Today, we are answering more of your real estate questions. We discuss if it is a good idea to have your rental properties in an LLC, if you can claim a loss on US taxes for an international property, and where to store your money that you want to direct toward syndications. Our guest today is Michael Episcope from Origin Investments. He tells us about what funds are available currently and what new changes are happening at Origin, and he helps answer a listener's question about passive real estate vs. REITs.
I include my real estate funds and syndications and all of that in my investment asset allocation. That's included in that 20%—mine is split up 5% publicly traded REITs. That's essentially in the Vanguard REIT Index Fund or ETF. Five percent is in private debt real estate funds. These are funds that essentially loan money to developers for anywhere from 6-18 months. They charge the developers 10%, 12% and a couple of points to borrow that money. It makes sense for the developers. It's just a cost of doing business for them. The fund gets its cut; it gives me the rest. In the event that the developer plan goes bad, you're in first lien position and can foreclose on the property, and they only lend enough that you should still be able to get all of your principal back in the event of a foreclosure or bankruptcy of a developer. That does happen from time to time. A typical fund might have 75 or 80 or 100 loans in it, and one or two of those is typically in some sort of default situation. So, it does happen, and the fund has to be able to manage that. That's one of the problems with investing in these notes individually. Are you a real estate investor? Are you going to fix that if you have to foreclose on these guys? Probably not. You're not a developer, right? That's the nice thing about having a fund that has some developing experience that they can take care of that sort of a situation when it happens. Not if it happens, but when it happens.
The real risk of a debt fund, of course, is in a really bad economic downturn. In a bad real estate downturn, your debt fund essentially becomes an equity fund because the fund has to foreclose on all those properties and now it's running equity. The reason why you're able to make returns of 6%-12% instead of something lower is because you're taking on that risk that your debt could become equity in a really bad economic situation. The other 10% of our portfolio—this is half of our real estate—is in private real estate. I tend to favor funds, just for that instant diversification and sometimes a little bit more liquidity, although we have a few individual syndications left over. I figure if I can be paid for illiquidity, I can certainly afford to be illiquid on 10% or 15% of my portfolio, no problem.
These private real estate investments seem to have relatively high minimum investments. Sometimes on some of the crowdfunding websites, you can get in them for as little as $5,000 or $10,000, but more commonly it's $25,000, $50,000, $100,000, $200,000 minimums. It takes a certain amount of wealth and income for these to make sense for your portfolio. If all the money you have is $400,000, it might not make sense to put money into an investment with a $100,000 or $200,000 minimum. It's just hard to stay diversified when that's the sort of money you're working with. You have to technically be an accredited investor to invest in these, but that only means you need an income of $200,000 for each of the last couple of years, or you need investable assets of at least $1 million.
But honestly, I tell people you ought to have not only both of those things, but double both of those numbers. An income of $400,000 plus and a couple of million dollars in investable assets. I think to be able to really invest well in this space and maintain a diversified portfolio, it's just something that's really hard to do right out of medical or dental school. But by mid-career, a lot of white coat investors may actually want to consider some of these investments for part of their portfolio.
Congratulations on your success. Here's the deal. An LLC in most states provides some additional asset protection. It's a good idea to put any sort of toxic asset you have, (i.e. any sort of asset that can cause you to have liability) inside an LLC to take advantage of that protection. LLC provides internal asset protection. Internal meaning the LLC does something that it's liable for. It gets sued, and it has to go bankrupt. You want that to protect the rest of your assets from what happened from someone slipping and falling on the property in that LLC, that sort of a thing.
You also want to provide some external liability protection, and that varies a lot more by state. But basically, the idea is that in the states that offer the strongest protection, particularly in a multi-member LLC, a creditor to you is limited only to a charging order against that LLC. Meaning that they only get money from the LLC when you distribute money to yourself from the LLC. Since you're in control of when that money is distributed, you can actually just keep the money in the LLC. The interesting thing about it is, the taxes still have to be paid on that entity, right? But you can send the tax bill to the creditor. This is pretty good and really induces them to be more willing to settle for a little bit less money. Because of that, they're limited to that charging order. An LLC is a good idea. And yes, I think you ought to put your rental property into an LLC. That's easier than you might think it is. Usually, even the mortgage holder doesn't really have a big problem with it as you move it in there, as long as there's a personal guarantee on the mortgage loan still. No big deal. I do recommend you do that.
Should you use separate LLCs? Well, in some states, LLCs are really expensive. In some states, they aren't. In Utah, it's $70 to start an LLC, and it's like $15 a year. It's super cheap. If I were in Utah, I'd just start a different LLC for every single property I had. In California, an annual fee on an LLC is $800. That starts adding up, especially if you have a whole bunch of little properties. In that sort of a situation, you might look into a serial LLC situation or putting three or four or five properties together in one LLC, that sort of a thing. In Ohio, I looked it up and it's $99 to open an LLC and $50 a year. It's pretty cheap in Ohio. For your businesses, I'd put each one in a separate LLC, especially because these are two very different businesses. The rental property goes into one LLC; this other education company goes into a separate LLC.
You had a question about ownership of this other company. Who's going to own it? What's the format going to be? This really comes down to how you guys structure the business. Are you going to be partners, or is one person going to own it and the other person going to work for it? It can work out just fine either way. If you talk to Dave Ramsey, he'll tell you the only ship that doesn't sail is a partnership. And there's some truth to that. Any partnership you're in, it changes and grows as the years go by. Even though you're best of friends, it can end up being a little bit acrimonious. Be careful getting into partnerships, especially where you're a minority partner and don't have any control over the partnership.
The people you're in business with matter more than anything else. Even when there's a misunderstanding, even when you don't see eye to eye, even when there are changes, if they're good people, things usually work out reasonably well for both parties. If they're not good people, you can really end up with a real headache on your hands. If it's an option for you to just own the business and the other person to be your employee and everybody's OK with that relationship, that's what I would favor rather than having somebody be a minority partner or being 50-50 partners or that sort of a thing. Sometimes everybody involved has a valuable thing to contribute to the partnership, and everyone wants to be an owner. Sometimes you can't work it out as an employee, even with some sort of bonus structure or some sort of phantom equity or anything like that. If that's the case, then you end up with a partnership, and of course, you ought to put an LLC shell around that partnership. Even if it's taxed as a partnership, you get that additional liability benefit. I hope that's helpful and answers both of your questions.
Well, Joshua, I've got some bad news for you. I don't think this qualifies as a capital loss. You might want to get a second opinion from a CPA on that. It would be cool if it would—at least then you could use it to offset some capital gains down the road—but I don't think it does. It doesn't count as a business loss. If you had been planning to rent out this sprinter van, maybe you could count it as that, but it's not really an ordinary loss in that respect. Maybe it's a little bit more of a theft kind of an issue. I'm not sure whether it even counts as that, but that's probably the most likely category it goes into.
