Have We Hit The Top?

[Red Lion]

56 minutes ago, Dinar said:

Luca, I guarantee you that there a lot of people with plenty of cash flow which is not considered taxable income.  Real estate is a perfect example.  

This right here is why I started investing in residential real estate.
 

 Buy 10 million of 4 CAP multi family with no debt and you’ll basically pay zero tax. 

[Dinar]

21 minutes ago, RedLion said:

This right here is why I started investing in residential real estate.
 

 Buy 10 million of 4 CAP multi family with no debt and you’ll basically pay zero tax. 

100%.  I am not good at fixing things and finding high quality tradesmen and judging people - prospective tenants, so I am long NEN and AIV at 10-11% cap rates, but I do not get the tax shield.  

[Parsad]

60 Minutes on commercial real estate...up to 40% drop in value over the next two years...banks are kicking the can down the road instead of writing off non-performing loans.  Cheers!

 

https://www.cbsnews.com/news/real-estate-owners-saddled-with-half-empty-offices-as-hybrid-work-continues-60-minutes-transcript/

[Red Lion]

2 hours ago, Dinar said:

100%.  I am not good at fixing things and finding high quality tradesmen and judging people - prospective tenants, so I am long NEN and AIV at 10-11% cap rates, but I do not get the tax shield.  

Me neither. This has been a serious effort in personal development, and I’m having second thoughts on a near daily basis. Still the numbers are turning out good, and I’m hoping to work through the issues with coordinating tradesmen, permits, back order supplies, etc. 

 

The tax shield is an obsession of mine, but I’m trying to decide whether I have the ability to develop the skills I need to do this. 
 

The great thing is that residential real estate is like the stock market, but less efficient, able to take complete control , use leverage, and get amazing tax breaks. So I question as a value investor how I can stay away, I’m like a moth to the flame. This seems like the best way for a smaller player to get an edge. 

[Luke]

8 hours ago, Dinar said:

Luca, I guarantee you that there a lot of people with plenty of cash flow which is not considered taxable income.  Real estate is a perfect example.  

I was talking about taxable income, but i see, according to you even the waiters almost make a 100k or fruit stand with 300k.

[Sweet]

5 hours ago, Parsad said:

60 Minutes on commercial real estate...up to 40% drop in value over the next two years...banks are kicking the can down the road instead of writing off non-performing loans.  Cheers!

 

https://www.cbsnews.com/news/real-estate-owners-saddled-with-half-empty-offices-as-hybrid-work-continues-60-minutes-transcript/

Interesting video, thanks, big issue here.  Understand why the banks would kick it down the road, they are hoping for normalisation.

[Spooky]

10 hours ago, RedLion said:

This right here is why I started investing in residential real estate.
 

 Buy 10 million of 4 CAP multi family with no debt and you’ll basically pay zero tax. 

 

Can you explain more about how the tax shield works in this scenario? 

[Dinar]

35 minutes ago, Spooky said:

 

Can you explain more about how the tax shield works in this scenario? 

You pay $10MM for a property that generates $400K per year in cash flow on an unleveraged basis.  You can depreciate most of the $10MM, excluding the value assigned to the land, which cannot be depreciated, unless it is an agricultural property, in which case part of the value of the land can be assigned to minerals in the soil and can be depreciated.  The part that you can depreciate is in theory can be written off against taxes over 39.5 years.  However, iif you run cost segregation study, you can depreciate over shorter periods (windows I think 15 years, roof - 25 years, boiler - 10, etc).  So say $8MM of the 10MM can be depreciated, and on average over 20 years.  Then for the first 20 years of ownership, you have a $400K per annum depreciation tax shield.  In addition, most people borrow when buying real estate.  Say you use 50% leverage.  Then, assuming $5MM of debt at say 4% interest rate, you get a $200K annual interest bill.  So in year one, your taxable income = -200k (400K - 200K depreciation - 200K interest.)  In year 2, assuming 3% inflation, your unlevered cash flow = $412K, your taxable income = -$212K.  

