Ep. 11 The Attorney's Guide to Wise Real Estate and Equity Ventures

Unlock the secrets to savvy investing with Todd Whatley and me, Ian Weiner, as your guides through the often opaque world of alternative investments. Today's episode is a goldmine for attorneys looking to navigate the complexities of private equity, private credit, and real estate. We shed light on the allure of these opportunities, while also stressing the necessity for transparency and a solid understanding of associated fees, expenses, and liquidity. You'll walk away from this conversation with a clear sense of how to approach investment pitches, and with the knowledge that those managing the investments may just be the ones seeing the greatest returns. 

We then take a deep dive into the nuances of real estate investments, discussing why past performance is no guarantee of future success and the importance of dissecting fee structures and preferred returns. I'll help you grasp the critical differences between being a registered investment advisor versus a broker-dealer and what that means for your investment journey. Whether you're pondering how to leverage real estate for tax benefits in your law practice or considering the advantages of opportunity zones, this episode equips you with the strategies you need to make informed decisions. Plus, keep an ear out for our upcoming guest expert, who will expand on the tantalizing possibilities of opportunity zones for your portfolio.

Transcript

Speaker 1: 0:01

Welcome to the Lawyer's Money Show with your hosts, todd Whatley and Ian Weiner, where finance meets the legal profession. Here we dive deep into the economics of law practice, from managing your firm's finances to optimizing personal wealth strategies for legal professionals. Every episode we bring you insights, strategies and stories from leading experts to help you navigate the financial landscape of the legal world. Stay tuned as we uncover the tools and tactics needed to help lawyers make the right money moves so they can grow their career, manage their practice and optimize their wealth so they can focus on enjoying the life they've worked so hard to build. For more resources, visit us at wwwlawyerstotalplancom.

Speaker 2: 0:45

This is the Lawyer's Money Show, and my name is Todd Watley and I am here with my co-host, ian Weiner. Hey man, hey Todd. Hey, is this going to be a good show today? It'll be all right. I changed it up on you. This time you did change it. So anyway, yes, thank you for joining us today. We are here again to discuss some specific asset of finances with attorneys, and I'm loving doing this because I am learning some. You know, being a part of this business, I've learned some things, but I don't think a day goes by that I spend with Ian that I don't learn something different or unique or a different approach, and so I am glad you're listening, and I think you'll be glad that you're listening after you finish this. So today, ian, you want to talk about I think a good term is alternative investments. Yes, for attorneys.

Speaker 3: 1:42

Yes, okay, we can as with many of these, we can and will do a handful of episodes on this topic, but there are a couple that I want to talk about. So I want to talk about private equity, private credit, real estate and some of the things to be thinking about here, and you know, some of the things to be thinking about here. And the reason I want to talk about this is because what I find is, a lot of times, folks get to a certain level of success and they start to get a lot of, I'll say, opportunities that come across their desk. I see this a lot when I work with doctors and physicians, surgeons those types of folks, folks that tend to have a higher income, and if they're business owners, that's an even bigger target on their back. I'll say it that strongly. And so I want to talk about what to do when you get these opportunities that come across and how to evaluate them a little bit. We'll talk in more detail. This is a service that we can even offer to folks is helping to evaluate some of these and for our private planning clients. This is something that we do, but you're going to have, the more successful you are in your career. You're going to get pitches, proposals, investment opportunities that come across your desk, and what I want to encourage you to do is to have a system for evaluating those, and I'll cut to the chase. The system can be us helping you to evaluate those, and this is an aspect of buying back your time and using your time well, and so you'll see where this comes around.

Speaker 3: 3:24

But I find, a lot of times, some of the worst investments that I review are these private investments that sound really great. They sound really kind of sexy and interesting and exciting. You know, and you hedge fund could be. Hedge fund could be private investments, private credit, private real estate deals, and I have a buddy who he works as a he does these particularly in real estate, and we're going to have him on our other podcast because he's local here and we're going to have a really interesting debate about this.

Speaker 3: 4:02

He doesn't quite know that I'm not going to be as nice to him as he thinks I will, but look, I mean the point of this conversation is about transparency and there's a couple of things that we want to look out for here, and it really comes down to estimating performance fees and expenses and liquidity Estimating performance fees and expenses and liquidity. You may not be seeing these things yet, but I want you to build in your mind almost a checklist of these are the things that I should think about. Ian told me to look out for these things when this happens.

