Jeff Nabers’ Self Directed IRA & Solo 401(k) Blog

In Part 1 of this post, we examined the facts concluding that inflation is caused by monetary debasement. In this follow up, we’ll observe the reason behind why common belief is that inflation is at 3% - 5%. First, let’s recap what was already covered:

What is Inflation?

Inflation is the steady, continual rise in the price of goods. It is typically measured using a “basket of goods”. In this approach, the prices of many different goods are tracked and then integrated using some sort of logical weighting calculation.

What causes inflation?

In most developed countries, money is created by a central banking system. In the US, our central banking system is that of the Federal Reserve, a private bank. Money can be created by the Federal Reserve depositing newly created money into its member banks in exchange for US bonds. This increases the amount of money in existence. Additionally, every bank in the US has the ability to lend out 7 to 11 times as many dollars as it has in deposits. This also increases the amount of money in existence. With an increased money supply, prices rise. A continually increasing money supply, aka monetary debasement, causes inflation.

What is the current rate of inflation?

This is where there is a difference of opinion. For decades, inflation has been estimated using a “basket of goods” approach. In this method the price of each of a variety of goods is tracked, a logical weighting is applied, and the output is the rate of inflation, usually annualized. Under this method we can see inflation swinging up and down through economic cycles. In the early 1980’s, this data shows inflation at nearly 15% per annum. This is based on the published figures of the US Bureau of Labor Statistics.

In the early 1990’s the methodology of inflation reporting changed drastically, thus rendering the BLS “official” figures virtually useless. Unfortunately, these BLS figures continue to be used as if they were accurate.

A change in calculation method

Around 1993, Alan Greenspan argued that there was a flaw (more…)

****** A note from Jeff Nabers ******

I asked attorney Dan Marsh to shed a bit of light on entity maintenance and its importance. With a general purpose LLC, failing to properly maintain the entity can result in “piercing the veil” which means subjecting creditors to assets of the LLC owner(s). With a special purpose IRA LLC, “piercing the veil” could mean a prohibited transaction resulting in hefty taxes, penalties, and interest.

Entity maintenance is important and it shouldn’t take too much time or money… yet it could save you a lot of time and money in the long run. I suggested Dan keep this post brief, but instead he did what attorneys are supposed to do: he was thorough. Rather than ask him to dumb it down and shorten it, here’s the article in its entirety…

*************

(more…)

LLC stands for limited liability company, and that is the primary purpose for forming such a legal entity. When you enter into a business transaction as an individual (aka sole proprietor), if somebody decides to sue you, all of your personal assets can be subjected to satisfying the law suit. The idea behind an LLC or Corporation is that people are doing business with that entity (the LLC, for example). When a true separation is maintained between the LLC and its members/owners, the LLC can only lose its assets… but not the unrelated assets of its owners.

The cross-liability of one LLC with multiple assets or businesses

Jeremy forms JAH LLC to buy and hold apartment buildings. He buys Apartment Building A as well as Apartment Building B & Apartment Building C.

An accident occurs and somebody gets hurt in the common area of Apartment Building A. This person sues the owner of the buildings, JAH LLC.

Personal assets - Jeremy’s personal assets are protected from exposure to this law suit (except for what he contributed into JAH LLC).

Apartment Building A - All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building A and even the real estate itself.

Apartment Building B - All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building B and even the real estate itself.

Apartment Building C - All of the assets of JAH LLC can be exposed to satisfying the law suit. This includes bank accounts relating to Apartment Building C and even the real estate itself.

The additional protection of multiple LLCs

Jeremy forms (more…)

Conventional Tax Strategies for Real Estate

Many real estate investors boast of their tax strategy as involving one or more of the following:

Depreciation - This is a tax concept where the property owner pretends that his property is decreasing in value. For residential real estate, it assumes that the property’s improvements will become worthless over 27.5 years. In commercial real estate, the calculation is for 39 years. During each year of property ownership, the owner can take that year’s pro rata depreciation as if it is a loss against the income of the property… which reduces the taxable income of the property, thus reducing the amount of taxes due. Upon future sale of the property, depreciation normally must be “recaptured” which means that there is no more pretending, and the taxes on the truly realized gains must be paid anyways.

Cash out Refi - This is where the owner of the property will refinance the mortgage. The new loan will have a higher balance than the old one, resulting in “cash out”. Because this is just borrowing, it is not a taxable event. Upon future sale of the property, however, taxes will normally be due on the actual gains anyways.

1031 Exchange - Upon the sale of real property, the gains can be deferred if they are used to purchase property of “like kind” within a certain time period. It goes something like this:

• Sell Property A
• Have a “qualified intermediary” receive the proceeds of the sale
• Replacement property (”Property B“) must be identified in writing within 45 days of the sale of Property A
• Property B must be purchased (closed) within 180 days of the sale of Property A

• Property B must be of equal or greater value to Property A
• Both properties must be “like kind”. For instance if Property A was U.S. real estate, Property B must also be U.S. real estate.

