Sunday, May 9, 2021

140 Why Can't The Fund Manager Provide Valuation To IRA Companies More E...

At the end of every year, IRS requires that you get a market value in your assets that are being invested. Is it true that getting a valuation in a fund is the easiest thing to do? In today’s episode of Passive Wealth Show, Bill Fairman, Wendy Sweet, and Jonathan Davis of Carolina Capital Management will answer the “Ugly Question” of the day: “Why Can't The Fund Manager Provide Valuation To IRA Companies More Easily?” Timestamp 0:01 – Teaser: “Have you ever wondered if you have an IRA how difficult is it to do your end-of-the-year valuation on your assets?” 0:45 – Introduction 1:08https://www.CarolinaHardMoney.com 2:39 – Breaking News 8:59 – Do you think inflation will increase? 15:32 – Ugly Question: “Why Can't The Fund Manager Provide Valuation To IRA Companies More Easily?” 26:06 – Aren’t they using the relief money to pay rent? 28:49 – Wednesday With Wendy: https://calendly.com/wendysweet/wednesdays-with-wendy?month=2021-05 Carolina Capital is a hard money lender serving the needs of the “Real Estate Investor” and the "Small Builder" borrower who is striving to build wealth and generate income for themselves and their families. We offer “hard money rehab loans” and "Ground-up Construction Loans" for investors only in NC, SC, GA, VA, and TN (some areas of FL, as well). As part of our business practices, we also serve as consultants for investors guiding them to network with other investors and educating them in locating and structuring transactions. Rarely, if ever, will you find a hard money lender willing to invest in your success like Carolina Capital Management.

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Bill Fairman (00:15):

Have you ever wondered if you have an IRA, how difficult it is to do your end of the year valuations on your assets? Some people think it's even more difficult when you're in a fund, if it is more difficult right after that.


Bill Fairman (00:46):

Hi, everyone. Welcome to the Passive Wealth Show. I'm Bill Fairman. This is Jonathan Davis, Wendy Sweet is on the road. Joining us in the background. We are Carolina Capital Management. We do loans for real estate investors in the Southeast. If you're interested in borrowing money, then go to our website at www.CarolinaHardMoney.com. Click on the apply now button. 


If you're a passive investor, looking for passive returns, click on the accredited investor tab. 


Bill Fairman (01:32):

It's been an interesting week. Today is the 22nd of April.


Bill Fairman (01:56):

Typically in our part of the country, once you've passed April the 12th, it's okay to start planning your stuff because no frogs.


Bill Fairman (02:34):

Excellent. Now we're going to do some updated breaking news right now.


Bill Fairman (02:55):

Employment numbers, unemployment numbers, if you will. First time claims were below expectations. They havehit the lowest since the pandemic started, it was 547 million.


Jonathan Davis (03:20):

That's a lot of people, that's more people than the United States.


Bill Fairman (03:22):

They revised last week down to 570 million something so not bad. The continuing claims were also at the lowest. It was 3 million and some change. Nice things are looking good. I don't understand these numbers. I always thought continuing claims was how many people were still unemployed, but apparently that's not the case because they said 17 million people are still unemployed receiving benefits. So it was continuing claims in 3 million and 17 million still receiving benefits. Is that how it works?


Jonathan Davis (03:57):

How do those numbers work?


Bill Fairman (03:59):

I don't get it.


Jonathan Davis (03:59):

I have one word. Government.


Bill Fairman (04:03):

This past week, we've got a bunch of people being interviewed down into restaurants and stuff. You're trying to gear up all that answer because frankly they're getting paid in a lot of businesses more to stay at home than they are to go to work.


Jonathan Davis (04:21):

The big thing is people are incentivized to not be productive.


Bill Fairman (04:29):

Well, I hate to be a conspiracy theorist, but if you think about it. What better way to raise minimum wages without having to make a law than to start paying people that door. Then you're forced to raise minimum wages to get people to come to work.


Jonathan Davis (04:46):

And that only works if you couple that with inflation.


