Pilot Money Guys

Can I Get Rich With Options Trading?

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You are on a trip and your fellow pilot says they have a new investment strategy that’s getting amazing returns. You are skeptical at first, but after talking about it for the next five hours on the way to LaGuardia you become convinced you must be missing out.

We hear these stories often; we even experience it ourselves! That’s why we are starting a new podcast segment where we discuss some hot topics circulating the pilot lounges, crew vans, and cockpits. We are calling these episodes the Pilot’s Crew Lounge!

In this episode, we are taking on the hot topic of Options Trading. We’ve had a few pilots come to us with questions about Option Trading after hearing about them on trips. We are here to address these questions and give our thoughts!

Are you missing out by not using options? In this podcast we discuss our Top Five Considerations Before Trading Options.

If you have questions, comments, or topics that you would like us to cover, send them to us at

Get your peace of mind back this summer with a comprehensive financial plan! Give us a call at 865-240-2292!

Flight #9: Can I Get Rich Options Trading?

[00:00:30] Rob: [00:00:30] A tip of the cap to you.

Thank you for joining us here at the pilot money guys, podcast. Welcome to the
special edition that we're calling the pilot lounge during these flights or episodes. If you will,
we will talk about the questions we've heard around the system in the pilot lounges. And of
course, I'm your host, Rob Eklund.

[00:00:48] We've got the flight crew today. We've got the godfather certified financial
planner. Charlie Mattingly. Sir.

[00:00:55] Charlie: [00:00:55] Yes, sir. Here, president of for

[00:00:58] Rob: [00:00:58] perfect and [00:01:00] advisor, Mr. Cal bell V Ben Dickinson.
Welcome Ben.

[00:01:04] Ben: [00:01:04] I wish you still have that cowboy cowbell. Oh, the ringtone.

[00:01:07] Rob: [00:01:07] Yeah, but that's

[00:01:09] Ben: [00:01:09] all right. That's

[00:01:09] Rob: [00:01:09] all right.
[00:01:10] Without that certain special occasions, although it is the pilot lounge, so we will
have to get to it.

[00:01:16]Ben: [00:01:16] We might add it in post

[00:01:17] Rob: [00:01:17] production. Do you hear that? If you didn't bend was lazy. Okay.
Exactly. All right. Let's jump into some aviation news. Charlie, we're talking a little history.
What do you got?

[00:01:29] Charlie: [00:01:29] Yeah, so we decided to take the aviation news segment. And
and go historical we were talking before we came on you all about Pardo's push. I said, have
you all heard of Pardo's push? I remember talking about this. We used to do aviation or
excuse me, military history, every Friday night at the squatters, it was cool to go on or some
of our some of our warriors that went before us.

[00:01:48] So Pardo's push is very fascinating. It was I'll just tell the story real quick. Captain

Bob Pardot and wingman captain Earl Amman, I think is how you say that. Eighth tactical fighter wing [00:02:00] out of Thai air force base back in Vietnam, March, 1967, trying to tack a steel mill north Vietnam, just north of Hanoi.

[00:02:08]Both fr Phantoms were hit by anti-aircraft fire. Amman's plane took the worst
damage. His fuel tank had been hit and he quickly lost most of the fuel. So Amman
determined that they did not have enough fuel to make it to the tanker, the KC 1 35 tanker
over Laos. So the options are basically little bailout over hostile territory.

[00:02:28] So Pardot said, Hey, I'm going to push you. I'm going to push you to friendly
territory. So Pardot tried pushing the airplane. Now he's pushing his F for another F four
with his F four 80. So he tried using the drag shoot. Couldn't do that. Basically a mom put his tail hook down and then Pardot put the tail hook on his windscreen.

[00:02:49] And he pushed him that way. So basically then Amman shut down both engines and Pardot began pushing him now, in [00:03:00] reality, he's just minimizing the descent so he can push him far enough into friendly territory. It kinda did the trick basically then. So it gets more interesting.

[00:03:08] First of all, the tail hook would not stay in position for longer than about 15 to 20
seconds. So we had to reposition. Do it again, put the tail, look on his windscreen and push
some more just to reduce that descent, which is pretty incredible. And if you know the
physics of the it's, they call it the rhino or the flying tank, because it is a huge fuselage, huge
body of the airplane.

[00:03:29] And then these tanks, excuse me, the wings that go out are very thin they're not
big for the airplane. So the. So the glide ratio is not good, right? So they're doing some work
there. So he's repositioning every 15, 30 seconds to push the tail hook, to get them to
friendly territory. But Pardot was also struggling with fire and one of his own engines and eventually had to shut it down.

[00:03:50] So in the remaining 10 minutes part, I'll use the last engine to slow the descent of both airplanes. So it was pretty incredible. So they're flying [00:04:00] two airplanes are descending slowly on one engine

[00:04:02] Rob: [00:04:02] in between both of them. Most of the time they have four
between them. Yeah, exactly. So

[00:04:07] Charlie: [00:04:07] Pardot is playing running out of fuel after pushing a Mons plane almost 88 miles.

[00:04:11] Again that's really incredible considering where he would have been, had he not had somebody pushing him, he would have who glided a little bit, but not that much.

So the planes reached a friendly airspace at an altitude of 6,000 feet and left them about two
minutes of flying time where they ejected evaded capture and were picked up by rescue

[00:04:31] So incredible story.

[00:04:32]Rob: [00:04:32] It, we talked about a little bit Charlie, but yeah, it was funny. It was part, it was reprimanded for not saying his own aircraft, but then yeah. Military re-examined and said, oh, actually you deserve the silver star for saving both your butts on.

Absolutely. Yeah.

[00:04:47] As a credible. And they both retired at the prestigious rank of Lieutenant Colonel.
Yeah. That's a big rank. I'm a. That's the team in 20 days. Nice.

[00:04:58] Charlie: [00:04:58] Congratulations,

[00:05:00] [00:04:59] Rob: [00:04:59] man. Thank you. Thank you. July 4th is my retirement date. Oh, nice. So you're going to expect presence from Uben for sure. July

[00:05:09] Charlie: [00:05:09] 4th, you'll be retiring as a Lieutenant, as a reserve, as a
Lieutenant Colonel reservist, correct?

[00:05:16] Yeah.

[00:05:17] Ben: [00:05:17] Robbie better sill better. She'll be on your game. You're still notthere yet. Can tell him those chickens.

[00:05:24] Rob: [00:05:24] Yeah, good point.

[00:05:27] Ben: [00:05:27] Good point. They're watching. I'm watching you like a Hawk.
Anything. I see.

[00:05:33] Rob: [00:05:33] Good call. All right. Thanks Charlotte. That's good. Any other aviation news you guys want to talk about?

[00:05:42] Ben: [00:05:42] Man. There's not much. It's been boring out there. I want some
more elevation. Come on. I'll just lines.

[00:05:47] Rob: [00:05:47] Give it to us. The Southwest boring is good. Boring is good.
Southwest is buying 30 plus max seven aircraft. So it's 7 37, 700. They're buying more of

[00:06:00] those. I think it would have over 60 next year.

[00:06:02] So that's good news, but a little bit other news, we got the electronic vertical
takeoff and landing system, apparently American and Virgin at least are buying some of these IE Vittol electronic, vertical takeoff and landing aircraft that will be coming out at some point. So that'll be interesting to see how that develops.

[00:06:23] So we talked supersonic last week and now we've got V. Wow. Heck yeah. Apple
is crazy world. Crazy world. Yeah. Yeah. All right. Any any

[00:06:32] Charlie: [00:06:32] talk at Southwest about different non Boeing airplanes?

[00:06:37] Rob: [00:06:37] Not that I've heard. Cause

[00:06:39]Charlie: [00:06:39] That was a big, hot topic about a year ago. Yeah. Have you
talked to Gary about that?

[00:06:43] Gary talks about it. Yeah. Because that's, this time last year I was like, holy cow,
you have one type of airplane. We know it. Wasn't this time last year. It was two years ago
when we had the max issues. So yeah, one type of airplane and they're having trouble.

[00:07:00] So that was difficult.

[00:07:02] Rob: [00:07:02] Yeah. Yeah. I don't know.

[00:07:04] I think right now we're they're focused on that, that max seven and what that's
going to do, there is rumors who knows what they're true or not of maybe some eat tops
out of Denver. I don't know. Woo. Nice. That'd be interesting.