Speaker 3: 4:41

I want to finish up talking about using real estate as a strategic asset. I think attorneys should consider this, especially if they have the ability to buy real estate in their area where they can work, because there are some incredible tax benefits that can be utilized with real estate. If you have a business and there's some magic that we can do there, and I realize that, as we're talking about this, the building that we're in, that your office is in. The people that own it have an extraordinarily high valuation of the business, and it's laughable frankly, and so this is a bigger, longer conversation for you, todd.

Speaker 3: 5:18

So, private investments, private equity, private credit you get to a certain point in your career where you become an accredited investor and it's becoming a more loose definition. But you've got to have a certain asset level or a certain income level and then you get access. I'll say it in a very positive way. You get access to these other investment opportunities that normal folks like the rest of us don't have access to. Now, I say that with a kind of a twist in my voice there, because I want you to.

Speaker 3: 5:51

When you get this pitch from your broker or from the guy at the country club or from whomever, I want you to be skeptical of this. Okay, I'm just telling you. I mean, these are situations where I have access to these. We have, we have a situations where I have access to these. We have a platform where we have access to the top hedge funds in the world if we want. It's extraordinarily rare that we would use them.

Speaker 3: 6:14

Okay, because the fees and expenses are so high and the returns are not where they need to be. Relative to that, the people who make a lot of money in these deals in the private equity deals, private credit deals, hedge fund deals and private real estate deals are the people that run the funds. And I'm hoping when you're listening to this, you're going yeah, of course that makes sense, but this is what you should be thinking about. And so you'll hear things like they'll start talking about the internal rate of return, the projected internal rate of return or the multiple uninvested capital, and so they'll start throwing these metrics at you. Fancy terms, fancy terms and what happens is people are like they want to be sophisticated and so they like, kind of, will go along with it. What a lot of times they don't realize is these are projections.

Speaker 2: 7:09

Also known as guesses.

Speaker 3: 7:10

Yes, or we could even say fiction. Where did I? Oh, jonathan Godwin, one of the CPAs that I work with. We were talking about projecting cash flow for his business clients and I love the way that he said this. He goes we project out cash flow for a year, because anything beyond that is fiction. And I was like I'm stealing that. That is magnificent, but that's what we're looking at, and so you might get a nice pitch deck that has like hey, we've bought and sold these great assets over the last 10 or 15 years and here are the big exits that we had, and here was the internal rate of return and the multiple on the invested equity that we got. And they have to tell the truth there, or they're supposed to, in those presentations.

Speaker 3: 7:55

They don't always frankly, and it's like man, it sounds really good and you lock the money up for five years and then it'll double or triple over that time period Amazing. So at the time of this recording, this is 2024. What I want you to know is that in a lot of markets, real estate as an asset class has been on a bull tear for the last 10, 15 years, and this may be a shock to you, but real estate investments don't always go up. I know there are some, you know don't always go up what I know.

Speaker 3: 8:23

Wow, there are some you know, and sometimes the fees in these can be quite complex, and so I just want you to become aware of this, because we're starting to see some of these that you know were started over the last few years, using, you know, previous returns and previous deals as an example, and they're not panning out as well as the brochure would have thought these projected returns. Some of them are turning out to be fiction.

Speaker 2: 8:52

Truly being fiction.

Speaker 3: 8:53

Yes, Okay, and so it's just. I want you to be aware of these and the things to kind of think about. So the first thing that you want to look at is the internal rate of return that's projected or the multiple uninvested capital that's projected. These are projections. These are not guarantees. The next thing that you'll look at is they will have something. Typically it's going to be called a PREF, or a preferential rate or a preferred return. That's the rate that you, as the investor, you have to get that rate of return before the sponsor or the fund gets their percentage. That could be 6%, 8%, 10%, 12%. That's great. That doesn't mean that that's a guaranteed rate either. So you could have an 8% preferred return on the deal. But if the return does 5%, guess what you're getting Right? Yeah, and yes, the general partner typically in the deal it's a GP they're not going to get anything in that case, unless they're collecting other fees which happens?

Speaker 2: 9:55

I'm sure they're not.