Bill Fairman (04:51):

Yes.


Jonathan Davis (04:52):

Because if the cost of living stays the same, they're still okay not being productive, increase receiving government employment, and living the same life then it's probably not too much of incentive to work and go make more money. But if costs of goods go up, then you have to.


Bill Fairman (05:10):

I Agree. In housing numbers we always have to do a look back. Because all these numbers are always rearward facing. February's existing home sales were the lowest. Since they've been keeping a record, there were only 840,000 homes listed for sale.


Jonathan Davis (05:38):

Really.


Bill Fairman (05:38):

In the entire country, in February. They've been keeping records since 1982, but that's pretty low. Rates went up a little bit. Now rates did take back down to under 3%. It was like 2.97% for 30 years. I mean, that's good news. The problem is we just don't have enough inventory. We didn't build enough homes. People aren't putting their homes up on the market because frankly where are they going to go when they do sell their house.


Jonathan Davis (06:24):

Do you think inflation will increase? Do I think inflation will increase?


Bill Fairman (06:36):

I will get to that in just a second. 


New home sales. There are 40,000 that are available for sale in March.


Jonathan Davis (06:44):

In the whole nation?


Bill Fairman (06:46):

Yes. typically they want around 80,000. They're not building any new homes or at least not building them quick enough either. Because the cost to build homes are higher and the home price point where a builder is gonna start making margin is going to be above the median price point.


Jonathan Davis (07:12):

Yes. Because the costs of goods are so high right now.


Bill Fairman (07:14):

And most of the people that want to buy homes are going to be at the median or below. So we have a problem.


Jonathan Davis (07:21):

And you said 17 million people are still receiving government unemployment benefits. Does that play into the homes being sold? Are there less people because if you're in governments, if you're not employed, can you get a loan?


Bill Fairman (07:41):

No you can't.


Bill Fairman (07:44):

The other thing is that some of the numbers that people aren't really considering are a lot of the new builds now are being built to rent. They're not going on the market.



Bill Fairman (07:56):

You still have higher housing starts, but there are lots of communities that are being built specifically to be rentals.


Jonathan Davis (08:05):

I talk to people almost daily. That's something that's going on, whether it's mobile, modular or stick-built, there's a lot of rental communities going up.


Bill Fairman (08:16):

Listen, when prices get to a certain point, is it better to rent? Wait for the prices to come down. Because we all know this is a cyclical business. I'm old enough to have seen at least four cycles in real estate. Most all of it was interest rate controlled.


Bill Fairman (08:42):

2008 was completely different than it was just a freezing of the capital markets. But that said, there's always going to be ups and downs and rent. Well, the prices are really high. Buying when the price has come back down again, if you can do that because not everybody can.


Bill Fairman (08:57):

Let's go to Scott's question. Do you think inflation will increase?


Jonathan Davis (09:04):

Do you think inflation is going to increase?


Bill Fairman (09:06):

The simple answer is yes. Where are you going to continue to see inflation? Because until the government stops printing extra money, we're going to get inflation. You can't continue to make money more available without the cost of goods going up.


Jonathan Davis (09:31):

I mean that's economics 101,



Bill Fairman (09:38):

You look at the stock market. Your stock market is based on cash flowing businesses.


Jonathan Davis (09:47):

Which most of them are.


Bill Fairman (09:52):

A lot of them are because of the pandemic because now they can utilize e-commerce and virtual employees. They don't have to pay the travel expenses they used to pay for their executives and salespeople and that type of thing. They are a lot more efficient,


Jonathan Davis (10:27):

I hear what you're saying it’s money saved but is it money saved? I don't buy into that.


Bill Fairman (10:40):

We're a perfect example of that. We saved quite a bit and expenses in 2020.


Jonathan Davis (10:45):

Sure, but we're not publicly traded. One of the differences when a publicly traded company, when debt is as low as it is, they're buying back all their stuff. They're amassing debt to buy back their stock to inflate their stock prices because the CEOs are paid bonuses on the stock prices. When you start amassing that much debt, when you actually take that into account, they're probably not cash flowing.