[00:07:17] Charlie: [00:07:17] Don't forget about the Dreamliner rumors there at Southwest.

[00:07:20] I'm starting through dream liners coming to Southwest fall 20, 22.

[00:07:26] Rob: [00:07:26] Your words not mine.

[00:07:30] Excellent. All right. That's all we have for aviation news. Quick commercial here,
summers here, planes are full. Things are hopping while you enjoy the sun and fun. Or
overtime flying, whatever. Nice. Let us make sure your retirement plan is on track. Give us a
call or shoot us an email to discuss your financial needs.

[00:07:48] We are fiduciary fee only advisors, and you can reach us at 8 6 5 2 4 0 2 2 9 2 or
good old electronic mail. Do you know what that is? [00:08:00] Even electronic mail.

[00:08:03] Charlie: [00:08:03] You have to go to the post

[00:08:04] Rob: [00:08:04] office for that. Anyways. That's
And if you want to reach Ben Dickinson directly, call them at (865) 290-7523.

[00:08:18] Again, that's 8 6 5 2 9 0 7 5 2 3. That's enough of

[00:08:22] Charlie: [00:08:22] that, please call.

[00:08:24] Ben: [00:08:24] I need some more. I need some friends.

[00:08:29] Rob: [00:08:29] I know who I'm calling late Friday. Excellent. Let's jump in. We've
got options. I know we talked a little bit about. The pilot lounge would cover options,
covered calls and how to buy an airplane and the tax implications of these a little bit too
much to cover on one podcast. And we're just going to cover the options and covered calls.

[00:08:45] And we're going to get to the airplane and tax implications next week. Charlie,what do you got?

[00:08:50] Charlie: [00:08:50] Absolutely. We've got some top five considerations before
considering wait a second. That's redundant considerations before I said a lot of things here.