The authority on casualties, disasters, and thefts is IRS Publication 547. That publication is very bad news for you. It defines a theft as the taking and removing money or property with the intent to deprive the owner of it. Taking of property must be illegal under the law of the state where it occurred, and it must have been done with criminal intent. You don't need to show a conviction for theft. That includes the taking of money or property by the following means: blackmail, burglary, embezzlement, extortion, kidnapping for ransom, larceny, robbery. Taking money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Maybe your case would fall under that last line. Here's the bad news. Theft loss deduction is limited. For tax years 2018-2025, if you are an individual casualty and theft loss is a personal use property, those deductible losses are only attributable to a federally declared disaster and a federal casualty loss.
I don't think yours are. I'm really sorry. This sucks. I hope you get something back. Even if you get back a quarter on the dollar, that's better than a kick in the teeth. I hope you do get something back. But like you, I wouldn't necessarily hold my breath. There's a good chance that they've got creditors senior to you, and this is going to be a complete loss. I'm really sorry. The good news is you've got your financial ducks in a row. You will recover from this. Eventually, you will probably get a sprinter van built from a reputable company. But I'll bet you put a whole lot less down in the beginning with that. I'm really sorry. Sometimes you do your best due diligence, and it still doesn't work out well.
Thanks for listening. We appreciate it and hope that it has helped you and that you also pay it forward. I'm not an expert on Indian tax law, but as a US investor, if I invested in an Indian property and I lost money on it, I'd claim that loss and I'd use it to offset other income. This would be a capital loss. If you invested $100,000 in US dollars and you got back $50,000 in US dollars, that's a $50,000 loss. I don't think anybody cares that the loss was in the other currency. You're paying US taxes so I think we care about US dollars. I'd claim that, and I don't see why you shouldn't. If there's some expert on Indian tax law and they know I'm blowing smoke here, I'm sure I'll hear about it within the next week by email or on the Speak Pipe, and I'll be sure to let you know. But I think you're OK claiming that loss.
We've got another question off the Speak Pipe, but it's actually a very specific question about a specific company. And it's a company that I was meaning to talk to anyway. We've arranged for Michael Episcope from Origin Investments to come on and talk with us for a while about his firm and also about this question that we got from a listener, as well as some recent changes at Origin. Michael is a principal and founder of Origin Investments. Welcome back to the podcast.
We always appreciate your sponsorship and your assistance and everything you've done for white coat investors over the years. I want to take this opportunity to publicly thank you for that.
There are lots of exciting things happening at Origin. Right now, my understanding is you're still offering three funds. One is the IncomePlus Fund, which is one I've been invested in for a number of years. You have a Qualified Opportunity Zone Fund. It's actually your second one of these. Then the most recent offering is the Growth Fund IV, which my understanding is that is mostly a ground-up offering. Is that correct?
Let's talk a little bit about that Opportunity Zone Fund for a second. Who should be considering that fund?
Do you find that the investments you get and are able to put into the QOZ Fund are just as good as the ones that tend to end up in your other funds?
The other Origin Investment I've had is Fund III, which has been wrapping up lately over the last year. I think it sounds like the projections are still for it to wrap up in 2023. Is that still your expectation?
Now, one of the things I like about the IncomePlus Fund is it's pretty evergreen. I can reinvest all my earnings in it. I'm not having capital call all the time. I'm not getting capital back all the time. It can just sit there kind of like a standard publicly traded mutual fund, in that respect. Do you anticipate having any other offerings that are evergreen like that moving forward?
You've had a few changes at the firm recently that we've had lots of questions about. I thought it'd be best just to get the answers straight from the horse's mouth. Tell us what's going on with this strategic transaction you've done at the firm.
You mentioned this isn't a cash-out thing. This isn't Kovitz buying Michael and David out.
Awesome. Well, we've got a question from one of our listeners that I thought would be pretty appropriate to address together with you. Let's take a listen to this question from Marissa and then we'll get your two cents on it.
I think there are really three questions inherent in there. The first one is the merits of private real estate over publicly traded REITs, like you'd buy in the Vanguard REIT Index Fund or ETF. I think the second one's kind of specific to Origin. She's obviously a potential investor in Growth Fund IV. Then the last one has to do with what she ought to use that tax-protected space in her self-directed 401(k) for and what investment she might consider for that sort of a real estate investment. Why don't we start with the broader question, the case for private real estate over publicly traded REITs? Do you want to talk about that first, Michael?
The only other thing we probably ought to talk about in her case is that she has this solo 401(k) space. This is a tax-protected space. Any depreciation she got from a ground-up development, such as Growth Fund IV, isn't going to pass through in tax-protected space. When I think about real estate investments that I put into a retirement account, it's usually the more tax-inefficient stuff. I'm talking about debt funds like this lending income fund you have coming up. That sort of an investment is the sort of thing I tend to put in retirement accounts. I tend to keep my equity real estate outside of my retirement accounts, but if you're an investor where almost everything's in a retirement account, then don't necessarily let the tax tail wag the investment dog. I think any of your funds can be invested in retirement accounts, correct?
I think you may run into an issue as well, Marissa, at least for a year or two in getting the minimum investment into that solo 401(k). If the minimum investment is $100,000 and you can only get up to $66,000 in a single year in the solo 401(k), it's going to be a couple of years before you could meet the minimum investment within that account. You have to keep in mind when you add in more moving parts, you have to make sure everything works well together.
Michael, thank you so much for coming on the podcast today, helping us to answer Marissa's question, and giving some information on the recent changes at Origin.
For those who are interested in more information about Origin Investments, you can go to whitecoatinvestor.com/origin. You can also just pick up the phone and give them a call. They're always more than willing to talk to you, answer any questions about the funds. I found them over the years to be very responsive and easy to get additional information out of. They're quite transparent about what they're doing. If that's a good fit for you and your portfolio, please consider Origin Investments at whitecoatinvestor.com/origin. Thanks for your time today, Michael.
I hope you enjoyed that in-depth dive into what's available at Origin Investments as well as some of their recent changes. And I hope we got your question answered, Marissa. “Is it worth it?” It’s always one of those questions that's in the eye of the beholder. There is some additional hassle to investing in private real estate. There are minimum investments to deal with, there are PPMs to review. You have illiquidity. You often end up filing in multiple states. There's a lot more hassle there than just buying VNQ in 30 seconds at Schwab or Fidelity or Vanguard brokerages. There's no doubt about it. Is it worth it? Obviously, I think there's a good chance it's worth it because I'm putting some money in there. Michael is obviously a big believer but obviously has his own conflicts of interest there. It's really one of those questions that only you can decide if it's worth it.
But it's not like you have to go wholesale in or you have to choose one or the other. As you can see, both Michael and I have chosen both. You can choose both as well. I would say most people start out with a dedicated real estate investment, because if you just buy total stock market, you're owning some real estate, right? There are REITs in the overall stock market indices. But if you want a dedicated stock market investment, I would say most people do start with VNQ and then, as they become wealthier, they at least consider some of these private real estate investments or even investing directly on their own.