Bill Fairman (11:12):

Well, their stock prices are going to be based on earnings. That's the thing I hate about the stock business that most companies are only focused on next quarter's earnings. Home Depot is one of those that are not like that. They are always looking 10 years ahead. Even when things were bad, they were still focusing on what's happening in 10 years. They're getting a little pushback now because of the Georgia voting, because they didn't say anything. They tried to remain neutral. I tell ya, politics is in everything. Now that said.


Bill Fairman (11:54):

I want to talk about Credit Swiss as well.


Bill Fairman (12:00):

They were one of the big commercial banks that were involved in the Arcos. I think it was called. It was a family office/hedge fund that was levered at five to one.  Those of you who don't know what that means, they were able to buy five stocks, five shares of stock by putting up the money to buy one. 


These investment banks would basically lend them the money to buy five stocks with only enough money to buy one. Unfortunately for this family investment firm bought a bunch of stock in volatile sectors. When the price went down they have to (what's called a margin call) put up more money to back up these stocks because the prices have dropped. If they don't have the money, then the commercial banks go in and they take possession of those stocks and they sell them on their behalf. 


Bill Fairman (13:22):

But It's their collateral essentially. What happened with Credit Swiss is that while all these other financial institutions are posting record numbers for the first quarter, they had a 240 (something) million dollar loss for the quarter. They've already said that they're going to post another 200 million dollar loss for the second quarter. 


Now they're selling all those shares they bought when they were cheaper to try and raise more capital. Is this going to be systemic? I'm not sure. I don't know the answer to that. However are other investment banks going to start going back through their portfolios now and see who they're levered with and maybe change the rules?


This is why we always talk about it's nice to, as a private company it's okay when institutional investors come in and work with you. We definitely utilize them when we can. But don't be dependent on them because they will change their mind at the drop of a hat.


Jonathan Davis (14:32):

All it takes is one regulatory change and it's over.


Bill Fairman (14:39):

Not even a regulatory change. If somebody does something stupid and loses a bunch of money then they just pull back.


Jonathan Davis (14:49):

That's true.


Bill Fairman (14:49):

Then another shiny object may come along and they go to focus their attention on those. I say this to all people in our industry, utilize the cheap money while you can just don't make it a business model because eventually you're going to lose that model. It will bite you trying to keep as much of your independence and your control as much as possible.


Jonathan Davis (15:19):

Yes, if we were dependent on one bar or to keep us in business that's not a good thing. Just like one bar should not be dependent on one lender to keep business.


Bill Fairman (15:29):

Absolutely. Okay. I think it's about time for our “Ugly Question”. 


Bill Fairman (15:46):

Today's Ugly Question: 

 “Why can't the fund manager provide the valuation to an IRA company more easily?” 


Bill Fairman (16:05):

I'm really surprised at that question because getting the valuation in a fund is the easiest thing to do anyway. For those of you who don't not have an IRA, at the end of every year, the IRS requires that you get a market value on your assets that are being invested. Let's say your IRA is invested in a house and you buy a rental property. They want to know what the value of that rental property is because they want to know what the value of your investment is. They want to keep track of that as you go along.


Bill Fairman (16:50):

In most cases, if you own a home, you're required to go out and get an appraisal done to prove that the value is. If you're lending money, if you're doing individual loans, then they're going to require the documentation to be a copy of the note. Along with an amortization schedule maybe.


Jonathan Davis (17:14):

If it's amortizing.


Bill Fairman (17:14):

They want to see the copy of the note. For them to know is it an amortizing loan? Is it an interest only loan? They want to see the value of that asset.


Jonathan Davis (17:27):

If you're the lender on it, or if you're in a fund who is a lender on it, you're passing through that to the IRA. Then the value you're saying is just the note value?


Bill Fairman (17:36):

If it's an interest only loan.