[00:09:00] Top five considerations before. Trading options. So yeah.
[00:09:04] Number one, what is your goal? Are you trying to make money? You're trying to
minimize risk. What are you trying to achieve here? Just like our now famous Bitcoin
discussion, it's like we don't just buy an investment to be buying it. We have to know why
we want it. Secondly, is it something, I think this is this has to be true.
[00:09:22] It has to interest you because you need to spend some time. Studying this stuff,
understanding it. Options can be boring and confusing. So you better enjoy it before you
jump in there. There's other ways to achieve the same results. So that's number two,
number three. Are there more profitable alternatives for you?
[00:09:37] In other words, how do you spend your time? Is there an, is there a better way to
spend your time maybe so profitable and maybe monetarily, maybe in quality of life, that's
number three, number four. Do you have the time. Maybe we just talked to that. I don't
know. Maybe that's a, maybe that's a sub-bullet of number three, nonetheless.
[00:09:54] It is. It does take a lot of time, and you've got to take that into consideration. If
you're taking time away from your normal [00:10:00] job, then there's a cost to that.
Number five. What other options do you have for your free time? Other hobbies, you might
enjoy spending time with your family instead of investing in options.
[00:10:10] But we'll talk about today. Investing in options, pros and cons, nuts and bolts. Yes,
that's true.
[00:10:15] Ben: [00:10:15] It's exciting. It's this has been a hot topic on on tip
[00:10:20] Rob: [00:10:20] tic-tac.
[00:10:22] Ben: [00:10:22] Yeah, absolutely. People are making millions from what I've seen some of these videos. According to these anonymous
[00:10:29] Charlie: [00:10:29] videos
[00:10:30] Rob: [00:10:30] and they've only lost 10 millions, so yeah,
[00:10:32] Ben: [00:10:32] exactly.
[00:10:33]They don't put this on important, it's not really that, that math doesn't really need
to work. Yeah.
[00:10:37] Yeah.
[00:10:39] Rob: [00:10:39] That's funny. We've got Obviously, we're going to explain a little
bit about options. We're not going to get too in the weeds. What are we not going to get
into? Oh my gosh. I wouldn't even some of those fancy
[00:10:48] Charlie: [00:10:48] terms.
[00:10:49] I want that straddles long call butterfly spreads are my favorite. Yeah. Not to be
confused with peanut butter spread.
[00:10:58]Rob: [00:10:58] No. That's different
[00:10:58] Charlie: [00:10:58] long [00:11:00] strangle, married put, but. But call spread. No,
that's not the butt call spread. It's the bull call spread. Sorry, I misread my notes there. I was
pretty close, protective collar rights and unwinds.
[00:11:13] So we're not going to, luckily we're not going to talk about any of those that,
especially the buck calls. Those are not fun to talk about.
[00:11:20] Rob: [00:11:20] Optimism.
[00:11:21] Ben: [00:11:21] Call me all the time, Charlie. We should talk about
[00:11:23] Rob: [00:11:23] this. That's a good point.
[00:11:26] Charlie: [00:11:26] We've got to
[00:11:26] Rob: [00:11:26] keep it professional today. Call you at eight six five two nine zero
[00:11:33] Yeah. All right. Excellent. We're not going to cover that. We're just going to keep
it high level, if you will, or low level or whatever, we're not gonna get into the details. Okay. I
love that. Yeah. So what is an option? It's a derivative means derived from something else
for our purposes today.
[00:11:48] We're just going to talk about stock options, where the options derive their value
from stock. Typically one option is worth. 100 shares. So that's the first part I [00:12:00]
want you to know. We get a little bit of the history here. Options are very old. They're not
brand new. They've been around quite awhile.
[00:12:05] They were even, yeah. During the stock market crash of 1720, and yes, you heard
me right. 1720, not 1929. Whoa. So back then too, people would go into a contract and
that's all an option is a contract between two parties. And they would enter it in the contract
or one person would write the contract, given the buyer the option to buy or sell the stock if
it hit the exercise or strike price on or before the exercise date.
[00:12:35] So it was just a contract between two people. That's it? That was back then.
Obviously if one person didn't have the shares or couldn't buy the shares, when the exercise
price was hit on the exercise date or before. Then that would be a problem. So in 1973,
Chicago board options exchange came about and they were able to solve some of these
[00:12:54] And now it's called CBO for you traders out there. , CBO came about helped solve
some of those problems. And if someone [00:13:00] wanted to write an option, Now they
needed to show that they had the shares and this exchange would make sure of this so that
someone would just, wasn't saying, oh, I've got the chairs when they didn't and take off to
London or something.
[00:13:11] And they, or they have money in a margin account. So they say, okay, you've got
money in a margin account. If the stock goes, whatever way we can put more in. And that's
what the margin call is, where you'd have to put more money in. I don't ever want to be a
part of those. I don't think there are any fun for.
[00:13:28]Some of the folks I've talked to who have been a part of those, you have to put
more money in and it can get ugly. But in any case, you get to a point where you're writing
options and they're called naked options or naked calls and naked puts. And all this means is
you don't know the shares.
[00:13:44]With the exchange you're on that margin account where you have that money
away so that they can go in there and trade on your behalf. If the stock goes the wrong way.
Opposite of being naked as being covered, which leads us to cover calls. Charlie, what do
you [00:14:00] got on to cover calls?
[00:14:02] Charlie: [00:14:02] They're not naked, so that's the good part.
[00:14:04] That's good. So options are like we say, can get very complicated as you've
already learned. Very difficult to follow along some of these, but the most basic. When I
was studying and learning about options they said is , you could do covered calls with your
[00:14:21] In other words, it's conservative enough to be able to do that. So that's the one
that people maybe are most familiar with and are able to do if they wanted to not a
recommendation if they want to do that in their 401k they can, in most 401k is like in an, in
a in a brokerage window of some sort.
[00:14:39] Of course in a taxable brokerage account at Schwab or E-Trade or fidelity, you can
do any of these things if you want to, or there's other brokerages out there that facilitate
options specifically. They specialize in that. However, again, we're going to focus on what is
a covered call.
[00:14:53] So let's pretend for a minute that, that I own a stock now. Now most people buy
covered calls [00:15:00] or write covered calls, the lingo there, like Robin said, okay. In a
market where they believe it may be flat, the stock market, the stock may go up in price a
little bit.
[00:15:09] It may go down a little bit, but flat that's when they might do a covered call, but
basically it can add income to your investment. So it's essentially like an income producing
strategy, maybe like a dividend, you could compare it to. So just real quick explanation, let's
say I own a stock ABC stock it's at $20 a share.
[00:15:29] So I own that stock and I say, Hey, I'm going to produce a little extra income. And
I'm going to sell a call option. I'm going to sell that contract. Someone's going to pay me to
do that. So I take that premium that I get paid by selling that a call option. I still own the
stock. Let's pretend then that the stock goes down.
[00:15:48]If the stock goes down, I still own the stock and I've got money for that call option
that I wrote to someone or sold to someone. So that's one scenario. Now let's say that I did
the same thing. I sold the call [00:16:00] option. And the stock goes up well, I've got the
premium from the call option that I sold stock goes up to the exercise price or strike price,
someone else exercises that option I am required to now sell my stock.
[00:16:14] And so it's gone. So in other words, let's say I own that stock at $20, ABC stock at
$20, I wrote a call. I received a premium, it went up to $25. It was called away because I had
to sell. So I made 20 excuse me, $5 on the increase in the stock. And I made a little bit of
premium on the selling of the covered call.
[00:16:35] So that is the strategy in a nutshell. And there's a lot of services out there that
offer that as in, I'll be honest with it, they offer it as some magic solutions and magic potion
to increase your 401k and make your life wonderful.
[00:16:50] Rob: [00:16:50] Yeah. And it's interesting why they might do that.
[00:16:54] You start talking about a lot of, Robin hood and, almost all the brokerages
nowadays are doing zero [00:17:00] commission trades for you. And a lot of people get
confused and they think, oh I'm not getting charged anything. Everything's great. And yes,
that is true. However, the brokers are still making a lot of money, especially when it comes
to option trading.
[00:17:13] So on a normal equity trade, a broker might make 17 cents portrayed off of
what's called. Payment for order flow. So that's where they get a kickback from the market
maker, the person actually doing the trade there, they get paid to channel the trade to that
person. And you'll never guess who actually pioneered profit for excuse me, payment for
order flow.
[00:17:39]Any guesses there? Bernie made off burning. Whoa. He planned here or helped
pioneer payment for order flow. So the broker gets a kickback. Yeah. You're not paying
anything, but they are getting paid off that bid ask spread is pretty big compared to a regular
[00:18:00] trade when you're talking about option trading and that market maker is able to
offer those guys as much as 58 cents.
[00:18:05] So 17 cents. Compared to 58 cents, those are just rough numbers there, but
they're making a lot of money off of option trading, which is why you'll see some companies
Robinhood, even TD Ameritrade, other companies wanting and pushing option trading
because they are getting a heck of a lot of money.
[00:18:22] I think one of the quarters, Robinhood and TD Ameritrade, there were upwards of
400 million during the quarter. So it's a wow, it's a lot of money out there and it makes sense
why they're pushing it because they get. Again, they get more money off of it. Off of those
zero commission trades there.
[00:18:39] They're getting quite a bit of money. Now, quick note here, fidelity doesn't accept
payment for order flow. And why do you care about that? You're like I don't care except that
if someone's getting paid to channel your trade to a certain market maker, that means you
may not get the most favorable [00:19:00] terms.
[00:19:00]If they're getting. If they're getting paid to send it to, Maydoff, then they're going
to send it to him to get paid. So anyways enough about that what'd you have,
[00:19:10] Ben: [00:19:10] yeah, that's a shame. I was just going to say. Yeah. Like you said,
with these. Different brokers out there that are now pushing options more.
[00:19:17]Options trading has exploded in popularity in the last 10, 15 years. And it keeps
increasing. I think I saw recently it was like 20 million options are traded a day now, and so
talk about a moneymaker, but then also talk about the popularity increase. Like it is a
serious thing and now.
[00:19:35] Again. I actually see it on social media, people talking about this as if it's, instant
way to, to make a bunch of cash. And so yeah, if you want to know these, the ins and outs,
but gut.
[00:19:47] Rob: [00:19:47] Yeah, absolutely. If you want to get into any of option trading,
just try to search for any podcast on opposite trading.
[00:19:53] You'll get a bazillion different ones out there because people are pushing it like
crazy. [00:20:00] Not to say you can't make money. You just better know the risks. And to
that point, some of the things, some of the things we talk about here at leading edge, if
you're going to do it, and you really, like Charlie said, you want to get into it.
[00:20:12] You're really interested in it. You have the time you have the, it's a hobby for you
or whatever, then you're going to want to put no more than at least what we advocate here
is no more than 5% of your portfolio in that you don't want to put too much because you
might lose it for one. If you're going to do it, make sure you define your risk and know your
[00:20:34] It can take years to get comfortable with it. That's something you're going to have
to make sure you have the time to get. Get good at it. It's not something you're just going to
pick up one day and say, oh, I'm going to, I'm going to be a great option straighter and make
a ton of money tomorrow.
[00:20:46] The one thing I will read here, which is pretty interesting is one of the quotes, the,
one of the quotes from TD Ameritrade that they make you read before you can even start
trading options.
[00:20:55] As opposites are not suitable for all investors. As the special risks inherent to
option [00:21:00] trading may expose investors to potentially rapid and substantial losses.
And it goes on to say a whole bunch of other things. Option trading privilege privileges in
your account are subject to TJ, TD Ameritrade review and approval.
[00:21:13] Not all accounts owners will qualify. So lots of different things out there. Charlie.
What else? What else do you got on options? Yeah.
[00:21:22] Charlie: [00:21:22] Yeah. It's just it's just, I don't know the way you think about
some of these things, a lot of times as investors, we're sold stuff, we're sold strategies.
[00:21:29] We're sold annuity, sometimes nothing wrong with annuities. If they fit your
situation, nothing wrong with options. If they fit your situations, don't get sold something
though. In other words, let's say someone's trying to sell me on call options. Call options are
great, cover calls, fine, income producing the stock gets called away, fine, whatever it can be
beneficial, but as a, as an accumulator right now in my life or any, let's say one of our pilots
still flying, do I really need to [00:22:00] produce some income?
[00:22:01] And my 401k, people are like of course I do. Maybe not because I really want to
keep those investments and I want them to grow. For the long-term, so what is it that I
really need because sometimes executing this fancy complex call strategy sounds really cool,
but is it really what I want?
[00:22:19] And I probably could do better if I, go, just go long on equities, period. And so
that's, I'm not trying to produce income until I'm in retirement. I really want capital
appreciation. So that's one of the things and the other thing is that, we talk about the risk of
options and there are some risks, but most options strategies they're designed to reduce
your risk, buying a put option, it's designed to provide a floor to a stock that you might own.
[00:22:47]To minimize losses, or like I said, covered calls, designed to produce a little bit of
extra income. So most of the time, these things, are risky mitigation strategies that large
insurance companies are using. Large [00:23:00] institutions are using hedge fund managers
are using an individual investor.
[00:23:04] I'm not so sure that we often understand exactly what options are for when we're
investing in them. In other words, most of our most investors will say, I just want to make
more money. Options probably aren't your best bet. Then you don't just go along the stock,
or as many oxygen you can.
[00:23:19] So anyway it's interesting how sometimes things are sold to us when we don't
really know exactly the purpose of the particular investment, we're just attracted to it
because of the complexity.
[00:23:29] Rob: [00:23:29] Yeah, that's a good point and note on that. If you're buying call
options or you're a call option holder, and you're not entitled to the quarterly dividends,
every other person is, that, that has, that just regularly buys that stock regardless of when
they purchase, when you purchase that option.
[00:23:47] So something to keep in mind, sometimes you don't capture those dividends,
which dividends aren't the end all be all, but they are, they do help in certain cases. So
something to keep in mind. Yeah.
[00:23:57] Ben: [00:23:57] Yeah. So I heard something that, . [00:24:00] And again, this is
the pilot lounge topic, cause this is something that we hear.
[00:24:04]That people are talking about and whether it be in the cockpit or in the pilot
lounge, but there's a lot of different people out there actually trying to sell what they call
like the, basically the signals of, Hey here's what options I'm looking at. Here's what options
you should go and buy.
[00:24:20] And then, you pay a subscription fee. They give you a, Hey here's three options a
week that you go and buy and here's the returns I'm making. It's crazy. That's just something
to look out for because I've seen that a lot going around. I've heard a few of our pilots tell us
this and that people are doing it and people are asked telling them about it.
[00:24:38]I would definitely do a lot of more research before you go ahead and subscribed
to something like that, because a lot of scams happen that way. And it seems to be
increasing in popularity. I don't know if you all have seen any of that advertised or anything,
but it's definitely something that you should be .
[00:24:53] Cautious of, if you see
[00:24:55] Rob: [00:24:55] it. Yeah. It's been floating around for sure. One of the pilots I flew
with [00:25:00] not too long ago, he's doing it and, I think he's trying to make sure he's doing
it the right way and protecting himself. But just a side note here, if you're riding or selling a
naked option, You get paid for writing that contract, but your losses can be all the way, you
could lose it all.
[00:25:15] So knowing your risk again, foot stomp in that know your risk, know your
downside as you're getting into this. And if you don't know that, then you probably shouldn't
be doing it.
[00:25:25] Charlie: [00:25:25] Yeah, exactly. And like we talked about before, there's a
couple other alternatives too. Like individual options contracts. So there's a lot of mutual
funds out there that, that take these strategies and wrap them into a mutual fund.
[00:25:39] In fact, there's an ETF. So we'll talk about it in a minute too. But so what I did is I
just Googled, the top 10 mutual funds that, that execute option strategies. So I've got the
top 10 . I put them in our software. And Rob, I was showing you this before we got on the
call here.
[00:25:55] And I was like, we'll look at the risk return profile of these investments in
[00:26:00] the expenses. We're all averaging. They probably average about 1.5. In fact, I
might be able to take a look right now, but it is significant, so here's an example for you on a
portfolio. You typically average a 0.16%.
[00:26:15]It's what our portfolios, average expense ratio. So for every a hundred thousand
dollars, that's $161. So the expense ratio of these option based mutual funds is an average
of almost 1.5%, which is $1,400 annually versus 161. So you've got huge expenses and oh, by
the way, let's take a look, is it worth it to have those expenses?