In addition, there are other interesting tricks. I am sure @Gregmalcan explain better, but if I am not mistaken, when you refinance a property with a larger debt balance, you can increase your taxable basis in the property and get another depreciation tax shield.  Lastly, most people who do this tend to use appreciation in one property to borrow additional funds to invest in other properties and effectively keep getting bigger and getting more and more tax shields.  I think President Trump was a good example with less than $500K in taxable income.  

 

[Spooky]

3 minutes ago, Dinar said:

You pay $10MM for a property that generates $400K per year in cash flow on an unleveraged basis.  You can depreciate most of the $10MM, excluding the value assigned to the land, which cannot be depreciated, unless it is an agricultural property, in which case part of the value of the land can be assigned to minerals in the soil and can be depreciated.  The part that you can depreciate is in theory can be written off against taxes over 39.5 years.  However, iif you run cost segregation study, you can depreciate over shorter periods (windows I think 15 years, roof - 25 years, boiler - 10, etc).  So say $8MM of the 10MM can be depreciated, and on average over 20 years.  Then for the first 20 years of ownership, you have a $400K per annum depreciation tax shield.  In addition, most people borrow when buying real estate.  Say you use 50% leverage.  Then, assuming $5MM of debt at say 4% interest rate, you get a $200K annual interest bill.  So in year one, your taxable income = -200k (400K - 200K depreciation - 200K interest.)  In year 2, assuming 3% inflation, your unlevered cash flow = $412K, your taxable income = -$212K.  

In addition, there are other interesting tricks. I am sure @Gregmalcan explain better, but if I am not mistaken, when you refinance a property with a larger debt balance, you can increase your taxable basis in the property and get another depreciation tax shield.  Lastly, most people who do this tend to use appreciation in one property to borrow additional funds to invest in other properties and effectively keep getting bigger and getting more and more tax shields.  I think President Trump was a good example with less than $500K in taxable income.  

 

 

Thanks Dinar, pretty interesting.

[ValueArb]

15 hours ago, Gregmal said:

Well the other issue is, and I dont mean to offend anyone cuz I have plenty of friends in Manhattan, but like WTF are you still doing in Manhattan at that point? Theres plenty of more appropriate and safe places to raise a family that are within 50 miles of NYC. So if things are tight on that income, its kinda your own fault. 

 

For an investment manager, I'm gonna bet that the costs of living in Manhattan pay for themselves in terms of networking value.

[TwoCitiesCapital]

14 hours ago, Dinar said:

You clearly take nothing into account, since you accept government statistics that have nothing to do with reality at face value.  

You lived in Manhattan (in the past 5 years) with four kids and you spent less than $350K per year in a nice apartment, kids in good schools, nice travel, etc?  Care to share the budget?  I know a lot of people in my kids' public school who would like to know your secret.  I know people who live in Manhattan with four kids on $100K post-tax, but they sure as hell don't describe their lifestyle as luxurious (6 people in a 700 sq foot 2 bdr apartment.)

Again, you are telling me that making 10% year in year out in investment returns is not working?  What % of the population actually achieves that?  One other thing, since there are drawdowns, and sequence of returns matters, clearly your investment returns need to be higher than 10%.  Again, how do you achieve that by literally doing nothing?  Again, I'd like to know how I can make a guaranteed 10% per year not working, thank you.  

 

No, just like I don't assume anyone who lives in Ladue area of St Louis, Missouri as 4 kids on sub-100k. There are areas where that is prohibitibely expensive. 

 

You've narrowed your entire argument down to "if I can't live in the most expensive areas, with 4 children, while NOT working - I can't be rich". Really?!??!

 

The fact that you're bringing in 350k post tax is what makes you wealthy. How you choose to spend it is on you. It's not my problem, nor a signal of how "not rich" you are, if you're choosing  to blow 20k/month on rent instead of living further out where places are larger and more affordable . It's not a signal of how wealthy you aren't if you're paying 50k/year per kid to send them to ultra-exclusive private schools.

 

Just because that's how you've chosen to blow you're money doesn't mean you're not wealthy - it means you spent it on things totally out of reach for the average person. 

 

 Am definitely more convinced than ever that you're absolutely out of touch with the average person - none of whom could ever hope to raise 4 kids on a large apartment/condo in Manhattan. 

Edited January 15 by TwoCitiesCapital

[ValueArb]

7 hours ago, Luca said:

I was talking about taxable income, but i see, according to you even the waiters almost make a 100k or fruit stand with 300k.