Bill Fairman (17:39):

It's the note value because the current market value of that investment is that note plus the money that you've received from the payments, assuming you're getting monthly payments.



Bill Fairman (17:55):

Would be already in the account and that's accounted for through the IRA custodian. Any cash in the account, the custodian is validating that’s the value. Then whatever is remaining on the note, you're validating with the copy of the note.


Jonathan Davis (18:13):

If you lend, you only have to provide the note. If you are buying properties, you have to get an appraisal done every year?


Bill Fairman (18:23):

Yes, you're supposed to. Most people will do a printout for the Tax Value.


Jonathan Davis (18:29):

I was gonna say, can you use the tax value?


Bill Fairman (18:31):

You can, again, the IRS says they want an appraisal. That said they're not going to go after everybody who's printing up tax may use along the way. When you sell that asset there's going to be a value there. They'll know the difference at the end when you sell it.


Jonathan Davis (18:52):

I'm just curious now, if you only provide a tax assessment. Like you go to the tax assessor's website printed off and that's what you provide, but it's not what the IRS wants. Is that enough to blow up your IRA? Or is that just a slap on the hand?


Bill Fairman (19:09):

That's not a question for me.


Jonathan Davis (19:10):

I'm just curious.


Bill Fairman (19:11):

I'm not an IRS specialist.


Jonathan Davis (19:13):

I've never heard anyone say anything about it.


Bill Fairman (19:17):

If they went after every single IRA that owned a piece of property in it, because they got a tax value. I don't know what they're going to get out of it.


Jonathan Davis (19:25):

I was just curious.


Bill Fairman (19:26):

That said the IRS is known for their customer service.


Jonathan Davis (19:31):

True. They'd call you between the hours of nine and five. They're on different numbers constantly, usually from your same area code.


Bill Fairman (19:39):

When your money is in a fund of some sort, it's typically the fund manager that is going to provide the valuation. There are forms that the fund manager can fill out with the custodian. Some custodians, we have a lot of accounts with one particular IRA, and I'll go ahead and say their name, Quest. They allow us to print out a report from our portfolio that gives us the value of everyone's account and the total value of the fund. That's all the information they need to know is what's the total value of the asset and what is the value of our client's portion of that asset.


Jonathan Davis (20:28):

You can print that report off and send that off pretty much immediately. That's all it is. It seems like it's pretty easy in a fund.


Bill Fairman (20:37):

It's very easy in a fund. Now, for those custodians that will not allow for the report. We still have to physically fill out the form that they provide for us, which is still not a big deal. It's the form that we filled out my signature.  Then the last statement for that customer-attached and sent to them. It's not that big a deal and it doesn't cost them anything that most fund managers are doing that free of charge. It's a lot cheaper than getting an appraisal.


Jonathan Davis (21:09):

For everyone that has multiple IRA accounts and they're not in a fund, they're just lending or buying properties or whatever they're doing like buying gold stocks or whatever, they have to provide an evaluation for each account.


Bill Fairman (21:24):

Correct. Market value of every asset that is not in their portfolio with the custodian who has control over that asset.


Bill Fairman (21:41):

Because you can invest in anything you want that is not a collectible.


Jonathan Davis (21:55):

Was that a 401k?


Bill Fairman (21:57):

Well, 401K are a little bit different. You can invest in different stuff in a 401k than an IRA.


Bill Fairman (22:02):

That's another topic for somebody. My suggestion is that Quest-IRA has tons of education on their website. CAMA plan has tons of education on their website.


Jonathan Davis (22:15):

American IRA.


Bill Fairman (22:16):

American IRA has tons of education on their website. I would go to all of those and get information. You may not have as much information on 401K's because they don't typically deal with a 401k, but they do have the solo 401k. The rules are a little different for a 401k than there is for a traditional or Roth IRAs.


Jonathan Davis (22:41):

Now switching gears or just real quick. Did you discuss inflation versus stagflation versus deflation last week?


Jonathan Davis (22:56):

What'd you come up with?