[00:26:37]No, it's not worth it because up until last fall, The intermediate term treasury was outperforming these top 10 together. So I took the top 10 option based mutual funds. I
equally split them, about 8.3%. And their performance was was just about on par with a
government [00:27:00] treasury. Wow. And so not only are you taking more risks, you're
paying more expenses, but I could have been the same thing with immediate term.

[00:27:06] Yeah. So I'll be honest with you. I don't get it. I don't get, because one, an investor doesn't usually a mutual fund like this for a timing strategy. If I'm going to buy a mutual fund like this, I'm going to let those managers execute their strategy. That's the whole point. And that's why you pay more expenses.
[00:27:23] But they've not really done what they said they were going to do. So anyway, I'm just very fascinated at why and what place. Cause that's what we think about Rob and Ben is like as investment advisors. Where, what role does this play in my portfolio? Does it provide diversification? Does it add value? When times are tough, does it help me?

[00:27:44]Let me tell you about in 2020, the options based mutual fund portfolio that I
created returned 3.6, 2%. Intermediate term government treasury 7.5%. Okay. If you'd just
done a 70, 30 portfolio, you probably [00:28:00] would've gotten mid-teens. So what role, a lot of people say you gotta have alternatives in your portfolio.

[00:28:05] Wow. I don't get it. So I'm not sure, you know what I'm missing here. But I don't think I want them in my portfolio.
[00:28:12] Ben: [00:28:12] It's like people it, there's something about the complexity of it
and, Hey, we're doing all these options training. It may sound great. Hey, we're doing all this look, look at all this complex stuff we're doing it sounds maybe good on the surface, but really, yeah, like you look at the numbers, you look at the fees involved, you look at the risk profile, you look at what are their returns been, and you start to realize that just because things are really complex and these portfolio managers are really active. Doesn't necessarily mean that's what's best for you.

[00:28:40] Charlie: [00:28:40] Yeah. And that's a behavioral thing as investors. We just can't believe sometimes that it can really be that simple to own a diversified portfolio.

[00:28:49]Government treasuries provide the best diversification and in difficult times, at
least they've shown to do that in, in, in history anyway. So we, it's just our natural tendency
to look for something [00:29:00] really complex. Somebody has got to have the secret potion out there and listen to these names, equity call a premium, a tactical core fund, enhanced equity, income, strategic program, risk emergent.

[00:29:11]It's that sounds pretty good but it looks when you look, dig a little deeper, it
doesn't look so, so good. So anyway, so sometimes simple wins out in these types of

[00:29:20] Ben: [00:29:20] It's boring just to own a fund with a bunch of companies in there, but then you look deeper and you realize, these companies that like it and are just a regular portfolio, that's not doing these complex options.

[00:29:31]These are companies and businesses that are doing complex things behind the scenes, trying to make more money for their company and grow. So really it's not boring. It just, it may sound more boring than that. I want that tactical, a whatever you called it. That sounds pretty cool, but really it's just a S a smoke and mirrors from what it seems like,
obviously on the, in those tendencies.

[00:29:52]But is there a place for options?
[00:29:56] Rob: [00:29:56] Yeah. Sure. Sure. I think if you're going to be [00:30:00] trading stocks, individual stocks, and you're scratching that itch again with a very small portion of your portfolio and you're trading stocks, I can see where you're going to head some of those positions. Yeah. To protect yourself from the downside.

[00:30:12] And that's where I see if you're going to be doing that. Then, that's one thing. Or again, if you're really adamant and you're really You really want to get into this, riding those covered calls and doing some of those things with a small portion of your portfolio. I think it could be interesting too.

[00:30:26] And it's got an appeal to it, to some

[00:30:27] Charlie: [00:30:27] people. Yeah., and the way we make decisions is interesting. If

I just had my speculative money out, and I'm ready to go do some different things and just
learn about investing. I'd have no problem doing covered calls.

[00:30:39] I have no problem. With put options buying put options, they create that floor for you, and they're better than doing like a limit order. limit order on a single stock or a put option is better than that because it gives you more flexibility. We won't go into too many details, but think about it this way.

[00:30:53]If the choices of my hobbies and my off time are like to do put call, put options
and cover calls

[00:31:00] versus say, buying a horse. I think you're way way better, better off doing covered calls. Okay. Let me just put that out there because you don't have to feed
them. You don't have to call the vet. You just have to spend some time and if you enjoy it,
great do it. But like you said, Rob, just understand that it's speculative unless you've unless you're doing something little more conservative, again, cover calls, fairly conservative, just to understand which kind of options strategy you're doing.

[00:31:25] Rob: [00:31:25] Yeah. Good stuff. Yeah.

[00:31:28]Charlie: [00:31:28] Hey, do we have time to talk about the the last ETF?
[00:31:32] Rob: [00:31:32] I, yeah, absolutely. I think so.

[00:31:34] Charlie: [00:31:34] I think so. Like you said, Ben, the options are used by our
clients, if they buy and, in fact to fixed indexed annuities and that's, that sounds like a dirty word to some of us, but there are some times when fixed index annuities are appropriate, just depends.

[00:31:50]But those types of annuities use option strategies. They use out of the money calls in the money calls and they create. This floor for [00:32:00] investors and they create a cap.

Now all of that is very confusing. We won't go into detail on how those constructed, but
sometimes they're appropriate.

[00:32:07] Sometimes they can serve a purpose and that's why insurance companies use them. So that's one example. There's another example, and this is a relatively new thing in there called buffer ETFs. You can look these up online. They're called innovator ETFs and they came out a few years ago. And basically what they do is they're that fender fixed indexed annuity that I just described where there's a floor created, and then there's a ceiling created.

[00:32:30]. So a couple of years ago, these buffer ETFs came out and they've since multiplied like crazy, they have all kinds of them right now.

[00:32:37]. They don't talk about how exactly how they construct them. But nonetheless, I
could buy one of these buffer ETFs it's in an ETF wrapper, which makes it much more

[00:32:46] I know what to expect. I say because there still are some things to think about. I know the expenses they're less than an insurance product. The fact they're about 0.8% is the expense ratio, which is expensive for an ETF. There's no doubt about it, but there's a lot of moving parts going on here.

[00:33:00] [00:33:00] So I will tell you that last year during the COVID downturn this was an alternative to getting out of the market completely. It's not a panacea. If I, when I describe it to you right now, it will sound like a panacea. Okay. So in other words, I can buy an ETF. That's called a buffer ETF S and P 500 is what I'm tracking.