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Transcription – WCI – 307
Intro:
This is the White Coat Investor podcast, where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.
Dr. Jim Dahle:
This is White Coat Investor podcast – Private Real Estate versus REITs.
Dr. Jim Dahle:
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Dr. Jim Dahle:
All right. Welcome back to the podcast. Hope you're having a great winter. We sure are in Utah. We are getting absolutely pounded with snow. We're very happy about that. We love snow here in Utah. We do everything we can to try to get more snow. Not only does it give us something to ski on in the winter, but it fills up our reservoirs and lakes to play on in the summer and makes our rivers run strong so we can float down them in the spring.
Dr. Jim Dahle:
So, we love snow. I don't care how much I have to shovel in the winter. Let it keep coming. I think we're at something like 170% of normal, which although it may cause some flooding problems in the spring, will go a long way to alleviating our 20-year drought.
Dr. Jim Dahle:
By the way, if you are looking for a new credit card, you just want to make sure that you're getting the best deal on a credit card, check out our resource at whitecoatinvestor.com/best-credit-cards-for-doctors.
Dr. Jim Dahle:
And by choosing the right card or cards, a doctor or other high earner can maximize their convenience while potentially saving money on purchases or earning free travel, making it worth the effort to find the right card for your situation.
Dr. Jim Dahle:
Now, obviously, you spend more when you use a credit card, right? They should be called convenience cards. But if you're going to spend the money anyway, you might get 1% or 2% or 3% or more back in benefits rewards while you're doing it. If you're carrying a balance, you don't need credit cards. That's not what they're for. They're not actually for credit, they're for convenience. But if you're interested in the best ones, it's the best credit cards for doctors.
Dr. Jim Dahle:
By the way, we're going to be talking a lot today about real estate, and if you're interested in learning a little bit more about our No Hype Real Estate Investing course, but not really ready to purchase yet, check out the free masterclass.
Dr. Jim Dahle:
You can find it at whitecoatinvestor.com/remasterclass. It's three sessions. It's totally free. You can watch them from the convenience of your own home or your own phone, and see if that's something you're interested in getting more into, learning more about. And you can upgrade from there if you'd like, to the paid No Hype Real Estate Investing course.
Dr. Jim Dahle:
But that's something we produce just to give you a little bit more insight into some of the topics we'll be talking about today as well as just learning more about this type of investing.
Dr. Jim Dahle:
Okay. Let's get into some of your questions today. The first one comes from David off the Speak Pipe. Let's take a listen.
David:
Hi, Jim. My name is David. I know on your website you posted your financial plan that says 60% stocks, 20% bonds, and 20% real estate. Inside of the real estate, is that where you put money for syndications and things like that? Or is the real estate 20% REITs and other liquid assets and then your syndication holdings are outside of the 60/20/20? Thanks so much for everything you do.
Dr. Jim Dahle:
Okay. I include my real estate funds and syndications and all of that in my investment asset allocation. So, that's included in that 20%, mine is split up 5% publicly traded REITs. That's essentially in the Vanguard REIT Index Fund or ETF. 5% is in private debt real estate funds. These are funds that essentially loan money to developers for anywhere from 6 to 18 months. They charge the developers 10%, 12% in a couple of points to borrow that money.
Dr. Jim Dahle:
It makes sense for the developers. It's just a cost of doing business for them. The fund gets its cut, it gives me the rest. In the event that the developer plan goes bad, you're in first lien position, can foreclose on the property, and they only lend enough that you should still be able to get all of your principal back in the event of a foreclosure or bankruptcy of a developer.
Dr. Jim Dahle:
And that does happen from time to time. A typical fund might have 75 or 80 or 100 loans in it, and one or two of those is typically in some sort of default situation. So, it does happen, and the fund has to be able to manage that. That's one of the problems with investing in these notes individually. Are you a real estate investor? Are you going to fix that if you have to foreclose on these guys? Probably not. You're not a developer, right?
Dr. Jim Dahle:
And so, that's the nice thing about having a fund that has some developing experience that they can take care of that sort of a situation when it happens. Not if it happens, but when it happens.
Dr. Jim Dahle:
The real risk of a debt fund, of course, is in a really bad economic downturn. In a bad real estate downturn, your debt fund essentially becomes an equity fund because the fund has to foreclose on all those properties and now it's running equity.
Dr. Jim Dahle:
So, that's the real risk there. And the reason why you're able to make returns of 6% to 12% instead of something lower is because you're taking on that risk that your debt could become equity in a really bad economic situation.
Dr. Jim Dahle:
The other 10% of our portfolio, this is half of our real estate, is in private real estate. And I tend to favor funds, just for that instant diversification and sometimes a little bit more liquidity, although we have a few individual syndications left over. But yeah, 10% of our portfolio is in these private real estate investments.
Dr. Jim Dahle:
I figure if I can be paid for illiquidity, I can certainly afford to be illiquid on 10% or 15% of my portfolio, no problem. So, we'll be talking a little bit more later today about what some of those funds are, but that's how our portfolio shakes up.
Dr. Jim Dahle:
Now, these private real estate investments seem to have relatively high minimum investments. Sometimes on some of the crowdfunding websites, you can get in them for as little as five or $10,000, but more commonly as $25,000, $50,000, $100,000, $200,000 minimums.
Dr. Jim Dahle:
And so, it takes a certain amount of wealth and income for these to make sense for your portfolio. If all the money you have is $400,000, it might not make sense to put money into an investment with $100,000 or $200,000 minimum. It's just hard to stay diversified when that's the sort of money you're working with. You have to technically be an accredited investor to invest in these, but that only means you need an income of $200,000 for each of the last couple of years, or you need investable assets of at least 1 million.
Dr. Jim Dahle:
But honestly, I tell people you ought to have not only both of those things, but double both of those numbers. An income of $400,000 plus and a couple of million dollars in investable assets. I think to be able to really invest well in this space and maintain a diversified portfolio, it's just something that's really hard to do right out of medical or dental school. But by mid-career, a lot of White Coat Investors may actually want to consider some of these investments for part of their portfolio.
Dr. Jim Dahle:
All right. The quote of the day today actually comes from much derided, but also lauded, Robert Kiyosaki who said, “It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
Dr. Jim Dahle:
Our next question also on real estate, this one comes from Shannon, who wants to talk about direct real estate investing.
Shannon:
Hi, Dr. Dahle. This is Shannon, and I'm an advanced practice provider from Ohio. I'm fairly new to investing and the business world, so I am very thankful for your podcast and all that you do.
Shannon:
I have a two-part question about LLCs. I have had a rental property for the last few years, and I am looking to start an LLC to offer some protection. I am also looking to start a business that has to do with training.
Shannon:
The first part of my question is, should I have just one LLC for both companies, or should I have one for each to offer individual protection? The second part, which makes it a little bit more complicated is I am looking to start the training company with a partner.