Speaker 3: 9:56

No, they want the investors to be treated first right.

Speaker 3: 10:01

Typically, but not always Some of these if they're real estate deals, they'll charge a fee for an acquisition. If they're real estate deals, they'll charge a fee for an acquisition. They'll charge a fee for 1% of the capital that's in the deal, whether or not they buy anything or do anything. So these can add up to 1%, 2%, 3%. In some cases that's before anything is even bought or any expenses, and so you're like oh man, that gets a little bit higher pretty quickly. And, yeah, the target internal rate of return might be 15%, but by the end of it, by the time everyone's taken their piece of the pie, you might have got 7%, 8% for locking up your money for five to ten years, taking a ton of risk, arguably compared to other investments, risk arguably compared to other investments.

Speaker 3: 10:53

And all I'm trying to tell you is these things are a little bit more sophisticated than they appear to be and in a lot of cases they can sound really good and don't end up bearing out that. Well, now, there's great ones, there are great operators, there are great syndicators. We can find those. That's not a big deal. We do that, but just want folks to understand these things are complicated instruments when you have to be an accredited investor or a qualified purchaser to be able to get in the deal. You need to have a team around you that can help evaluate that deal with you because these are highly sophisticated situations.

Speaker 2: 11:25

Yeah, qualified means they don't sell it to just anyone. You have to have X number of dollars or invested yeah. Qualified means they don't sell it to just anyone. Yes, you have to have X number of dollars or invested yeah, and that allows them to bypass some of the disclosure right, there are some kind of interesting things.

Speaker 3: 11:46

So I had a conversation with a real estate person recently in this and they were saying, hey, in the private placement memorandum document, which is like this is the document that you've got to read and sign to be part of this deal, it said that him, his organization, would become a registered investment advisor if necessary in the future. And that's what he called me to talk to me about, because he knows that we work with one and how that works and basically the way the conversation went I haven't told you this. Basically the way the conversation went was yeah, you probably wouldn't want to do that and he was like huh, like yeah, you probably would want to try to be a broker-dealer instead, because if you're a registered investment advisor and what really, you're registered and you have your funds that you're selling, you have to operate in the best interest of your clients.

Speaker 2: 12:44

God forbid, we can't do that.

Speaker 3: 12:47

Wow, we can't do that. And in some of these situations I don't know that you can allocate this significant amount of money to these. Like if it's your fund. If Todd and I had a fund and that's what our investment company did, we have a absolutely clear as day conflict of interest, because we would be recommending our fund and if our fund had higher fees than other comparable funds, it would be hard to recommend that in the best interest of the client. So what I told them was if I were you, I would not be setting up a registered investment advisor. You would want to work with a broker dealer, because broker dealers do not have a fiduciary standard. They have a suitability standard and so you can line that up with the rest of them and they can pick.

Speaker 3: 13:39

If they need a real estate investment, it has to be a real estate investment that's suitable. That's suitable. Isn't that interesting? Yeah, so I mean these they're. And look, I'm not trying to say that everyone's doing shady business, but it's like measure twice cut once. That's really the idea here is be aware of this and the syndicator does not have to. The syndicator is the person who sets up this fund and is buying whatever this is, unless they are a registered investment advisor and you're a client, they don't have to operate in your best interest. No, and they have to operate in the best interest of their investors, which is them, sure, which is really, really interesting, that's and you know there can be layers of fees and you know percentages that they get above. You know. So if they hit the hurdle rate, maybe the hurdle rate's 10%, anything above that, they split with you 50-50, 20-40. It's interesting. So these are complex situations and there can be cases for them, absolutely. But if this is like your first big investment, please let's have a conversation here.

Speaker 2: 14:44

Please call us. Yes, yeah, you definitely need a second opinion on that. You need someone who knows what those words mean and the underlying. Just like people hire you as an attorney and you can cut through the stuff and get to the meat of it and say, wow, this is not a good idea for you or, yeah, this is great, that's what we do for you. And again, you use your time doing what you can do, what you get paid to do, and pitch this off to us. Let us look at it, let us sit down, analyze it. We will send you back a report or just a phone call and say, hey, our recommendation is this we don't have any skin in the game.

Speaker 3: 15:30

That's what's important.