So, savvy real estate investors often (more…)

While I generally avoid mutual funds like the plague, I don’t avoid the stock market altogether. I’ll split what I do in the stock market into two categories: long and short. Either way, I’m honest with myself in admitting that no matter what I do in the stock market, it will be speculative and risky.

Long

“Going long” means buying a stock and expecting its price or income to rise so I can sell later for a profit. There are millions of people who have access to the same information as you, and that is generally reflected in the price of that stock. If you know something non-public about the company, trading it may be illegal for you. I’ve bought individual stocks before; I just treat the situation honestly; it is speculative in nature, and I only make such trades with very small portions of my portfolio.

I don’t go long on mutual funds because I don’t know what I’m going long on. It is virtually impossible to know what I’m actually investing in when I buy shares of a fund.

Short

Selling Short… A short position is the opposite of a long one. Instead of buying low and selling high, selling short is a matter of selling high and then buying low. For me to do this, I borrow shares of a stock and simultaneously sell them at the market price in expectation of a price decrease. To close this position later, I just have to buy back shares of the same stock at the then market price and pay back the borrowed stock. If during my position the stock price declined, I profit; if the stock price increased, I have a loss.

Ex: ABC Company seems to be doomed. It’s currently trading at $50, but I think it will go much lower over the next couple months. I sell 100 shares short. This means I borrow 100 shares and simultaneously sell them for $5,000. A few months later I see the stock price has declined to $35. To close my position, I buy 100 shares back for $3,500. I pay back the borrowed shares and retain the $1,500 profit, less fees and commissions.

I like short selling more than going long. I often notice (more…)

Luck… Doing very well in publicly traded securities is sometimes a streak of good luck. I’ve had a terrific run on the craps table in Vegas many times. Eventually, I run out of good luck. Many people experience the same thing with trading.

Insider Trading… This is when a person has non-public information on which he bases a trade in a public securities market. It is illegal. Insider trading in public securities can lead to imprisonment. Insider trading in real estate and private investments can lead to extraordinary profits.

Arbitrage… This is the act of profiting from the mispricing of assets. When an ounce of gold costs $900 in New York and $895 in Japan, “arb” traders will buy lots of gold in Japan and immediately sell it in New York… theoretically risk free. When dealing with transaction costs, arb trading typically requires (more…)

Has your saving really been a loss? Has your investing really been saving? Let’s find out. To start, here are my definitions…

Investing - the placing of assets to build wealth in a way where overall return can be maximized and risk minimized confidently, competently, and consistently.

Saving - the act of reducing spending in an effort to accumulate wealth.

Surrendering - the placing of money into a situation where you have little to no understanding of where your money actually went… and thus little or no control of what happens to it.

Building on that, my philosophy of wealth building contains 4 simple truths:

1. Investing primarily in the stock market is only possible on a large scale (like Warren Buffett) or with nonpublic information. The latter is illegal and can result in imprisonment.
2. In the current inflationary environment, saving US dollars results in a loss of wealth… even in a CD or money market fund.
3. The average person’s investable assets are inside retirement accounts, such as IRAs or 401(k) plans.
4. The average person cannot invest until they restructure their retirement accounts to have unrestricted investment options.

What you’ve called investing may have actually been saving and surrendering under my definitions.

Investing into a stock may be (more…)

If there is one conversation central to society right now… it’s energy. More specifically oil. With gasoline passing the $4 per gallon mark in many parts of the country, it’s hard not to wonder what are our alternatives to the internal combustion engine automobile.

In the mid 90s, GM came out with quite a successful electric vehicle (EV), but mysteriously repossessed and destroyed all of them. While there are many theories as to their GM’s motives, perhaps it is more useful to focus on the car companies who are producing efficient, working, zero-emmissions vehicles that require no gasoline, oil, or internal explosions to operate:

Telsa Motors

Elon Musk, cofounder of leading online payment processor Paypal, has spearheaded the development and productions of the Tesla Roadster…

Driving Range: 221 miles
0 - 60 mpg in under 4 seconds
To Speed: 125 mph
Energy cost: $0.02 per mile (about 10 times cheaper than a gasoline car)
Retail Price: $110,000
Full charge: about 3 hours

This isn’t a “we hope to offer it in the future” car. It’s already been produced. Over 600 have been sold or reserved, and there are an additional 400 on the waiting list. The roadster is a car that will hang with Ferraris and other exotic, high performance sports cars.

More importantly, Tesla plans to introduce a $60,000 luxury sedan in 2009, and a $30,000 model soon thereafter.