[00:33:19] It protects me for the first 9%. Decline. In other words, the stock, the market goes down S and P goes down 8%. I don't go down at all. So that sounds pretty good. Now, if I go to, if it goes down 20, then I'm going to go down 10 ish. The difference. Okay. So there is not complete protection, but they have other ones that can protect you almost 30% on the downside.

[00:33:39] That sounds great. But the upside is also kept much, much lower. Ah, so see how
these get complicated really quickly. There's the rub. So now is it an alternative? And again, going back to, how does this fit in my port polio last year, we thought, Hey, should we use these or not? And in fact, we tried [00:34:00] to talk to, if a client was having difficulty maintaining their plan in the market, they wanted to go to all cash, which we thought was a bad move.

[00:34:09] Then buffer ETS, we thought were a good solution. Because it provided
somewhat of a predictable outcome. In other words, at the end of this one-year period,
they're all based off of one year, because that's when the options expire, you know what
you're going to be limited to on the downside and the upside.

[00:34:27] So that provided some people, some certainty in a time where uncertainty was rampant. I talked to one person last year and they said, Hey, I think we're headed for the great depression. And I couldn't disagree with him. I had nothing to come back to cause
anything could have happened. That sounds silly.

[00:34:40] Maybe looking back now, but at the time it was pretty scary, a lot of uncertainty.

Now they're not a stock replacement. And maybe they're not a bond replacement, maybe
they're a hybrid, so you gotta think about how you're using them in your portfolio.

[00:34:52] There's pros and cons to everything. I'll go over the couple of negatives real quick.

They're very expensive. Like I said, 0.8% is a very high expense ratio for [00:35:00] ETFs, but you can understand why, because they have options, et cetera, going on inside these ETFs, they're likely to underperform during strong bull markets.

[00:35:09] Now last year, there was such a quick recovery hindsight being what it is.
Probably would have been better off not going into buffer ETFs. However, remember what I
said, it was a stretch, it was an option to go in into cash. We stayed in the market. We've got
some return, not as much as the S and P gives it recovered quickly and strongly stronger
than we ever thought it would.

[00:35:29]So there, there are these ETFs that have these options strategies, quite frankly,
they're going to underperform in the longterm. That's just what you're gonna have to, put up with they're complicated. They have a lot of moving parts. So again, anytime you use an
options, strategies, you need to know what you're doing and know what to expect, because there's nothing worse as an investor investing in something thinking I'm going to have this
result in the exact opposite happens.
[00:35:53] So I think that's one of the big things to consider.

[00:35:57] Rob: [00:35:57] Yeah, absolutely. That is a great [00:36:00] example. Charlie and to piggyback on that, that's one of the reasons why we are so adamant that we're getting your risk analysis, right? Because we want to know when COVID hits, when you know, the 2008 financial crisis hits, we want to know what your risk tolerance is.

[00:36:16] Sometimes you can't know until it happens. And I get that. But if you can, and if
you can simulate it and share flat or whatever you're going to do to see when COVID hits, I'm okay with it going down, 30 to 40%, and I'll, I'm going to be just fine because I'm a long-term investor or I've got my risk.

[00:36:32] I know I've got bonds. , and I'll be able to get through this rebalancing and those
kinds of things. So I don't need to get into to these options that we're talking about right
now, even the ETFs. If you've got your risk analysis nailed, you don't need to get into that.

[00:36:46] If you don't or if you start getting cold feet, that's where an advisor can really
help you out and get you through those hard times. All right. Anything else?
[00:36:58] Charlie: [00:36:58] I think that's about it. Like I said, if you're going to [00:37:00] do horses, the options are better.
[00:37:06] That's it? In a nutshell, I just got my little girl four chickens, because like I said, last time our chickens got eaten by someone besides me or something besides me. I don't like it.

We've got some new chickens. We're going to do some goats. But we're not going to do
horses. As long as I can stiff arm that as long as I have a say in my own family, Which may
not [00:37:26] Rob: [00:37:26] be very long.
[00:37:28] Yeah. Good luck. We're all counting on you. I'll

[00:37:32] Charlie: [00:37:32] talk a bit. Let's talk a big talk. Yeah, my daughter, this
weekend, we got chickens. Soon as we got chicken. So daddy, did you say I could get horses when I'm 12? No. 15. I said 15 and before it was 20 she's already talked me down. She's already anchored me down five years.

[00:37:47] It was 20 before
[00:37:50] Rob: [00:37:50] hires you hire her now. That's awesome. Good stuff. We've
arrived at our final destination. This I [00:38:00] believe is flight nine, episode nine. Thanks for joining this year. Pilot money guys podcast. If you have any questions. You would like us to answer anything on the show.
[00:38:09] Shoot me or Charlie and email Robert leading edge or Any of us throw us an email. We'll try to cover it. Leave you with a couple of Charlie Munger quotes. The big
money is not in buying or selling, but in the waiting a second one, here is a lot of people with high IQs, terrible investors, because they've got terrible temperaments.

[00:38:35] That's it, if you like, what you heard, please hit that subscribe button so we can reach more people. And remember, as Emerson said, the world makes way for those who know where they're going. So plan accordingly from all of us here at leading edge. Thanks for
stopping [00:38:52] Charlie: [00:38:52] we're out.

[00:38:55] Voice Actor: [00:38:55] Thank you for listening to the pilot money guys podcast.
[00:38:58] It has been our pleasure to [00:39:00] share some information with you today.

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Charlie Retirement

Don’t spend a lot, to save a little on taxes!

Tax Aversion Bias

By Charlie Mattingly

We often talk about behavioral biases, and we are constantly trying to better understand behavioral finance and behavioral economics to make better decisions. We think it’s fascinating because it can have a huge impact on our investment returns, saving habits and therefore our success in retirement.

Another one of the things that it affects tremendously, believe it or not, is taxes. So how does paying taxes drive our behavior?

First, let me talk about behavioral biases. What do we mean by behavioral biases? Certain parts of our brains are wired to make snap decisions to help save our lives, and sometimes this quick thinking really does save your life. What I’m referring to is the limbic system. This system is the emotional center of the brain that takes over under stress. The limbic system is the part of the brain involved in our behavioral and emotional responses, especially as it pertains to behaviors we need for survival, feeding, reproduction, caring for our young, and fight or flight responses.

This system has no doubt led to our advancement and survival as a species, however it often fails when tasked with evaluating certain complex scenarios we face in modern society, especially those that are highly emotional such as our finances.

So, what I wanted to do is address some of the weird things we do as taxpayers to avoid paying taxes.

Of course, there’s nothing wrong with minimizing your taxes. We don’t want to pay one cent more than we’re legally required to, on the other hand, we don’t want to reduce our net worth just to minimize taxes. Unfortunately, that’s what happens a lot of the time.

My father-in-law owns a lake house here in the Knoxville, Tennessee area. The house is paid off and it has appreciated significantly in value over the years. It’s a beautiful place, but they don’t want it anymore. It’s a lot of work for them to properly maintain. So, maybe selling the property would bring them more peace of mind and less stress in retirement. However, he won’t sell it. The primary reason is because he’ll have to pay taxes.

What other ways has the tax aversion bias changed our behavior? has a great article on some of these examples of tax aversion bias.

Have you been to Charleston, South Carolina and noticed that the buildings are narrow and close together? That design started in Amsterdam and was copied around the world. The buildings were intentionally built to be narrow because… you guessed it, taxes. In the 16th century, buildings in Amsterdam were taxed by the width of the property’s façade and how much street frontage they took up.

Real Estate Investing
Another fascinating example from Paris, is the design of the Mansard-style roofs. Architects actually created rooms above the roof line because taxes were levied on the number of floors below the roof line.
Mansard Roof
One of these behaviors that I struggle with and think about a lot is farm equipment. I’d like to buy a new tractor and I know a lot of you probably would too. Tractors are fun! That’s why towards the end of the year I hear folks say, “Hey, I need to reduce my taxes, so I’m going to go buy a tractor. Maybe even a bigger tractor!”
Again, if you need the tractor or farm equipment, that’s a different story, but don’t do things simply because it’s a tax savings. As my business partner, Kevin Gormley will tell you that’s the “tax tail wagging the dog”.

In summary, taxes are a very emotional issue, and this can affect our behaviors. Sometimes we let our emotions make decisions for us, such as the example where I’m not going to pay taxes no matter what or as little as possible no matter what. Just be aware that even though its painful, sometimes it might be smarter to just pay that tax.
Thank you for reading. Please reach out to us anytime., My email is We’d love to hear from you!