Shannon:
Both of us are single with no children. However, she does not own her own home and is in a lower tax bracket than myself. Because it is going to be with somebody else, should I have separate LLCs where one LLC has both of our names for the training company, or would it be better for just one of us to have an LLC to cover the training company and have the other one act as an employee and get paid by the business? Any insight you can offer to this would be greatly appreciated. Thank you for your time.
Dr. Jim Dahle:
Okay. Great questions. Congratulations on your success, by the way. Here's the deal. An LLC in most states provides some additional asset protection. It's a good idea to put any sort of toxic asset you have, i.e. any sort of asset that can cause you to have liability inside an LLC to take advantage of that protection.
Dr. Jim Dahle:
LLC provides internal asset protection. Internal meaning the LLC does something that it's liable for. It gets sued and it has to go bankrupt. You want that to protect the rest of your assets from what happened from someone slipping and falling on the property in that LLC, that sort of a thing.
Dr. Jim Dahle:
You also want to provide some external liability protection, and that varies a lot more by state. But basically, the idea is that in the states that offer the strongest protection, particularly in a multi-member LLC, that a creditor to you is limited only to a charging order against that LLC. Meaning that they only get money from the LLC when you distribute money to yourself from the LLC. And since you're in control of when that money is distributed, you can actually just keep the money in the LLC.
Dr. Jim Dahle:
And the interesting thing about it is, the taxes still have to be paid on that entity, right? But you can send the tax bill to the creditor. So, this is pretty good, really induces them to be more willing to settle for a little bit less money. Because of that, they're limited to that charging order.
Dr. Jim Dahle:
So, an LLC is a good idea. And yes, I think you ought to put your rental property into an LLC. That's easier than you might think it is. Usually, even the mortgage holder doesn't really have a big problem with it as you move it in there, as long as there's a personal guarantee on the mortgage loan still. No big deal. So, I do recommend you do that.
Dr. Jim Dahle:
Should you use separate LLCs? Well, in some states, LLCs are really expensive. In some states, they aren't. In Utah, it's $70 to start an LLC, and it's like $15 a year. It's super cheap. And so, if I were in Utah, I'd just start a different LLC for every single property I had.
Dr. Jim Dahle:
In California an annual fee on an LLC is $800. That starts adding up, especially if you have a whole bunch of little properties. So, in that sort of a situation, you might look into a serial LLC situation or putting three or four or five properties together in one LLC, that sort of a thing. In Ohio, I looked it up, it's $99 to open an LLC and $50 a year. So it's pretty cheap in Ohio.
Dr. Jim Dahle:
So, for your businesses, I'd put each one in a separate LLC, especially because these are two very different businesses. The rental property goes into one LLC, this other education company, whatever it is, goes into a separate LLC.
Dr. Jim Dahle:
Now, you had a question about ownership of this other company. Who's going to own it? What's the format going to be? And this really comes down to how you guys structure the business. Are you going to be partners or is one person going to own it and the other person going to work for it? It can work out just fine either way.
Dr. Jim Dahle:
If you talk to Dave Ramsey, he'll tell you the only ship that doesn't sail is a partnership. And there's some truth to that. Any partnership you're in, it changes and grows as the years go by. And even though you're best of friends, it can end up being a little bit acrimonious. And so, be careful getting into partnerships, especially where you're a minority partner and don't have any control over the partnership.
Dr. Jim Dahle:
The people you're in business with matter more than anything else. And even when there's a misunderstanding, even when you don't see eye to eye, even when there's changes, if they're good people, things usually work out reasonably well for both parties. If they're not good people, you can really end up with a real headache on your hands.
Dr. Jim Dahle:
So, if it's an option for you to just own the business and the other person to be your employee, and everybody's okay with that relationship, that's what I would favor rather than having somebody be a minority partner or being 50-50 partners or that sort of a thing.
Dr. Jim Dahle:
Now, sometimes everybody involved has a valuable thing to contribute to the partnership, and everyone wants to be an owner. And so, you can't work it out as an employee, even with some sort of bonus structure or some sort of phantom equity or anything like that.
Dr. Jim Dahle:
If that's the case, then you end up with a partnership, and of course, you ought to put an LLC shell around that partnership. Even if it's taxed as a partnership, you get that additional liability benefit. So, I hope that's helpful. I hope that answers both of your questions.
Dr. Jim Dahle:
We've got another question off the Speak Pipe, but it's actually a very specific question about a specific company. And it's a company that I was meaning to talk to anyway. So, we've arranged for Michael Episcope from Origin Investments to come on and talk with us for a while about, not only his firm, but also about this question that we got from a listener, as well as some recent changes at Origin. So, let's get him on the line and talk about that.
Dr. Jim Dahle:
Our guest today on the White Coat Investor podcast is Michael Episcope, who I know well and have known for a few years and skied with several times. He's a principal and founder of Origin Investments. Michael, welcome back to the podcast.
Michael Episcope:
Thanks for having me on, Jim.
Dr. Jim Dahle:
We always appreciate your sponsorship and your assistance and everything you've done for White Coat Investors over the years. And I want to take this opportunity to publicly thank you for that.
Michael Episcope:
Yeah, you're very welcome. We appreciate the partnership with you and everybody else at the White Coat Investor. And looking forward to the conference as well this year.
Dr. Jim Dahle:
Yeah, looking forward to seeing you in person again. I'm sorry we weren't able to ski together this year. The last few years we've been able to, this year just didn't work out. But luckily I think there was enough powder to keep you happy anyway when you came out to Utah.
Michael Episcope:
Yeah. And there's still time in the season.
Dr. Jim Dahle:
Yeah. So, lots of exciting stuff happening at Origin. Right now, my understanding is you're still offering three funds, the IncomePlus Fund, which is one I've been invested in for a number of years. You have a Qualified Opportunity Zone Fund. It's actually your second one of these. And then the most recent offering is the Growth Fund IV, which is essentially, my understanding is that mostly a ground-up offering. Is that correct?
Michael Episcope:
Yeah, that's correct, Jim. There's actually a fourth fund, and the fourth fund is our Credit Fund. And the most recent one just closed, but we'll be opening up a new one right around April 1st. And so, when you think about our product mix, our product mix is designed around the risk profile of the investor.
Michael Episcope:
Multifamily Credit Fund is for the low-risk investor, short time horizon. It's less tax efficient than our other funds. It is pure income. And actually, even though the underlying collateral is real estate, it really fits into the credit buckets.
Michael Episcope:
And then our other funds, the one you're in, the IncomePlus Fund is more low to moderate risk. It's income and appreciation. And then the Growth Fund IV is really for people who don't need income and are looking to maximize return. And that one invests primarily in ground-up development.
Michael Episcope:
And then QOZ, it’s almost identical to the Growth Fund IV, except it has greater tax advantages when you invest in that fund with capital gains. So, that's kind of how we think about our suite of products and how we've aligned them to the taxable investor risk profile.
