to provide- good quality homes for people that meet the need for their families.

For us, we look at these homes and we know they're going to be celebrating birthdays there, they're going to have a Christmas celebration there, and we want that place to look and be right for them, and for them to have what they need to enjoy those celebrations and just have a pleasant experience in those homes.

Kevin Schneider: That's amazing.

And Scott, I have a question for you, and this is getting more theological. I've just always wondered this and curious of your take. In the book of Luke, Jesus reprimands the guy who buries his talent. What do you think would happen if the guy who took the 10 talents and he lost it, but he took the risk? What would Jesus say to the man who tried,

but lost, because the guy who buried his 1 talent technically is better off, but the guy who invested 10 and lost it, because that ultimately happens in life... that's what we're talking about is [00:08:00] risks, and the risks are- you could lose your investment.

Scott Florida: I think that's a great question. One of the things that pops into my head, and I don't know that it's a one to one correlation, but when people take steps of faith, obviously, there's that piece where if he was just foolish... but, if it was some kind of black swan event that wiped him out and he just didn't see it coming, all that kind of stuff... I think, my perspective is, if this person is truly trying, and they're trying with a good heart and with a good perspective, God is very gracious,

and he gives people that double opportunity. The Bible says a righteous man falls seven times and gets up again, and it doesn't say why he fell, what caused him to fall, what tripped him up or anything- it just says he gets back up again, and so, I would expect that that particular person would be back up again and trying again.

I think that there's places, too, in Scripture, where I think of the book of Daniel when the king says- Hey, I want you to eat this food. Daniel, his guys, say- No, we're not going to eat that food. --And then God provides a [00:09:00] path of rescue for them.

They are allowed to eat the right kind of food. And then, just a couple of chapters later, Shadrach, Mesach and Abednego go into this fiery furnace, and, it's like, 'King, we don't have to answer you in this matter. Our God is able to deliver us, but if he doesn't, we still aren't going to bow down and worship.' -- And so, they took a massive risk that God was going to show up for them,

and again, they had reason to believe that. The book of Isaiah, which was written prior to that time, specifically said, 'If you walk through the fire, I'll be with you.' -- And so, they had that to know from or to draw from as they were making their decision about what to do,

but they also still took a massive risk to take that step. A couple chapters later, Daniel's praying, and he knows he's at risk to be praying because the guys have set up this thing to catch him and have him thrown into the lion's den, and he still goes out and he prays, and God steps in... And so, I think that there's a place in which even the risks that we [00:10:00] take are acts of faith.

If that's really where our heart is, if our desire is to really honor God and to really be a blessing to the Kingdom, and to be a blessing to our community, to our families... if that's really where our heart is, then that's going to play out, and God's going to respond to that act of faith to move in that direction.

It doesn't mean He's going to cause it to be successful necessarily, but He's going to use it in your life and help build you, and create in you what you need. I think it's interesting to me that they use that 'righteous man falls seven times and gets up again,' and a lot of times that number in the Bible is used to describe

perfection. The seven days, and creation and all of that, and there's a piece in my mind where I'm thinking- Okay, that person needed that seven times in order to get to the place where they were mature, and then, you step up that seventh time- you know some things that you didn't know before, you've gained some things that you didn't have before, you've matured to a certain level that you needed to mature to.

And so, I [00:11:00] think that risk... again, going back to your question, is- really, God uses that opportunity and those potential risks to build your character, build your confidence, build your strength, and I think ultimately He would be supportive, more supportive of risk than loss, than- I've not risked at all.

Kevin Schneider: That's great. Yeah, that was a good answer. Scripture is righteous and holy- can't be changed. I'm just wondering why God never put that. He put two people successful and one person who buried, not anyone who lost.

Being a CPA, we see both sides.

I see clients who grow and double in size and are successful. I see people who are scared to make risks and decisions, and they don't want to save on taxes fully and make these investments... they don't want to do that, and I see people lose their... But, I see all across the spectrum, and now, not everyone's Christian, and not everyone adheres to it, but it's just I do feel like Scripture, even whether you're Christian or not, [00:12:00] it applies to everybody.