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 09/06/2019 and are subject to change at any time due to the changes in market or economic conditions.

Pilot Money Guys

Should you invest in Real Estate Now?

Stitcher Button

Flight #8 – Should you invest in Real Estate Now?

Podcast Transcription:


 I’m excited. Real estate rentals. This, this is a topic that comes up all the time. Yeah.  

Charlie: Yeah, it is. It’s awesome. Right? Can be you see my sign on the back? I’ve got here. Can you all read that? I love real estate. I line through it. Yeah. It has an extra, for some reason. Anyway, I I’ve been a real estate investor, all my adult life. 

I can’t remember where the first time, not really intentionally, you know how it is Rob, you move around in the military, you end up keeping a house that you lived in, you end up renting. So that just happened to me a lot. It seemed like, and most of the time it worked out okay. Sometimes I made a little money and sometimes I lost some money. 

So we’ll talk about those today. Yeah. Yeah, exactly. But we’ll, we’re going to talk, you know, maybe if I could do my three point thing here, like we’re taught to do Rob and the air force three, three talking points, you know, the investment, you know, what is the in real investment? Most people don’t. Properly analyze this investment. 

So then it’s like poker or blackjack. You walk away from the poker table, the blackjack table. And you’re like, man, I really, I think I actually made money or there, I really believe that I made money. You know, I came in with a thousand. I only left with 200, but you know, I made money somehow. And you know, we, we kind of lie to ourselves a little bit. 

So that’s the blackjack mentality that happens in real estate. So we’re going to talk about how to properly analyze real estate investing so that you can make a great decision on whether it’s right for you or not. We’re going to talk about some tax pros and cons, and then we’re going to talk a couple other items, like maybe a LLC trusts. 

Self-directed kind of stuff in, uh, although I’ll lump those three topics into one point I had to only have three, so that’s okay. So we did that. You liked that very  

Rob: quick. All right. Yeah.  

Charlie: So what do you all think? I mean, I didn’t fall asleep on you. Yeah. You weren’t paying attention. Do you all want to, uh, What do you think about real estate before I jump into this diatribe that I have and do all this talking? 

Yeah. Give me some inputs. Yeah. And  


Rob: the millennial perspective?  

Ben: Well, I mean, you get on Tik TOK or Twitter or Instagram. I mean, you hit  

Charlie: on Tik TOK. I know. 

Ben: I, uh, I downloaded it and then I deleted it within maybe 10 minutes of down there, but I do, I do see a lot of videos and, and a lot of them are about how it seems like it’s millennial focus or something, but about how, you know, it’s a second stream of income, you can get, get rich, quick doing real estate somehow. 

Um, you know, here’s all the tips and tricks to real estate investing and it’s exciting. I mean, it’s definitely something that I’ve always been interested in and, um, I want to participate more and do some rental. Yeah. Uh, uh, or some real estate investing. But, um, it, as far as the millennial perspective, it seems like it’s just a thing that right now people are just talking about like crazy, whether it’s, uh, with Airbnb being a huge, uh, uh, another driving factor of, of real estate in general. 

But, uh,  

Rob: you know, well, the market’s been such still great since, uh, 2008 there, right. Or 2010 issue. The market’s just been hot. So. No wonder everyone’s jumping on, but it won’t always be hot. I can  

Charlie: guarantee you that that’s right. Yeah. This is like our last podcast where we talked about the recency bias or at least I think we did because you know, prices are high right now. 

Everybody’s making money on real estate. Yeah. But like you said, Robin’s not always that way. So we got to look at the entire body of evidence and not just the last couple of years, because we know that’s a, that’s a fallacy that leads us down the wrong path. So we’re going to today, we’re going to talk about what are the real estate like big picture. 

Should you do it? Should you not? So, um, like I told you guys before we got on here, don’t let me get too negative. Okay. Cause I just, I just came out of a bad relationship rental relationship, but we’ll talk more about that in a minute, but there’s some really good things. Let me talk, start off with some good stuff. 

Okay. You get, uh, you get the advantage of leverage. Most likely, most people were going to buy rental real estate using leverage. Um, you also have an advantage. In rental real estate where you do not have the market. And that’s what I call the informational advantage, you know, in the stock market, we really don’t have. 

In fact, there’s a strong argument that says no one has an informational advantage unless it’s inside information, which is illegal. But if you’re doing rental real estate investment in your local community, you have the ability. I have an information advantage. You could know that market. In fact, Rob, you will know the Colorado Springs market better than I know the Maryville, Tennessee or Knoxville, Tennessee market. 

You will know that, you know, you will have the information advantage, right? So you can profit off of that. And, and, and, oh, by the way, if you’re willing to get in there, if you’re handy, if you, if you can do some, you know, sweat equity, there’s an advantage there. Uh, I can’t do anything, so I gotta pay somebody else to do all that stuff and I don’t want to do anything. 

So those things all go into this decision, but it can be a great thing. Also, it’s a diversifier, you know, it’s a different type of asset, which we love. Um, and there’s a huge behavioral advantage and here’s what it is. You’re not going to see the daily price of your rental real estate fluctuate wildly like you do on the stock market. 

In fact, you know, unless you, you know, even if we have 2008, the great recession, you’re not going to see. I said, unless we have that, because you did see those values decline drastically, but, uh, except for extreme scenarios like that, you’re really not going to see the daily fluctuation. You’re going to treat it, you know, like a hate, just an income producing thing. 

I know it’s probably going to average three to four to 5%, you know, um, uh, appreciation and that’s it. So there’s no, I’ve got to sell it. It’s down. I got to sell it. It’s up. There’s no, there there’s none of that stress. What do you all think so far?  

Rob: Yeah. Yeah. Uh, I think, uh, you know, it can be good. It can be good. 

I’ve got obviously being in the military, we’ve got tons of buddies who’ve done really well. Uh, lots of buddies who haven’t done so well. And, and I would, you know, just my small sliver of the pie seems about half and half. Yeah. Uh, on those who’ve done pretty well. And those who haven’t the one thing that, that I know you’re going to get into is, is the time and the pain that, uh, having the rental comes up becomes  

Charlie: yep. 

Cost to that.  

Ben: Yeah. And just that, that PA that extra passive income I think is, is just a really nice, you know, freeing feeling that you’d get from, from having real estate, you know, just a little something else that, again, even if it’s just basically, you’re, you’re only getting the appreciation on the, the real estate itself, just to having that extra monthly stream of income and letting it pay for itself. 

I think that’s kind of, uh, something that’s interesting to me and,  

Rob: yeah, and it’s a diversifier, like you said, the only, the only thing that comes to mind is, you know, the, you have, when you have that leverage and you have the opportunity to have that upside, you have risk. And sometimes that risk you can’t see coming, uh, you know, your roof and all the different maintenance costs that come with having a house and having renters. 

Who’s, you know, they’re living in your property. It’s not theirs. They don’t treat it like you would. So you’re going to obviously have some more costs with that. Yeah,  

Charlie: you’re right. And like we said, the leverage is a benefit, but it can also be a disadvantage 2008. Again, the great recession is people were over leveraged. 

Big time. People were not putting any money down. They were doing interest only loans. So we learned the hard way there. What happens when we all do that? A lot more to that story. We won’t go into that, but let’s talk about some numbers. So I kind of did a case study all, just we can talk to it and we can address a lot of these questions that people have and the reality of their investment return or how to analyze it. 

So let me start with the first rule of thumb, the 1% rule, and, and you all may have heard of this. Your monthly rent should be equal to, or greater than 1% of the total purchase price of the investment. For example, I buy a rental real estate investment property for 250,000. My monthly rent needs to be 2,500. 

Now I’ll be honest with you and in our area and maybe different in the Springs and in Denver. That’s a lot. I think that’s very high. I think that would be really tough to achieve. And I looked at some properties in this area before we got on the call here. That’s really challenging. In fact, I think it’d be closer to 0.6 to 0.7% versus one. 

Nonetheless, that’s going to vary greatly and it’s not a disqualifier. Um, yeah, if you, if you don’t meet the 1% rule, there’s a lot of variables there. Uh, the other rules of thumb, another really challenging one. If you want to make money real estate, here’s, here’s the three things you got to do sounds early elementary, but it’s really challenging. 