Dr. Jim Dahle:
Let's talk a little bit about that Opportunity Zone Fund for a second. Who should be considering that fund?
Michael Episcope:
Well, there's a couple of things. Number one, you have to want to allocate to real estate for one. Number two, you have to be willing to take ground-up development risk. So, your risk profile shouldn't change based on the taxes. We've talked about that, you never want to let the tax tail wag the dog. But it's really anybody who has capital gains and it can be from any source out there.
Michael Episcope:
And the beautiful thing about QOZ too is you get two benefits. One is a deferral. So if you recognize the gain, even in 2021, 2022, if it's a partnership gain, you still may be able to invest those capital gains. So, let's just call it, if it's $200,000, you've recognized capital gains in the form of stock, in the form of really any asset. If it shows up as a capital gain on your taxes, it's eligible to be invested in a QOZ Fund.
Michael Episcope:
And so, you don't have to recognize those taxes this year. You won't have to recognize till 2026, pay them in 2027. The risk in that is that you are subjecting yourself to potentially higher tax rates in the future. But the offsetting feature, which we all love about this, is that if you are in the Qualified Opportunity Zone for 10 years and one day, and that $200,000 grows to $400,000, $500,000, $800,000, you pay zero taxes on that gain.
Michael Episcope:
So, it's a great program. Certainly, if you want ground-up development, if you like that risk profile, then there's not a lot of programs that I'll call a no-brainer. But if you're looking between the Growth Fund IV and Qualified Opportunity Zone Fund, and you have capital gains, the QOZ Fund, it's a great program and almost a giveaway to investors.
Dr. Jim Dahle:
Yeah. Do you find that the investments you get and are able to put into the QOZ Fund are just as good as the ones that tend to end up in your other funds?
Michael Episcope:
Yeah. We don't look at them any differently. Certainly, it's more challenging because the Qualified Opportunities Zone areas, there's about 8,700 of them across the United States, but these areas are identified as low to moderate-income areas based on the 2010 census. And we're only in about 12 cities. So, when you narrow the map to 12 cities, and then you look at, “Okay, well, we have to be in neighborhoods that are up and coming.” It's really 3% to 5% of the map that's investible. And that makes the data set much, much smaller.
Michael Episcope:
We've had a lot of success in finding sites. We've got some of the best QOZ sites. And I don't qualify them by QOZ. These would be sites that we would be doing in Growth Fund IV, because they just happen to be good sites and we're not underwriting any differently. All the benefits happen on the backend on the investor side.
Michael Episcope:
So, this doesn't help us pay more for real estate. We don't have a different underwriting standard. We don't have different Excel models. We look at everything through the same lens. I'm investing in this fund, my partner's investing in this fund as well. And I would say, we have a site in Nashville that you would scratch your head and you would look at, you're like, “How can this be a Qualified Opportunity Zone?” Because across the street it's all non-qualified, market-rate development.
Michael Episcope:
And the short answer is that when you think about the cities and how much they've changed over the last 12 years, Nashville has changed, there's no city that's gone through more transformation than that city. And if you were in downtown Nashville in 2010, there was maybe 1,500 units. Nobody lived down there. And today it rivals Denver, the downtown of Nashville, and there's not anything left. So, it's really about looking for diamonds in the rough.
Michael Episcope:
But all of our sites, I could say that about. When you look across the street and there's market-rate development going up, and a lot of who we're competing against when we're trying to buy these sites are non-taxable investors. So, pension funds. You can imagine, pension funds don't even want the QOZ benefits. They don't even look at those. And that sort of embodies, they're good sites for development in these cities. And that's what we want to be in.
Michael Episcope:
And the nice thing when we look at it, because they're 10 years, these are growth cities, and they're going to do very, very well over 10 years. And certainly, there's maybe some uncertainty in the environment right now, but over the next kind of 5, 7, 10 years, maybe even 20 years of holding these projects, they're going to do well.
Dr. Jim Dahle:
The other origin investment I've had is Fund III, which has been wrapping up lately over the last year. I think it sounds like the projections are still for it to wrap up in 2023. Is that still your expectation?
Michael Episcope:
Probably 2024. The capital markets just aren't kind right now. We know what's happened to interest rates, capital markets. We have seen transactions come to kind of a standstill in the last six months. We don't expect that to change, with the Fed continuing to raise rates.
Michael Episcope:
And really we need the capital markets to recover before we bring these to market, because we would be a buyer in this environment generally. And if you're a seller, you're just selling it at very distressed prices.
Michael Episcope:
And with one of our projects, Longmont, which is near Boulder, that particular project, we want to establish long-term capital gains. And you don't get long-term capital gains on a ground-up development project unless it's held for a year from stabilization. So, that would be one of the reasons to hold that project.
Dr. Jim Dahle:
How do you expect Fund III to work out compared to projections?
Michael Episcope:
Fund III will deliver right around a 1.6X multiple, which is below projections. And this is one of those instances where I think we made the right decisions, but we had the wrong outcome. And I say that, and you probably remember this, but in February of 2020, it couldn't have been worse timing. We called capital for a ground-up development in Denver, and it was a sister project of one we were already doing at First Creek.
Michael Episcope:
And when COVID hit, we hadn't funded that deal yet. And we pulled out. So, we called, I think it was about $12 or $13 million of capital at that time that would've represented about 8% or 9% of the fund capital. We were a $150 million fund. And we decided to sit on that capital and sort of batten down the ship.
Michael Episcope:
We didn't know what was happening March of 2020. We thought we were right back in 2008. We wanted to hoard cash, we wanted to make sure we could get to the other side, get into a more favorable environment. And so, we didn't do that deal.
Michael Episcope:
And when you think about it, we're talking about a multiple. The denominator is really important. The denominator is the amount of capital you've called. So, we ended up calling all of the capital, and the numerator is essentially the profit that you've made on the capital you've called.
Michael Episcope:
One thing, we called that capital. Well, we never invested it. So that was one thing that hurt us there. The other thing was that had we done that deal, that deal would've easily been a 3X and we would've ended up hitting our returns. And in every fund, you're going to have outliers in a fund that really bring up the overall return.
Michael Episcope:
Going back, I'll just be honest, we wouldn't do anything differently though. I think we did the right thing at that moment in time by saying, “Look, we don't know what's happening here. The global economy shut down.” And we were sitting on money, and I think that as fiduciaries, we had an obligation to pull out of every deal that we are in, and we killed over $250 million deals at that moment in time. So, it underperformed, certainly expectations for that vintage and what we were trying to achieve.
Dr. Jim Dahle:
Now, one of the things I like about the IncomePlus Fund is pretty evergreen. I can reinvest all my earnings in it. I'm not having capital call all the time, I'm not getting capital back all the time. It can just sit there kind of like a standard publicly traded mutual fund, in that respect. Do you anticipate having any other offerings that are evergreen like that moving forward?