EV’s Longer car life

If you think $110k or $60k for an electric vehicle is expensive, think again. While the (more…)

With tens of thousands of self directed IRA investors utilizing LLC structures to enjoy “checkbook control” authority of their self directed IRA investments, this post may serve as great news for those who aim to follow suit.

Solo 401(k) retirement plans can grant direct checkbook control without the use of an LLC or custodian.

The concept of custodian comes from Internal Revenue Code Section 408(a)(2) and is defined in Section 408(n). This entire IRC section 408 is devoted to Individual Retirement Accounts, or IRAs. The code basically explains that an IRA is normally a trust, and the trustee must be a bank. It then defines bank as a bank, trust company, or any company specifically approved by the IRS. This capacity of trustee to an IRA is known as “custodian”. This trustee role is simply that of investing the plan as directed by the accountholder.

A Solo 401(k) plan is a type of 401(k) that is designed for self employed individuals whose businesses have no full time employees. All 401(k) plans are qualified plans, and qualified plans do not have any special restrictions on who can serve as trustee.

So the significant difference is that with a Solo 401(k), the participant can actually be the trustee and handle (more…)

I recently talked to a real estate investor friend online who I have known for about 4 years. He started investing in the height of the housing bubble, and now I think he’s finding it difficult to shed the “bubble mentality”. In our conversation I did my best to cause him to question his perspective and his investing strategy.

I’ve pasted our Instant Message conversation below (with the screen names changed for privacy). I didn’t correct capitalization, punctuation or spelling errors, so you’ve been forewarned.

I thought this would be a useful post because of how tightly this gentleman seemed to grip onto his investment strategy he’d been using since 2004. How tightly are you gripping onto your investment strategy?

[19:00] re_investor: HI Jeff
[19:00] re_investor: How are you buddy?
[19:00] jeff_nabers: Hey there
[19:01] jeff_nabers: I’m doing good. How are you?
[19:01] re_investor: How have you been doing?
[19:01] re_investor: Im alright!
[19:01] jeff_nabers: How’s the RE market up there?
[19:01] re_investor: OH its tight!!
[19:01] re_investor: Its flat and declined over the pervious 6 months
[19:01] re_investor: TOUGH
[19:02] jeff_nabers: what about cash flow?
[19:02] re_investor: Its cashing …
[19:02] re_investor: but, its still tight. I actually was in the process of buying another one
[19:02] re_investor: I stoped canceled the purchase/sale
[19:03] jeff_nabers: how did your previous investments turn out?
[19:03] re_investor: Oh great actually..
[19:03] re_investor: I sold the one in Fairview park
[19:03] re_investor: I got a cash buyer
[19:03] re_investor: The other three are turning out fine
[19:04] re_investor: The one house I have I have 67K in equity right now
[19:04] re_investor: I am currently renting it for 1K
[19:04] re_investor: but, I cant do anything with it until the maket comes back
[19:04] jeff_nabers: Sounds decent
[19:04] jeff_nabers: how’s the cash flow return?
[19:04] re_investor: Its about 300 dollars
[19:04] jeff_nabers: renting it at $1k what do you net per year?
[19:04] jeff_nabers: i see so 6k per year
[19:05] jeff_nabers: how much money did you put into it?
[19:05] re_investor: I was just in the process of refinancing it
[19:05] re_investor: and the mtg company I was using closed up
[19:05] re_investor: so the refi stoped
[19:05] jeff_nabers: how much money did you put in tha tone?
[19:06] re_investor: I was bummed out
[19:06] re_investor: I put in 15K
[19:06] re_investor: to fix it up
[19:06] jeff_nabers: and the down payment was?
[19:06] re_investor: It was alot
[19:06] re_investor: I cant remember…
[19:07] re_investor: I am trying to do something with the equity.. but, I dont know what
[19:07] re_investor: There is not much I can do
[19:07] jeff_nabers: you don’t remember how much you put down?
[19:08] re_investor: why are you wanting to no such details?
[19:08] jeff_nabers: i’m curious what your return is
[19:08] jeff_nabers: cashing out would only decrease your cashflow
[19:08] re_investor: I got into it on no money down
[19:08] re_investor: I had good credit
[19:08] jeff_nabers: well then i would never refi it and never sell it
[19:09] jeff_nabers: you are making a 40% annualized return on the cash you put in
[19:09] re_investor: yeah. Its only worth so much you know
[19:09] jeff_nabers: why would you ever want to take an asset like that off your books?
[19:09] re_investor: To use the equity in the house
[19:09] jeff_nabers: with 10 - 15 of those you’d never have to work again
[19:09] jeff_nabers: to use the equity to do what? continue working real estate like a job?
[19:10] re_investor: right. I just need 9 - 14 more of them
[19:10] jeff_nabers: do your other properties cash flow like this one? (more…)