You got to make money when you buy, you’ve got to make money when you rent and you got to make money when you sell again, those sound like no brainers, especially the last one. I’ve got to make money when I sell. But a lot of times people do not make money when they buy. Because they overpay and just like stocks, we do not like to overpay for stocks because that means your future expected return is lower. 

That’s a big deal. So you better find a deal. You better be good at negotiating, or you better have some sweat equity that goes into that. And then making money when you rent is a big one, you know, you all know, and Rob, you fly with a lot of folks. Like I did that say, Hey, I’m trying to lose money on my real estate property. 

Oh, I’m like, why? Well, I want to pay less taxes. Well, don’t ever lose money on anything. You know, that doesn’t, that just doesn’t even pass the, um, the sniff test there. The common sense says, but we hate taxes so much, again, another behavioral bias that we addressed last time. So I’ve talked a lot there. You, I’m going to be quiet for a second, but those are some rules of thumbs. 

They get people going. Those are  

Rob: super important. And even, you know, we talked about, you know, you’re looking at the numbers and there’s so many terms that so many numbers you want to be looking at. That you want to be familiar with and really get into the, you know, first rule or one of the rules of real estate investing is cap rate, cap rate, cap rate, which is the capitalization rate. 

What are you, what are you doing with, uh, you know, how are you making that money? Which is, you know, basically it’s your net operating income divided by the purchase price. It’s just one number out there to help you, you know, figure out if this, this real estate is better than that real estate. Uh, but there’s a lot of terms out there. 

A lot of different, uh, markers that you should look at when you’re looking at this kind of stuff. I think the other one that I would definitely throw out there as the cash on cash return, which is your annual cashflow divided by the initial cash out of pocket. You’re going to want to know those numbers. 

If you are, you know, set on getting into this and again, just realize you do have, if you’re leveraging, you have the opportunity to make some pretty good money on these. If you’re in the right market, can you guarantee you’re in the right market? That I don’t think anyone can guarantee, but you can obviously have some informational advantage there. 

Charlie: Right? Bob and Ben, I know you’ve got something to say, but as soon as here in a minute, we’re going to talk about those ROI numbers and how to calculate them and what they should look like. And we’re going to go into more detail, but Ben, what you got.  

Ben: Yeah. Um, I just think, um, when you’re going into real estate, especially getting started in it, um, you know, I, I just think you need to find somebody that’s got some experience and maybe partner with them to, to get really into it. 

Um, you know, there’s so many different factors whether it’s buying the house that, you know, is, is the property going to be kept up? Is it, uh, you know, is the roof going to leak? Is it you’re going to have to replace the foundation? Do you have to get a good inspector? You have to know the area. No, no. What rent prices are typically got and then know how to work the bank as well and how to get the best rates you can. 

And if I’m going into a, uh, uh, real estate investment, I’m, I’m going to want some, somebody that knows what they’re doing to go in with me and partner with just because I don’t trust myself in making that right. That necessarily the best decision. I think that’s where that overconfidence bias may come in play. 

You may say, Hey, I know my neighborhood so well, I know this and that, but. You know, you got to think there’s so many real estate investors out there that are ready to make moves on houses. Why maybe haven’t they bought the house yet? So that’s another thing that I try to think about, think about what could go wrong, um, as well, but partnering up with somebody with experience. 

Rob: And when you partner with someone, you know, sometimes people partner with realtors and that can be good. That can be bad. Depends who you’re working with. But I almost think, you know, the realtor sometimes is you’re paying 7% to sell a house. Um, yeah. And I kind of think of that. I’m wondering what you guys think about this, but I kind of think about that is, is a bit ask, you know, spread, if you will, almost, you have to cover 7%, you know, off the top when you’re selling, just to kind of get back to even, I don’t know what you guys think. 

That’s a good analogy on that.  

Charlie: Yeah, I think it’s, I think your point is valid in that. It’s a cost, you know, when you, and when you partner with anyone, especially in real estate, because what value are they bringing to the table? You know, if I just partner with you, Ben, for knowledge, how do I pay you? 

What’s it worth? And how much does it cut into my profit? You know, so those are tough in the real estate world. Those are very difficult things to quantify. So I’ve seen real estate partnerships really struggle because what value is it that you’re bringing to the table to me? How do I pay that? And does it, does it reduce that hurdle rate, Rob, that you talked about my return on my investment because it will, the real estate fees will do it. 

In fact, let’s go ahead and transition into the numbers into my, into my supposed case study here and the RA and Ben, I’m going to pile on what you said there. You got to know, you know, you talked about knowing the financing, knowing this and knowing that, but what I learned as a real estate, uh, landlord, and not everybody. 

It was going to be a landlord. You don’t have to be a landlord to be a real estate investor, but most will, if you hold on to it, I learned how to deal with renters. I mean, I went into the deal like, oh, here’s a contract. I pulled it off the web. And, uh, see, uh, when the rent’s due, not really, really, I mean, you gotta, you gotta really be involved. 

You gotta really pay attention, detail, be directive, all those things up front. And I guess we call it operations, but you need to think really thoroughly and do your homework about the expectations you’re setting for renters. Otherwise you’re going to get burned, you know, and, and again, depending on who you’re renting to, you better be ready to either a, be a parent along with an investor, or, you know, if it’s a, maybe a higher income and then maybe less so, but you’re going to pay for that too in a different way. 

So let’s get into the numbers. Um, first of all, Rob, you nailed it. Before we got on this is just a risk return profile decision. You know, again, these questions do I use leverage? Do I use all cash? Let’s talk about it. Well, I’m going to use leverage if I need a higher return on investment, but I might use all cash. 

First of all, if I have it. You know, it’s not easy to throw down a couple hundred thousand on a property, but I do get a higher, you know, I get a higher, a clear, a higher cashflow. I get more cashflow subdued. So it’s just like a stock. Do I want appreciation? Or am I interested in cashflow? Most? Let’s just say most airline pilots, most professionals working now, they don’t need extra cash flow. 

In fact, they’re trying to minimize that because it’s just going to be taxed at the highest marginal tax rate, right? A 32% probably for, for a lot of the folks we’re talking to. And so maybe I don’t need cashflow. Maybe I just want to break even I want to appreciation. So that’s going to dictate what kind of property you buy. 

You better buy. If that’s what you want, you better buy a quality property in a quality neighborhood. You’re going to pay for that. You know, uh, if you want higher cashflow, Ben, like you were talking about, well, then you do what I did and I kind of do this by default. That’s my excuse. I didn’t do this intentionally, but I own two, I own two trailers. 

I had Charlie’s trailer park. That’s what I called it. I was a mayor of the trailer park. Yeah, that’s right. It was exciting. Uh, we’ll share some stories in a minute about the time that I had to evict of seven cats out of one of the residences while the kids were watching and crying and screaming for her mother, why is this man taking our cats? 

But anyway, uh, uh, allowed them to have one cat and they had seven, you know what the heck it’s the way it goes. But anyway, so that is a high yield bond because I didn’t pay much for those. I didn’t pay much for those properties, but they, I could charge a higher rent. And so my yield was phenomenal. 

However, you know, it was painful. You going to tell, I ain’t gonna lie to you. It was painful. Um, People threatened to burn them down and you know, all kinds of stuff. So that’s some good stuff. Good fun. Um, so that’s what you need to think about and Rob, you nailed it. Risk return. What do you want? What kind of property are you handy? 

Well, then go get something and fix it up. I flew with one, one pilot. He actually built his own rental properties, which I thought was genius because he was good at that. He could build them specifically to rent, which means they had concrete floors, very durable walls. And so, you know, that that was a pretty, a profitable thing. 

I believe. What do you have?  

Rob: Uh, just on something like that, you just want to make sure you have the right insurance. If you’re building a property, obviously you’re insured. If things don’t go quite the way you want them to, because we have professional builders, you guys, I don’t know if you guys have been a new house, I’ve been new houses where these professional builders to get in and they’ve messed all kinds of things up. 

It’s building the house. Isn’t exactly. It’s not rocket science, but it’s not exactly easy either. Yeah.  

Charlie: Yeah. That’s right. So think about, you know, when you’re looking at rental, what do we want? So in our case study today, we’ve got a $250,000 property, three bedroom, two bath, 30 year mortgage. Oh, by the way, as a, as a non-owner occupied property, you’re going to pay a higher mortgage interest rate. 