 

There are quite a few waiters making 6 figures, and the world is awash with food truck owners making multiples of 100k. I'm not saying thats the median pay, but I'm also saying its not that rare.

[TwoCitiesCapital]

"I can't afford my 3rd Ferrari while sending all of my kids to private school and living in one of the most exclusive areas of the world on a passive income . I'm NOT rich "

 

 

Edited January 15 by TwoCitiesCapital

[Dinar]

6 minutes ago, TwoCitiesCapital said:

 

No, just like I don't assume anyone who lives in Ladue area of St Louis, Missouri as 4 kids on sub-100k. There are areas where that is prohibitibely expensive. 

 

You've narrowed your entire argument down to "if I can't live in the most expensive areas, with 4 children, while NOT working - I can't be rich". Really?!??!

 

The fact that you're bringing in 350k post tax is what makes you wealthy. How you choose to spend it is on you. It's not my problem, nor a signal of how "not rich" you are, if you're choosing  to blow 20k/month on rent instead of living further out where places are larger and more affordable . It's not a signal of how wealthy you aren't if you're paying 50k/year per kid to send them to ultra-exclusive private schools.

 

Just because that's how you've chosen to blow you're money doesn't mean you're not wealthy - it means you spent it on things totally out of reach for the average person. 

As I said before, you and I have a different definition of what it means to be wealthy.  How can one one be wealthy if one cannot live where one wants?  As for why the average person in the US is not wealthy (per your definition) it is quite simple.  Excluding people who got very unlucky health-wise themselves or in their family, it is really a function of not willing to work hard, acquire useful skills, and live below their means and invest the savings.  Most people who have no savings have chosen to work less than 35 hours a week, spend their money on $300 sneakers and $800+ apple watches and $1500 iPhones.  I consistently meet people who complain that they have no savings, yet have never met an expense they did not like, and always turn down the opportunity to work beyond 30-35 hours per week, even at $25+ per hour wage.  

You have clearly not had a family in Manhattan.  When I was single, I thought just like you.  Again, wealth means freedom, and first and foremost ability to live where one wants.  Using your definition of freedom, anyone who can retire to rural Alabama is wealthy.  I beg to differ.

[TwoCitiesCapital]

7 minutes ago, Dinar said:

As I said before, you and I have a different definition of what it means to be wealthy.  How can one one be wealthy if one cannot live where one wants?  As for why the average person in the US is not wealthy (per your definition) it is quite simple.  Excluding people who got very unlucky health-wise themselves or in their family, it is really a function of not willing to work hard, acquire useful skills, and live below their means and invest the savings.  Most people who have no savings have chosen to work less than 35 hours a week, spend their money on $300 sneakers and $800+ apple watches and $1500 iPhones.  I consistently meet people who complain that they have no savings, yet have never met an expense they did not like, and always turn down the opportunity to work beyond 30-35 hours per week, even at $25+ per hour wage.  

You have clearly not had a family in Manhattan.  When I was single, I thought just like you.  Again, wealth means freedom, and first and foremost ability to live where one wants.  Using your definition of freedom, anyone who can retire to rural Alabama is wealthy.  I beg to differ.

 

You clearly just don't understand scarcity. Scarcity, and affording everything you want that is scarce, isn't the measure of wealth. 

 

The fact that you're able to live better than 99% of the population is wealth. The fact that you're trade-offs include options others only dream of is wealth. The fact that you're doing it all passively ( in the example we were discussing) instead of going to a soul-sucking job and putting up with some fragile-ego's bullshit all day is wealth. 

 

Blowing  it on those things and then not having enough for other super exclusive and scarce items doesn't change that you were wealthy . It just demonstrates what your priorities are. 

 

I generally consider myself wealthy. I make significantly less than 350k pre-tax and I do it by working - not passively, but I'm still in the top 5% of income earners periods (and higher for my age). I have lived in some of the lowest cost cities of the Midwest and spent 7 years in Manhattan. I've got a good idea what it means to be lower middle class, middle class, upper middle class, and wealthy in a variety of areas. 350k passively post-tax is wealthy anywhere you live. It goes further in some spots than others - but a large portion of that is based on your choices and priorities. 350k still gives you more choice amongst those priorities than 99% of the population has - especially after tax and when earned passively where it can be supplemented with a day job . 