Michael Episcope:
Yeah. Jim, the evolution of the IncomePlus Fund is kind of interesting because you were in Fund III and Fund III was our typical buy-fix-sell model. That was a closed-ended fund. And I think over the years, it's always an evolution and you want to improve on your product and you want to make things better. And we're taxable investors. You're taxable investors.
Michael Episcope:
And if you're in these, I actually think that it's broken to put real estate into a private equity fund like that. Because the reason why you want to be in real estate is for cash flow, for appreciation, for depreciation. Especially in multi-family real estate, you're getting government-subsidized debt by being able to go into Fannie and Freddy and borrow from there.
Michael Episcope:
And you're missing all that when you're buying good assets and you're fixing them up, and then you're selling them and you're just paying taxes, you're looking for the next great thing.
Michael Episcope:
And that's what the IncomePlus Fund was meant to do. It wasn't focused on IRR. It was really focused on building multiple. That's my biggest investment as well at Origin. And I love the fact that you can put all your money in, it's diversified instantly that you have the drip that it reinvests. Someday I might turn that off when I need income, but today, I'm leaving that on.
Michael Episcope:
And so, for the taxable investor, what that does is it's more of a buy, fix and hold, and we put the onus on you and the other investors in there to say, look, you can generate the taxable gain when you want, but we're not going to do that for you because real estate, especially in the multifamily space, you can be rest assured that it's going to be worth more in 10 years than it is today.
Michael Episcope:
That's as a result of replacement cost inflation, etc. There's never been a 10-year history where multi-family real estate hasn't made money. And all of our funds have some tax efficiency element built into them because 100% of our investors are taxable.
Michael Episcope:
So, the new credit fund that's coming out, that is also an evergreen fund, and that gives us flexibility to do investments, to do deals that maybe are on the shorter end time horizon that you couldn't do in a closed-ended fund that has a finite investment period.
Michael Episcope:
If we want to do a debt deal that's a year and a half or two years in the making that maybe is kind of a 1, 2, 5, 1, 3 multiple, we can do that because that capital can be recycled within the fund, and then we can continue to focus on multiple and not be beholden to IRR in a closed-ended structure.
Dr. Jim Dahle:
Yeah. All right. So, you've had a few changes at the firm recently that we've had lots of questions about. I thought it'd be best just to get the answers straight from the horse's mouth. Tell us what's going on with this strategic transaction you've done at the firm.
Michael Episcope:
Absolutely. Yeah. I don't think I've ever been called a horse, but I get the analogy. We entered into a strategic relationship with Kovitz, who's a wealth management firm in Chicago and their parent company Focus Financial Partners as well.
Michael Episcope:
David and I went out to the market to seek a financial strategic partner about a year and a half ago. We've been talking to Kovitz for more than a year and a half, and they actually approached us, but at the time we were like, “Look, we're really flattered. We like you guys, it's too early. We believe in our growth story as well.”
Michael Episcope:
And candidly, we wouldn't know what a good deal looks like, even if you gave us one. So, it's up to us. Just like the same way we do in real estate. We want to run a process. We want to understand the true valuation and who else is out there. And we did. And we had a lot of suitors. We had private equity. We had strategics.
Michael Episcope:
And we sat through all those conversations and Kovitz the whole time was definitely the one who we favored. They're an RIA. We know them well, we know their culture. They have real estate experience. We like the fact that even in this transaction, there can be some tax deferral through the public company shares. And we ended up picking them. If I go back, I think it was about September or October of 2022, and then ultimately inking the deal in December of 2022 and announcing it shortly thereafter a week later.
Michael Episcope:
And a couple of things. Number one, Kovitz is an RIA, registered investment advisor. They're true fiduciary. And they're somebody who we feel like we can grow with. And we as a company are independent still. We're not governed by anybody. There's nobody joining the firm, there's nobody leaving the firm. David and I have no interest in going anywhere. And that was really important for us to continue to do business as usual at Origin. And that's really what it is.
Michael Episcope:
I've talked to a lot of investors out there. I would say 90% of them were comfortable with the transaction and sent us congratulations. There were a handful who weren't. And I ended up talking to them and just reassuring them, look, this isn't a cash-out. We're not going anywhere.
Michael Episcope:
We're invested in these funds, QOZ, just like you are. And we're making 10-year bets. And when this transaction finally closes on March 1st, we're going to be making bigger investments in our fund because we talk about skin in the game. Well, when we have more skin, we can put more skin in the game into these various funds. So, I'm excited about this partnership and just about the future of Origin.
Dr. Jim Dahle:
Now, you mentioned this isn't a cash-out thing. This isn't Kovitz buying Michael and David out.
Michael Episcope:
No, no. They have no interest either in running our firm. They understand that David and Michael, the two of us, were intertwined with Origin to a degree that they couldn't. What they're going to help us do, and everybody should want us to do this, is build infrastructure, build a company that can last beyond.
Michael Episcope:
We call this “hit by bus” ability. You always want that within an organization, all your key players, if people get hit by a bus, I know it's terrible to think that, but you have to think about that as an owner. And how do you create redundancy? How do you create an organization that can survive without you?
Michael Episcope:
And our role is really, really important in terms of setting the direction and the tone and the values and everything else in the organization, but we don't do the things that we used to do. I used to be in acquisitions and asset management and accounting and do all that stuff. You don't want me in there. We have way better people in those departments and I've been sort of shipped out.
Michael Episcope:
And I view my role as an owner to constantly find people who can do things better than I can. And so, as we build the company, it's about the sustainability of Origin and moving ahead with sort of the same philosophy around investing and how we treat people, but keeping those core values intact.
Dr. Jim Dahle:
Awesome. Well, we've got a question from one of our listeners that I thought would be pretty appropriate to address together with you. It's not necessarily Origin-specific, but it is private real estate specific. So, let's take a listen to this question from Marissa and then we'll get your two cents on it.
Michael Episcope:
Sure.
Marissa:
Hello, Dr. Dahle and Dr. Spath. My name is Marissa. I've been a CRNA for about 16 years, but I've fairly recently become completely self-employed. I'm out here in rural Ohio.
Marissa:
Since I'm self-employed now, I was curious on your thoughts of what I should do moving from W2 jobs. I'm considering doing a mega Backdoor Roth with my solo 401(k).net. My plan is to make that Roth 401(k) be a self-directed 401(k), and then use that to purchase some private real estate funds.
Marissa:
My investor policy statement calls for about 20% in real estate. Currently, I only have about 10% in real estate, so I need to increase that. 100% of that real estate is in the Vanguard REIT and that's in my husband and I's current Roth IRAs. So, I'm just wondering if this sounds like a reasonable plan. I'm looking at something like the Origin Growth Fund IV to start out.
Marissa:
My questions would be, are the returns that you get from a fund like this worth the extra hassle of doing solo 401(k), a self-directed one, and purchasing the fund? And do the fees from both the self-directed 401(k) and from Origin negate any of the larger returns when comparing it to the Vanguard REITs?