That's how good it is, and so, no matter what you believe in, this is all true, good principles, financial principles, so...

no, thanks

Scott Florida: We call that common grace.

that

Kevin Schneider: you go.

Scott Florida: It applies to everyone.

God causes the rain to fall on the just and the unjust. It doesn't matter if you're a Christian or not, you put seeds in the ground, then you've got the potential of something growing, and so, all that stuff plays out.

And again, going back to that question of risk,

so many of the people that you see that are uber-successful in life, you could look at their failings, right? President Lincoln is one of the classics where you go through the list of his failures and his losses, and you think- This guy's terrible!

One of the greatest presidents, if not the greatest president we've ever had, who had what he needed at the point when he needed it,

because he was willing to take those steps, and take those risks, that ultimately ended in failure. I couldn't necessarily, at least not at this moment, point to a verse that says risks and failures are

of the Lord, [00:13:00] but I do think that it does make a difference. It's much better, I think, to be taking those risks, again, calculated, wise, with lots of advisors- I mean, all these things can be shown in Scripture as well, but all those pieces driving good, wise investing... but you've got to make a move.

You've got to put that money to work and see what, God will do, what He'll do through you, and what He'll build you into as a result.

Kevin Schneider: Yeah, and risks and losses aren't of the Lord, but trials are, so He could definitely utilize trials to sharpen you and make you stronger.

Scott Florida: Right, and of all the things that He says you're going to come forth as, you're going to come forth as... gold.

Kevin Schneider: Yeah.

Scott Florida: That's an interesting picture, isn't it?

Kevin Schneider: Yeah.

Scott Florida: Refined. Something of value. Good stuff.

Mike Pine: So, getting back to real estate investing, we're going to cover this a lot more in our Bonus Content to today's show, but let's go over what [00:14:00] Partnership 101 is. We talk about partnerships all the time. I love partnership tax. That is where my bread and butter is in the tax work. There's so many cool things, but Kevin, you want to quickly discuss what is a partnership for tax purposes?

How does it work? Again, we'll check out the Bonus Content to get in more detail on this.

Kevin Schneider: Yeah, So, a partnership is when two or more people go into business together. You can't have a partnership with just yourself. That is impossible. Now, if you're married and you go into business with your spouse, it depends on if you're in a community property state or not, and how all that fleshes out, but

generally speaking, you're going to have two or more people that go into business together. You can't just report all that activity on your personal tax return. You're typically going to have your own separate bank account that's operating the partnership. The partnership is going to be responsible for filing a tax return every year.

So, when you have formed a partnership, you're going to have now a separate filing requirement with the IRS, not just your 1040 anymore. It's going to be a Form 1065 [00:15:00] and all the 1065 does is it reports the income and expenses of that partnership, or reports the assets, liabilities, the capital accounts of each partner.

Everything gets reported at the partnership level. The partnership does not pay any income tax, instead it's called 'passing through'- it's a pass-through entity. So, a partnership doesn't pay tax. Instead, if a partnership makes $500,000, that $500,000 is going to pass through on a form K-1, which Mike and I will go through on bonus content. That K-1 is what you take to your personal tax return to report your share of the $500,000.So if you're in a 50-50 partnership, your tax taxable income would be $$250,000 in that form. case. Now, what Mike was saying, there's so many ways to slice and dice a partnership. A lot of service industries... or, if you're in sales of sorts and you want a partnership with somebody, you can say, 'We're going to be 50-50 partners in this,

but if I sell a million dollars and you sell $500,000 of revenue, I'm going to get more money out of the partnership because I'm [00:16:00] bringing more in. So, you can actually get creative with how you structure distributions, how you structure that, and that's why partnerships are really fun to play with, is because whatever two people agree on, you could probably make happen in a partnership on the tax side, on the distribution side, on liability protection side of one partner's more risk adverse, one's more willing to take those risks.