Speaker 2: 15:31

We work for you. We're going to, like Ian just said, we step into your shoes and say would we do this if we could? And how valuable is that to let you keep practicing law and let us figure this mess out.

Speaker 3: 15:47

And really what that is is that is building a team of other professionals and experts in figure this mess out. And really that's what that is is that is building a team of other professionals and experts in their field that specialize so that, when these opportunities come, you can delegate them to your team and know that your team has a handle. You don't have to worry about it even longer than that. If it's relevant, we'll bring you back into the conversation. Sure, you know, but how freeing is it to know that, whether it's a pitch for one of these, it's another offer of something else, a partnership opportunity, whatever it is that you have a team that can evaluate. It's so much easier than you don't have to duck the calls they're going to send you all this stuff. You go, yeah, I'll forward it to my team and we'll get back to you. It's the easiest way to defuse a salesperson, Just to put it that candidly Talk to my team.

Speaker 3: 16:31

I'll talk to my team. If they think we need to deal with it, we'll let you know. Okay, boom Done. Get back to work that saved you. I mean, what's your effective hourly?

Speaker 1: 16:41

rate.

Speaker 3: 16:41

There it is. That's one simple example. Sure, right, right. But so that's an example of the way that we help folks outside of some of the other things that we've talked about, you know, outside of just, you know, doing investments or taxes or coordinating this other stuff. We will help you evaluate those opportunities that come to you and help you decide whether or not it makes sense to allocate some of your capital there. And in a previous episode we talked about investing in your business, and in a lot of cases, probably, it's going to make more sense to invest in your business even than a really sexy real estate or private credit deal, you know, and private credit's the hot thing right now, in 2024.

Speaker 3: 17:24

I'll say it this way If you are extraordinarily sophisticated like you, like your family office has $100 million, you can make a killing in private credit. You really can. But what private credit is is those are the deals that the regular banks passed on, and so they go to private investors who are more sophisticated and have way more money to lose in certain situations. And so what I want to ask you is because I talked to an attorney recently who they just became an accredited investor, and their broker was like hey, you guys are accredited investors. We can use alternatives. Now here's a cool private credit fund from Blackstone. They're the biggest, baddest one around and it's like oh man, that sounds really cool, it sounds fancy, it sounds kind of sexy and it's like okay.

Speaker 3: 18:15

But what you got to understand is you are a creditor and when you think about who makes the most money in any company, is it the creditors or the investors, the equity holders? It's the equity holders in the long run. And if you had to choose, pick any company, would you rather let's say, let's talk about apple, let's use apple as an example. Would you rather be a creditor of apple or an investor in apple? Creditor, I mean, you're going to get paid and you're going to get paid a fixed amount, okay. Or an investor, you have unlimited upside. Yes, you have unlimited downside.

Speaker 3: 18:57

But here's what I want to ask you if you're concerned about the downside and if you think you wouldn't get paid as an equity investor because the company goes bankrupt, like, yeah, the creditor is going to get paid first in a bankruptcy, but if you think that there's a reasonable chance the company is going to go bankrupt, don't invest in it at all.

Speaker 3: 19:18

It's kind of like it's so obvious, yeah, but people miss it, yeah, and so, like, private credit can be great for family offices, and if your family office has $100 million or more, we should have a conversation because we've got some great opportunities for you. But for most people, that's not their situation. It's like, yeah, they look at a couple years' worth of returns from these funds and they're like, okay, those are really great. Yeah, the next 10 are going to suck and guess what? You're locked up for that period and the guys who are going to make the money in this deal are the ones that were in it at the beginning and, by the way, they're the partners in the fund and they left that out. Sorry, I'm tipping over sacred cows today, but it's important.

Speaker 2: 19:58

What is a typical investment in this $50,000, $100,000?

Speaker 3: 20:02

Typically minimum is $50,000 or $100,000. Okay, yeah, and even then it's like okay cool, make that investment, but you're giving up liquidity in a lot of cases and we need to have an exit strategy for this. We need to know when you're going to get that money back. Sure, because that's a big piece of this. You got to know the other stuff that's going on. So I want to close out and talk about real estate separate from funds, and I think this is important and I just want to tease this as a conversation for later on a little bit more. But if you're a business owner particularly this is who I'm talking to and if you're not, you can still own and operate real estate and it can be an attractive investment. But if you're a business owner and you can own real estate, especially like, let's say, it's the building that your office is in, man, there's some cool stuff that we can do. So you can lease the office to yourself and pay yourself rent. You can hedge against some risks with that. If you're paying yourself rent. You could lower the rent if you needed to, which would be helpful, but you can get some pretty significant tax benefits for that, and so what that looks like is.