Marissa:
Also, am I only drawn to real estate funds because it's like the new Tulip craze. I'm just wondering if the return is really as great as everyone says or if it's just the new cool thing. I'd love to hear your thoughts. Thank you both for all that you do. It's made a huge impact in my husband and I's financial life. Thank you.
Dr. Jim Dahle:
All right. I think there's really three questions inherent in there. The first one is the merits of private real estate over publicly traded REITs like you'd buy in the Vanguard REIT Index Fund or ETF. I think the second one's kind of specific to Origin. She's obviously a potential investor in Growth Fund IV. Then the last one has to do with what she ought to use that tax-protected space in her self-directed 401(k) for and what investment she might consider for that sort of a real estate investment.
Dr. Jim Dahle:
Why don't we start with the broader question, the case for private real estate over publicly traded REITs? Do you want to talk about that first, Michael?
Michael Episcope:
Yeah, absolutely. Thank you for your question, Marissa. I would say there's three big differences between VNQ and Growth Fund IV. Let me first say that, it's an and. We are big fans of public REITs. Jim, and in fact an IncomePlus Fund, which we just talked about, we allocated a small portion of that fund to public REITs back in October and November because of just what we saw as the dislocation in public REITs and the mispricing in those. So, we also use both and we follow that market.
Michael Episcope:
Now, there's a few big differences between the public REIT market and what we're doing, and I'll compare this to VNQ. But first of all, VNQ is all equity, and that's invested in public REITs, which are generally stabilized assets. And Growth Fund IV is 100% ground-up development and the returns are commensurate with that.
Michael Episcope:
And everything we quote by the way is net. When you're looking at Growth Fund IV over that four-year period, that is going to be a net return. So, when you're thinking about the fees, it's not on top of what we're showing in that fund as well. And so, the expected return, I would think of Growth Fund IV over the next four years is going to be far greater than VNQ. And I have the same choice as you, and my money is actually in Growth Fund IV.
Michael Episcope:
The second point is that in a public REITs, you're going to be subject to market volatility. And real estate values, they just don't fluctuate nearly as much as public REITs do. In the multi-family space, public REITs have come down 35% in the most recent pricing. The reason why we allocated to them is because their price reached 2019 levels.
Michael Episcope:
And when you look at the value of the multi-family real estate and the Sun Belt markets between 2019 and today, in a lot of cases, the value has doubled and yet your public REITs are trading at the same price.
Michael Episcope:
So, there's an inherent mispricing there, that we were taking advantage of that, but that's the volatility and oftentimes the public markets just don't value REITs in an accurate manner. And you will get accurate pricing though in Growth Fund IV because this is a private market and we do a mark-to-market and we go out there and value all of the assets.
Michael Episcope:
And you're certainly not going to have the same fluctuation as you would in the public REITs. Now I will say public REITs over the long run are great directionally, you're just going to have to deal with a lot of those fluctuations.
Michael Episcope:
And the last thing is, VNQ is invested in every single REITs sector, which means you get the good and the bad with that. You've exposure to multifamily industrial data centers, self-storage, cell towers, which have done very well over the last 5, 10, even 20 years.
Michael Episcope:
But you also have exposure to office, retail, hospitality, things that haven't done well. And I think when I look at VNQ over the last 20 years versus our performance, we've done better certainly than VNQ has over that time period. Origin only goes back to 2007, but even if we take it during that time period, we've done better.
Michael Episcope:
So, the point of that is Growth Fund IV is only multi-family, and we are in multi-family because it has produced some of the highest risk-adjusted returns over the last 25 years. COVID has brought a lot of that future growth forward, but we still believe the fundamentals are strong in that particular asset class. So again, I think it's an and. And when you add the private with the public, you're getting basically all of the asset classes, but you're investing in Growth Fund IV for the Alpha. For us to actually build value.
Michael Episcope:
And when you're talking about hassle, I'm assuming you're talking about the documentation, the K-1s, etc, things of that nature. And it is. It's a little more work than being involved in a public REIT. I think that it depends. We've set our minimums at $100,000 in that fund because we think that that's sort of the threshold at which it is worth that extra hassle. Jim, I answered the questions about Growth Fund IV. Were there other questions in there?
Dr. Jim Dahle:
No. The only other thing we probably ought to talk about in her case is that she has this solo 401(k) space. This is a tax-protected space. Any depreciation she got from a ground-up development such as Growth Fund IV isn't going to pass through in tax-protected space.
Dr. Jim Dahle:
So, when I think about real estate investments that I put into a retirement account, it's usually the more tax-inefficient stuff. I'm talking about debt funds like this lending income fund you have coming up. That sort of an investment is the sort of thing I tend to put in retirement accounts.
Dr. Jim Dahle:
I tend to keep my equity real estate outside of my retirement accounts, but if you're an investor where almost everything's in a retirement account, then don't necessarily let the tax tail wag the investment dog. I think any of your funds can be invested in within retirement accounts, correct?
Michael Episcope:
Yeah. But actually now that you bring that up, the challenge with Growth Fund IV is it doesn't have a REIT sub-structure. So you will be subject to UBIT. In the IncomePlus Fund, we actually have a REIT sub-structure that protects investors from that. And I wholly agree with you in terms of the tax analysis. We'd like to think that it is already tax efficient, but we have investors who invest in non-taxable accounts because of what you just said is that's just where happens to be all their money, their investment capital. So, the UBIT, the unrealized business income tax might be an issue.
Michael Episcope:
Marissa, if you want to give us a call, I'm sure you're speaking with somebody already at Origin, we can give you a little bit more information about that issue. So, if you don't have that REIT blocker, it does become a little bit more of a hassle.
Dr. Jim Dahle:
Yeah. I think you may run into an issue as well, Marissa, at least for a year or two in getting the minimum investment into that solo 401(k). If the minimum investment is $100,000 and you can only get up to $66,000 in a single year in the solo 401(k), it's going to be a couple of years before you could meet the minimum investment within that account. So, you got to keep in mind when you add in more moving parts, you got to make sure everything works well together.
Dr. Jim Dahle:
Well, Michael, thank you so much for coming on the podcast today, helping us to answer Marissa's question, and giving some information on the recent changes at Origin.
Dr. Jim Dahle:
For those who are interested in more information about Origin Investments, you can go to whitecoatinvestor.com/origin. You can talk to them at WCICON here coming up. You can also just pick up the phone and give them a call. They're always more than willing to talk to you, answer any questions about the funds. And I found them over the years to be very responsive and easy to get additional information out of.
Dr. Jim Dahle:
They're quite transparent about what they're doing. And if that's a good fit for you and your portfolio, well, please consider Origin Investments, whitecoatinvestor.com/origin. Thanks for your time today, Michael.
Michael Episcope:
Jim, thank you for having me. I really appreciate it.
Dr. Jim Dahle:
All right. I hope you enjoyed that in-depth dive into what's available at Origin Investments as well as some of their recent changes. And I hope we got your question answered, Marissa.