Edited January 15 by TwoCitiesCapital

[james22]

1 minute ago, Dinar said:

Again, wealth means freedom ...

 

But by your definition, anyone anyone who has "enough" is wealthy (agree) and anyone who does not isn't (disagree).

 

Not very helpful.

[Dinar]

6 minutes ago, TwoCitiesCapital said:

 

You clearly just don't understand scarcity. Scarcity, and affording everything you want that is scarce, isn't the measure of wealth. 

 

The fact that you're able to live better than 99% of the population is wealth. The fact that you're trade-offs include options others only dream of is wealth. The fact that you're doing it all passively ( in the example we were discussing) instead of going to a soul-sucking job and putting up with some fragile-ego's bullshit all day is wealth. 

 

Blowing  it on those things and then not having enough for other super exclusive and scarce items doesn't change that you were wealthy . It just demonstrates what your priorities are. 

 

I generally consider myself wealthy. I make significantly less than 350k pre-tax and I do it by working - not passively. I have lived in some of the lowest cost cities of the Midwest and spent 7 years in Manhattan. I've got a good idea what it means to be lower middle class, middle class, upper middle class, and wealthy and a variety of areas. 350k passively post-tax is wealthy. 

Of course I don't understand scarcity, you are the only one who understands anything.   Yes, I do not understand why someone would want to live in Manhattan and go to the opera & Carnegie Hall, jazz clubs and ballet.  Why expose kids to Metropolitan Museum of Art and incredible educational opportunities when one can live in Mobile Alabama for a fraction of the cost.  Who the hell needs to show kids Europe when you can play a video game.  

When I see my friend's immigrant parents from China work here for 40 years (retiring at 70) as a janitor and a seamstress barely speaking English, and thanks to a lifetime of hard work and thrift buy a million dollar condo in Flushing for cash and have another million in the bank, I do not understand why people who are healthy and born in this country complain of having no money.   If people you continually cite in your clearly wrong government statistics worked like my friend's parents, and saved, they would all be millionaires several times over, again barring health issues.   

You feel wealthy?  I am happy for you.  There is a difference between being happy and content with life and being wealthy.  

 

[Dinar]

21 minutes ago, james22 said:

 

But by your definition, anyone anyone who has "enough" is wealthy (agree) and anyone who does not isn't (disagree).

 

Not very helpful.

You are 100% correct, it's a philosophical discussion.  I think clearly one has to adjust for health for instance, skills/intangibles - a college professor may have no measurable wealth, but if he can enjoy and stay at his job till say 80, that is clearly wealth that a mover or a ditch digger does not have.  I think Seneca may have said it best - be content with what you have.  I am content with what I have. I will never fly on a private jet, but I will also not be upset over it. 

[mattee2264]

Reminds me a bit of the FIRE community. They work hard, save about half their income, so they can retire at 40. But it requires huge sacrifices both during the accumulation phase but also during the "retirement" phase because the only way you can retire early with $1m is if you are prepared to live of $30,000 a year. That doesn't go far and requires you to live in the middle of nowhere, never eat out, have campervan holidays, home school your kids and basically live like a pioneer. And probably at the back of your mind you are still worried that the historical returns do not hold up and you risk running out of money. It is a romantic lifestyle that appeals to some but I do not think you'd classify these guys as wealthy by any means. 

 

Then there is super-wealthy which entails yachts, gold diggers, private jets, a household of chefs, butlers, nannies and the like and other ways to burn through millions a year. But it is somewhat above your average middle class retiree so you can eat regularly at fancy restaurants, live in a big house in a nice area, go on luxury holidays staying in five star hotels, perhaps have a holiday home where you can spend the winters, and enjoy things like weekly massages and spa visits without batting an eye. 

 

Then your is your average baby-boomer retiree who through being frugal and working hard and investing sensibly has amassed a nest egg of a few million, has a home worth probably a similar amount and a defined benefit retirement plan throwing off an annual income some high percentage of their final salary. Kids have flown the nest. So if they wanted to they can eat out whenever they want at fancy restaurants, spend the winters in the Caribbean and the summers in Europe, fly business class, stay in 5 star hotels, have a weekly massage and belong to a country club, and basically never have to worry about money or sacrifice in any way. That is probably what I would think of as wealth. 