Speaker 3: 21:22

Typically, it's depreciating the property and the assets inside the property and what that depreciation does. Depreciation is simply an accounting tool used to lower the value of an asset over time, but we can accelerate that upfront and so you can use that depreciation to offset other income, depreciation to offset other income and this is a cool tool if we use it the right way. So your 37% tax bracket income can be offset with the depreciation from the building that you own. And because you own the building and you have a business associated with it, we get to play by different rules. This can be a great way to support your practice and to diversify a little bit outside of just your practice, while still investing in something that you have some control over.

Speaker 3: 22:11

A lot of attorneys, this ends up being their retirement plan on accident, and that's not bad. You know you still lease the building to whomever you know. But, man, if we go into it knowing that we're doing this and make a plan, this can be a very powerful strategy. And if that business is in an opportunity zone at the time, get a full step up in basis on the depreciation, which doesn't happen at any other time but death, if you own a building in an opportunity zone and do it right. After 10 years that could mean that you get significant tax-free income for a long time and get money out of your business in a very tax-advantaged way. I mean this could be hundreds of thousands of dollars over your business life.

Speaker 2: 23:09

Does every town have those?

Speaker 3: 23:12

Every state does for sure, and I am hoping and if you're active in this, please talk to your congresspeople about this I'm hoping that they expand this program because it's designed to stimulate investment in underdeveloped areas, but, in typical government fashion, some of the things were either designed extremely well or designed well on accident. The current ones go off of the 2010 census, and so areas that were kind of run down or hadn't had a lot of economic activity over the period of 10, 12 years could be great, great assets, and so you can get extra tax benefits for building real estate in those areas?

Speaker 2: 24:01

Yeah, where do you find that information?

Speaker 3: 24:04

So each state will have a list of the tracks that are available. You just type in opportunity zones in your state. You'll probably come up with syndicated opportunity zone funds. Those probably don't make sense, but there's one publicly traded one that's interesting to me right now. But if your office happens to be in an area that is an opportunity zone, these tend to be smaller towns or areas where the median income is lower than a certain percentage of the average in the state we can do some really cool things there, and so that's something that we need to talk about.

Speaker 3: 24:38

So we'll bring on a specialist for that episode. There's a guy that he's probably the most knowledgeable person I know in the country on these and he's he's great. He'll come on and talk about this, but this is a huge opportunity for folks. So I just wanted to tease this. You know, subscribe, share this and and stick with us as we continue to develop these, these ideas for you, and if you own your business and you own the real estate that your business uses, or you're thinking about that, let's have a conversation. Let's determine what's the best strategy to use there, because there could be hundreds of thousands of dollars in tax savings in there if we play this the right way, wow, that's worth a phone call.

Speaker 2: 25:20

Yeah, I think that's worth a phone call and that phone number is 479-485-1911.

Speaker 3: 25:26

Okay.

Speaker 2: 25:26

Ian at LawyersTotalPlancom, lawyerstotalplancom. And Todd at LawyersTotalPlancom. Thank you for joining us today. Please like and or subscribe and share with a friend. If you know an attorney who owns real estate basically anyone, if they're a business owner and they own real estate, but particularly attorneys have them, call us, email us and we would love to talk to them.

Speaker 3: 25:53

Yeah, or if you had an investment opportunity, come across your desk and it looks really good, we'll take a look at it and see if there's anything that just you might not have seen, because you don't see these all the time. Sure.

Speaker 2: 26:07

Good idea. Okay, Thank you all and we'll see you next time.

Speaker 1: 26:14

Thank you for joining us on the Lawyer's Money Show. We hope today's episode has provided you with valuable insights and actionable advice to enhance your financial well-being. For more information, to access show notes or to explore further, please visit our website at wwwlawyerstotalplancom. We look forward to guiding you through your financial journey. You can give us a call at 479-485-1911. Until next time, keep striving for excellence in both law and finance.