You can structure your partnership that way, and It's very creative, but you'd need a good attorney. You really need a good attorney who understands partnership tax law and you need a CPA who understands the tax side of things.

Mike Pine: There you have it. Partnership 101 by Kevin Schneider, CPA.

Scott, you're relatively new in getting into partnerships.

What are some of the big questions, comments, or just hard concepts to understand that you've gone through with partnership tax and being in partnerships?

Scott Florida: Syndication as a whole is something that takes a lot of education. Get your head around how they work, you start involving [00:17:00] yourself in something that's monitored. You're making an offering, and so, that's a security,

and so, the SEC is involved in certain levels, making sure that that's a legit deal. So, I think that was a piece of it for us is just understanding all the different pieces of it and how they worked. And again, each step of that way, going back to the previous discussion, feels like a risk because you're taking each step of those is the first time you're slowly stepping forward, and the process is that of surrounding yourself with people who understand it and getting that

good support that you need to get good answers. I think for us with the tax piece, having already owned single family rental properties, we understood a little bit about depreciation. We know how that would work. We knew about how our investment in our properties would impact our tax returns as well, for us in particular, we started learning about what a real estate professional was and how that would impact, our taxes,

and so, for us, my wife Lori took on the [00:18:00] responsibility of being the real estate professional because I was still working full time, and so, she started logging her hours in the real estate realm, and we've always done this together- everything, back to when we bought our first duplex in '97, she would

strap a baby on her back and go paint a room, or whatever it took- go show houses, and that type of thing. So, we'd always be doing that together, and so, she's been very involved too with helping us track information, and she helps very much with putting together pro formas.

And again, I think for us, it was like, you get your head around this big concept, at least an initial piece, and then you test your work. You take a crack at it and then sit down in front of you guys, and say, 'Mike, okay, here's where we are. What do you think of this?' With syndication piece, we talk with our attorney, with Premier Law Group, and we sell a rule and say, ' This is where we're at.

How are we doing? Is this what we need? The business plan look right to you? And so, it was some of those basic concepts of how the depreciation works, how you [00:19:00] share that across the partnership, what individual investors are going to get from the partnerships, and even what the individual partners need or are looking for from the partnership- all of those pieces are pieces

you've got to get your head around and gain the info that you need that will help you going forward.

Kevin Schneider: Scott, thank you so much for this conversation. It has just been a true joy just chatting with you. I wish we could keep going, but to be respectful of your time.. We've covered such an array of topics today- single family housing, God's principles of money management, there's so much there that could be 10 podcasts.

So, thank you so much for joining us, and if people wanted to reach out to you, how could they get a hold of you?

Scott Florida: Hey, thanks for having me. It's been so great being with you guys, and again, I appreciate you on a business level, but also just where your hearts are as well. But yeah, if somebody wanted to get a hold of us, they could check out our website at www.commongracecapital.com. We have an entire education page. They just click on that tab and there's a whole bunch of

[00:20:00] curated podcasts, not that podcasts that we've been a part of necessarily... most of them are just the podcasts that taught us what we needed to know in order to take that next step, help us feel confident enough to take the risk to get into single family investing, and so, the podcasts are there and available.

Also, you can get a hold of me by email- scott@commongracecapital.com if you want to get a hold of us. We'll be happy to send you. I was able to be a part of one of Kyle Wilson's books called Persistence, Pivots, and Game Changers. We wrote a chapter in that that tells more of our story, and if you're interested, be happy to send you a PDF of that chapter for free.

Just contact us by email and we'll fire that off to you.

Mike Pine: Thank you, very much, Scott.

It was a pleasure as always.

Scott Florida: Absolutely. Thank you guys.

Mike Pine: Don't forget to join our Bonus Content area where we're going to dive deeper into what partnership tax looks like, especially what a Schedule K-1 is and how it works.

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