Dr. Jim Dahle:
“Is it worth it?” It’s always one of those questions that's in the eye of the beholder. There is some additional hassle to investing in private real estate. There's minimum investments to deal with, there are PPMs to review. You have illiquidity. You often end up filing in multiple states. There's a lot more hassle there than just buying VNQ in 30 seconds at Schwab or Fidelity or Vanguard brokerages. There's no doubt about it.
Dr. Jim Dahle:
Is it worth it? Obviously, I think there's a good chance it's worth it because I'm putting some money in there. Michael is obviously a big believer but obviously has his own conflicts of interest there. So, it's really one of those questions that only you can decide if it's worth it.
Dr. Jim Dahle:
But it's not like you have to go wholesale in or you have to choose one or the other. As you can see, both Michael and I have chosen both. And you can choose both as well. And I would say most people start out with a dedicated real estate investment, because if you just buy total stock market, you're owning some real estate, right? There are REITs in the overall stock market indices.
Dr. Jim Dahle:
But if you want a dedicated stock market investment, I would say most people do start with VNQ and then, as they become wealthier, they at least consider some of these private real estate investments or even investing directly on their own.
Dr. Jim Dahle:
All right. Let's take our next question off the Speak Pipe. This one's from Joshua.
Joshua:
Hi, Jim. This is Joshua from the West Coast. I'd like to first thank you for everything you do. You have made a tremendous difference in my financial life and I'm so grateful for you.
Joshua:
I am currently lucky enough to be in a position where I have a great income, all my student loans paid off, a growing retirement nest egg, and have been able to save for some larger purchases that are important to me and my family.
Joshua:
On that note, recently, we were involved in a pretty unfortunate financial transaction. We are both avid climbers and skiers and have always dreamed of owning a converted sprinter van for our adventures. We contracted with a company to perform the conversion on our van and paid an $112,000 deposit, which was required by the company to start work on the van.
Joshua:
We feel like we did a basic level of due diligence on the company, and they seemed legitimate. Unfortunately, the company went bankrupt a few months after we put down the deposit prior to starting any work on our van. We recovered our van, but have yet to see any refund of our deposit. And from speaking to the liquidation representatives, it seems as if there are many other customers and creditors in our same position.
Joshua:
From reading about the subject, it seems that customer deposits are treated in bankruptcy court as basically being a creditor to the company. We will essentially be put at the back of the line, and I think it is unlikely that we will see much if any of our money back.
Joshua:
My question then is if there is any way to recoup some of this money through losses deducted from taxes? Would this qualify as an ordinary loss or a capital loss? I've tried to do some reading on the subjects, but it's not quite clear. Thank you so much for your help.
Dr. Jim Dahle:
Well, Joshua, I've got some bad news for you. I don't think this qualifies as a capital loss. You might want to get a second opinion from a CPA on that. It would be cool if it would, at least then you could use it to offset some capital gains down the road, but I don't think it does.
Dr. Jim Dahle:
It doesn't count as a business loss. If you had been planning to rent out this sprinter van, maybe you could count it as that, but it's not really an ordinary loss in that respect. Maybe it's a little bit more of a theft kind of an issue. I'm not sure whether it even counts as that, but that's probably the most likely category it goes into.
Dr. Jim Dahle:
The authority on casualties, disasters, and thefts is IRS publication 547. That publication is very bad news for you. It defines a theft as the taking and removing money or property with the intent to deprive the owner of it. Taking of property must be illegal under the law of the state where it occurred, and it must have been done with criminal intent. You don't need to show a conviction for theft.
Dr. Jim Dahle:
That includes the taking of money or property by the following means, blackmail, burglary, embezzlement, extortion, kidnapping for ransom, larceny, robbery. Taking money or property through fraud or misrepresentation is theft if it is illegal under state or local law.
Dr. Jim Dahle:
So maybe your case would fall under that last line. Here's the bad news. Theft loss deduction limited. For tax years 2018 through 2025 if you are an individual casually and theft loss is a personal use property, are deductible only at the losses are attributable to a federally declared disaster and a federal casualty loss.
Dr. Jim Dahle:
I don't think yours are. I'm really sorry. This sucks. I hope you get something back. Even if you get back a quarter on the dollar, that's better than a kick in the teeth. And I hope you do get something back. But like you, I wouldn't necessarily hold my breath. There's a good chance that they've got creditors senior to you, and this is going to be a complete loss. I'm really sorry.
Dr. Jim Dahle:
The good news is you've got your financial ducks in a row. You will recover from this. And eventually, you will probably get a sprinter van built from a reputable company. But I'll bet you put a whole lot less down in the beginning with that. I'm really sorry. Sometimes you do your best due diligence and it still doesn't work out well.
Dr. Jim Dahle:
All right, here's another question, this one via email. “I purchased a condo in India more than 10 years ago as a second home to be used later during my retirement. I had not rented it out or received any income from this condo while I was owning this property for more than 10 years.
Dr. Jim Dahle:
The money used for this purchase was from my work in the US as a physician. The same condo I have sold in 2022 for the same value according to the Indian currency. Due to the currency depreciation between these two countries, I have lost about 50% of the original value of the US dollars that I invested. My question is, can I show this loss in the US tax return for 2022? I have filed taxes in India after the sale to prove that there was no capital gain for Indian currency.
Dr. Jim Dahle:
Thank you for what you do to help people like me. I've had many financial mistakes since starting my residency in 2003, so one of my colleagues sent me a text in late 2019 to listen to the WCI podcast.”
Dr. Jim Dahle:
Well, thanks for listening. We appreciate it and hope that it has helped you and that you also pay it forward. I'm not an expert on Indian tax law, but as a US investor, if I invested in an Indian property and I lost money on it, I'd claim that loss and I'd use it to offset other income.
Dr. Jim Dahle:
This would be a capital loss. If you invested $100,000 in US dollars and you got back $50,000 in US dollars, that's a $50,000 loss. I don't think anybody cares what the loss was in the other currency. You're paying US taxes so I think we care about US dollars. So I'd claim that, and I don't see why you shouldn't.
Dr. Jim Dahle:
If there's some expert on Indian tax law and they know I'm blowing smoke here, I'm sure I'll hear about it within the next week by email or on the Speak Pipe, and I'll be sure to let you know. But I think you're okay claiming that loss.
Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
Don't forget about that Real Estate Masterclass. If you're interested in learning more about real estate, whitecoatinvestor.com/remasterclass. If you're ready to take our class, you can do that at whitecoatinvestor.com/nohype.
Dr. Jim Dahle:
Thanks for those of you leaving a five-star review for the podcast and telling your friends about it. Our most recent one comes in from Swnsn23378 who calls it, “The Gold Standard. Listen to this. Read his blog. Profit.” Five Stars. Short and sweet. We appreciate that review.
Dr. Jim Dahle:
Keep your head up, shoulders back. You've got this, and we can help. We'll see you next time on the White Coat Investor podcast.
Disclaimer:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
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