 

Then again the irony of wealth is that the people who are wealthy do not usually have the lifestyle you expect because the habits that made them wealthy are difficult to break so instead they just leave behind a huge inheritance. 

[Gregmal]

I’ve just never got the “NYC is expensive” cries from people with families. 
 

Looked for 2 minutes, you can put down 30% and your monthly payment is lower than what you’d get in a mediocre nyc “luxury” building. Safe as can be. Great public school. Yard for the kids and dog. Tons of stuff for the wives- ranging from bs part time jobs to social clubs for the stay at homes. 20 minute train/bus to the city. My friends dad has drove in every day for 40 years and if you leave before “everyone else” decides to go to work, it’s a 15 minute commute. Yea parking and tolls are a bitch but it still beats living in the city.

 

https://www.zillow.com/homedetails/502-Prospect-St-Glen-Rock-NJ-07452/37919664_zpid/

[TwoCitiesCapital]

14 minutes ago, Gregmal said:

I’ve just never got the “NYC is expensive” cries from people with families. 
 

Looked for 2 minutes, you can put down 30% and your monthly payment is lower than what you’d get in a mediocre nyc “luxury” building. Safe as can be. Great public school. Yard for the kids and dog. Tons of stuff for the wives- ranging from bs part time jobs to social clubs for the stay at homes. 20 minute train/bus to the city. My friends dad has drove in every day for 40 years and if you leave before “everyone else” decides to go to work, it’s a 15 minute commute. Yea parking and tolls are a bitch but it still beats living in the city.

 

https://www.zillow.com/homedetails/502-Prospect-St-Glen-Rock-NJ-07452/37919664_zpid/

 

 

Public school?!????

 

Why not just tell me to eat garbage and live in Mobile, AL while you're at it! 

 

/sarcasm

Edited January 15 by TwoCitiesCapital

[TwoCitiesCapital]

45 minutes ago, Dinar said:

You are 100% correct, it's a philosophical discussion.  I think clearly one has to adjust for health for instance, skills/intangibles - a college professor may have no measurable wealth, but if he can enjoy and stay at his job till say 80, that is clearly wealth that a mover or a ditch digger does not have.  I think Seneca may have said it best - be content with what you have.  I am content with what I have. I will never fly on a private jet, but I will also not be upset over it. 

 

But you WILL say someone isn't wealthy if they WANT a second private jet but can't afford it. 

 

SMDH

[mattee2264]

Agree you also have to consider what was required to do to earn the wealth.

 

A lot of wealthy people are crooks. They may have obscene amounts of material wealth but morally and spiritually they are bankrupt.

 

People who get wealthy the honest and hard way such as partners or law firms and other big professional service firms had to sacrifice family life, hobbies, social life, health to work the punishing hours required and be at the beck and call of clients and a lot of them hate the work. And part of the reason they became so wealthy is they never had any time to spend their money and were lucky enough to avoid the expensive divorce or sugar babies. And even people who love their jobs can unwittingly become workaholics and lose the balance in life and the second they retire they drop dead because they have little else to live for.

 

Warren has the right idea. It is about finding work you enjoy and if you do that you will naturally work hard at it and eventually keep working not because you have to but because you want to. But it is also about having people who love you and strong connections and a sense of purpose.

 

There is a great book "The Second Mountain" by David Brooks which covers these kind of ideas and gives a playbook for the 2nd phase of your life for after you are done chasing career success and material wealth and want to find a real sense of joy in later life. 

[james22]

2 hours ago, Dinar said:

There is a difference between being happy and content with life and being wealthy.  

 

But by your earlier definition (one is only wealthy if one is happy and content), there isn't.

 

2 hours ago, Dinar said:

I think Seneca may have said it best - be content with what you have.

 

Seneca didn't say "be wealthy."

 

 

[Santayana]

I don't understand how someone can claim that it's no problem to live in NYC on $40K and poverty doesn't really exist except by choice, but that making 10x that much isn't "wealthy".