Bill Fairman (22:56):

Inflation.


Bill Fairman (23:03):

It's hard to say whether we'll have stagflation and that's going to have a lot to do with the government, but to me it's just going to be inflation.


Jonathan Davis (23:12):

Stagflation would basically require a stagnant economy. One that there's no wage growth, job growth, GDP growth. But the GDP two thirds or typically 70% of it is influenced or determined by consumers. Spending on consumer goods. There's a lot of people out there thinking that Q1 is going to end up looking not so great on the consumer side. Because people who are getting back to business, they may not know that quite a few of their suppliers are out of business now. The economy is trying to stock back up with all those goods that have been run low. Some people are saying that we're going to have a huge consumer boom in Q2, which we're in right now. They say that's going to explode. We're going to have a smaller margin than expected number in Q1. Then we're going to have this boom in Q2, which will then continue down the road. If that is the case then it is inflation.



Bill Fairman (24:38):

Well, It's hard to say, I've heard people's predictions of a 6 to 7% GDP in quarter one.


Jonathan Davis (24:50):

I see. I think it's going to be closer to, I think it's going to be like 2.4.


Bill Fairman (24:54):

But you look at all these dollars that the government keeps doling out. A lot of people are paying down debt and they're investing in the stock market.


Bill Fairman (25:04):

It’s not going to show up in GDP because they're not buying anything with it. They're taking that money, they're using it to do speculative investments because it's free money anyway.


Bill Fairman (25:39):

It's been a long time since we've had a downmarket and the pandemic kind of woke people up. “Hey, maybe I really do need six months worth of savings in the bank to take care of times that are completely outside of our control. And yeah, if I have all this extra debt, there's no guarantee that my job is going to stay there”.


Bill Fairman (26:02):

Good for us for being a little smarter.


Jonathan Davis (26:06):

Scott's ask are they using the relief money to pay rent? If only they are. I'm sure a lot of people are. But there's probably just as many who aren't.


Bill Fairman (26:16):

Well, if the government is giving you money and they're also saying, Hey, you don't have to pay your rent because they can't kick you out. Sometimes you're going to spend it on something else.



Jonathan Davis (26:28):

I hope they are. That's the issue that really gets to me. It's like you as a renter and I'm not hating on renters, love renters. Like you can save all this money not paying your rent. You're getting all this money from the government and you're saving it, which is kudos to you. Good for saving money, but you're not paying your rent. That's not good. 


Then you have the lender who owns the property, who has to pay their mortgage and they have to get a forbearance agreement or some kind of modification agreement because now they can't pay them. Then you have this renter who can walk away with thousands or tens of thousands of dollars, but then you have this landlord who's stuck that has to pay back all this owed mortgage. It's like your help. Like we need to help everyone for sure. But it feels like we're skewing the help to maybe one side and not as much to the other that really needs it.


Bill Fairman (27:32):

If you are a tenant that is doing this, because you're just getting free money and you don't have to pay because you can't get kicked out. You're going to have to live somewhere eventually, that's going to ruin your opportunity to get a place in your name. 


Jonathan Davis (27:56):

Well, and here's the thing we see more. I hear more of this in the Northeast and the Pacific West. It has a lot to do with the government regimes that are there. Like down here, all of my tenants have paid. I think it's also a mentality. It could be a mentality thing as well. People down here aren't being told as much. I think it’s in the Northeast and the West that, Hey, you don't have to pay.


Bill Fairman (28:27):

Well, most of the investors that we know in this industry have very low delinquencies in their rental portfolios because they were out front and communicating from the beginning. They rent to a class of client that is most likely to pay.


Bill Fairman (29:12):

We need to wrap up. Again, we are Carolina Capital Management. We lend money to real estate investors in the Southeast. If you're interested in borrowing money, go to our website, www.CarolinaHardMoney.com click on the apply now tab. 


If you're a passive investor looking for passive returns, click on the accredited investor tab. Lastly, thank you so much for joining us on the Passive Wealth Show. 

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