In fact, the going rate right now for a second property rental property is 3.5 to 3.75. And you could probably get a whole point lower than that. If you’re owner occupied. You’re also going to put more money down. You’re probably, I don’t think you can get away with putting less than 20% down on, on a rental investment property. 

That’s just my latest, uh, look at it. I don’t know. Have you seen  

Rob: anything different? The only exception there is, if you were in the military or whatever you were, you moved in, you owned it, bought it occupied and then left obviously,  

Charlie: right. That’s a good way to do it. Yeah. Um, you know, I looked around at our local area and I’m telling you $250,000 property getting more than about $1,700 a month in rent is a stretch. 

Uh, and that’s only 0.7% that doesn’t even make meat, our 1% rule. So there we go right off the bat. We’re a little bit behind, but you know, that’s not the only factor. Um, my income rental income, um, what’s a 1750 times 12. It’s about 20 grand. If I’m not mistaken. Cause somebody do that math. I did a different kind of math on that one. 

Great math anyway. Um, so, so basically we’ve got some income, you know, 18 to 20 grand. We’ve put 40,000 down. And so man, we’ve got some good income and let’s see what our mortgage would be about. I think I put mortgage in here somewhere. It’s about 1200 bucks a month. No, 11 1122 a month. Yeah. So yeah. So once you get your, your more, you know, your, uh, income minus your mortgage, you’ve got a pretty good rate of return there. 

In fact, you’re probably approaching the double digits or more, you know, I didn’t do the exact math, but let’s just say we’re in the, in the low teens. Okay. However, here’s where it gets. Here’s where you got to do the real analysis. Like you’re talking about Rob and the return on investment. If you’re having someone manage it 10%, it’s $180 a month. 

If you’re, uh, you will be paying some maintenance costs, you know, we’ve replaced roofs, air conditioners, septic systems, somebody decided to flush Snuffleupagus Snuffaluffagus. Down the toilet stopped up the entire septic system and in the rain, you know, we’re out there digging up a separate system and then I had to put them in a hotel. 

So there are some expenses you’re going to have. Yeah. And, um, so be ready for that. Again, usually a couple, like 2% might be a rule of thumb to use. You’re going to have some vacancy. You got to plan for that. You’re not going to be rented a hundred percent of the time. You know, you’re even in a good scenario, you’re going to miss a month or two a year, even just in the turnover. 

You know, if you’re getting one renter out and one end, you need a few weeks to get it ready. So that’s at a minimum. What is your time worth? What are you spending on these rental properties? Now I will tell you if you want to pass the real estate professional test, which we’ll talk about in a minute, you better be at least spending 15 hours a week. 

That is one of several tests. So if you’re a high income earner, I don’t know somebody can do that. Math for us. Let’s say you’re, you know, the average CFO makes, I don’t know what, 130, 140 bucks an hour average captain makes 240 bucks an hour. That’s pretty doggone expensive. Now. I’m not saying you’re going to do that because most people can’t. 

And so therefore you’re not going to be a real estate investment pro professional, but nonetheless, let’s say you spend four hours a month. And that’s probably about what I did. You know, there’s some bookkeeping involved. Even if you use a management company, you’re going to get calls. You got to make some decisions. 

You got to go visit, you got to do stuff. Well, that’s about 800 bucks a month and I just kind of averaged, you know, some hourly internet airline rates there. Yeah. So now we’re, we’re, we’re, you know, if you’re a rental real estate investor, you better be tallying up these numbers that I’m talking about it and I’m not done. 

I’m only halfway done. So now we have property taxes, usually about one to two, actually closer to 2% of the value. In this case, 375 bucks a month. Insurance, homeowners, insurance, uh, that’s going to be paid in escrow, probably about a hundred bucks a month. Mortgage interest. You’re paying interest on that investment you made and there’s turnover fees. 

If you change renters, you got to clean the place you got to clean carpets. You might have to paint you better average, you better be ready to spend about a thousand bucks every time you change renters. So put that in the formula. Okay, so now we’re going to talk in general. What is my average ROI after taxes, insurance, and expenses. 

You’re probably in the high single digits. You know, which is not bad, right? I mean, 8%, let’s say I get 8%. That’s not bad. However, the only reason I’m there is because I use leverage, right? One of the only reasons is, um, um, I’m leveraging and that might even get me to the low teens, mid teens if I use leverage. 

But think about that. We’re not, you know, when we go think about the investment, my alternative is to go into the stock market and buy real estate investment trust without leverage. And that’s been one of the highest, uh, performing asset classes. The last 20 years, probably high single low double digits. 

If I, you know, I didn’t look that up before the, before the show, but so now again, we’ve got to come, we’ve got to analyze it appropriately with all the numbers I’ve just talked about and we’ve got to compare it to alternatives appropriately. Okay. I’ve talked to,  

Rob: yeah. So just to summarize that, it sounds like Charlie, uh, to wrap it up a little bit on, on this part, If you’re not using leverage, your returns can be okay again, you’re buying, you know, maybe one, two, three houses, and those risks, you know, associated with buying one house. 

If anything happens to it, if the soil is bad, if the water’s bad, all these different things that can happen, the roof goes back, you know, you can be out some pretty good cash with that. If you’re in it. And this is just all non leverage. If you leverage, you can get into some pretty good money. Again, the risk is higher because you’re leveraging, but the return on investment can be a little bit, a little bit more. 

Charlie: Yeah. Yeah. And I’ll tell you, Rob personally, I would not even do it without leverage. You know, it’s, it’s, it’s a lot of work. It’s some headaches. Some people are really good at real estate investing, you know, there’s no doubt. And like I said, I don’t want to get too negative on this, but I just want to be fair on how you analyze this. 

But some people are really good at all those things we’ve talked about so far. They know how to manage renters. They know how to buy, they know how to sell, you know, they’re really good at it. They treat it like a real business. We have clients that treat it like a real business. They do a great job and they probably have, uh, returns, um, because they’re leveraging of mid to low teens, you know, maybe even low twenties, but that I would not mess with this. 

If, if I didn’t get at least a double G in fact, my hurdle rate, if I was going to do it would be at least 12%. Otherwise I’m going to put my money in a REIT, um, you know, publicly traded REIT real estate investment trust, and I’m going to just. Let it go. I don’t have to do anything, pay anybody or worry about somebody sticking their stuffed animal down the toilet, you know,  

Rob: and a lot of this too can be, uh, you know, there’s some information, uh, bias that you have, I guess, and in a lot of it’s luck, where do you live? 

If you live in California, you can be doing really well. But if you live in Ohio where I live, maybe not so well, you  

Charlie: know, places, and even within those, even within cities, there’s these micro markets, you know, even in a certain part of town, you can really be profitable, you know? Uh, but  

Ben: yeah, and on that Charlotte, like I was going to say like the, the, the, there’s some units in a building right next to me that they’re selling for $500,000, two bedroom. 

That’s going, you know, the rent is, uh, maybe $1,800 a month. So, I mean, talk about the 1% rule that’s blown out of the water down here. So. You just did it definitely depends on what area you. Yeah.  

Charlie: Yeah. Yeah. And I, you know, let me summarize that return on investment equation, because I just talked about the things you better be thinking about, but here’s the equation, you know, it’s annual return, you know, in other words, the rent that you take in minus your expenses, including your mortgage payment and all the expenses I just listed, uh, divided by your total investment, which is the cost of your property. 

So that’s just the formula, you know, and again, we just talked about some rules of thumbs, some things to think about, but make sure to fairly analyze your real estate investment and treat it like a business and do not try to lose money on purpose. A lot of S and I’m going to throw the CPAs under the bus. 

Kevin is a CPA and, uh, I’m going to throw them on the bus. Cause they say, Hey, you need to go out and buy our property because you pay too much taxes. It’s like, holy cow, that’s a terrible reason to buy a property, never buy at any investment. It’s strictly due to taxes. So anyway, we’ve seen that. I promise you and, uh, Real estate can be great, but don’t do it just for taxes, which probably is a good transition. 

Rob: There will always be that Sarah alive, uh, skid way back with Steve Martin. He’s the doctor. He’s like, I recommend you. You do some bleeding, bleeding already. Exactly. Who’s the doctor here. That’s  

Charlie: right. That’s what this is for bleeding is a good analogy.  

Rob: Sometimes, you know, I hate to, I guess I watch too much TV, but, uh, the other thing that this reminds me of is the back to the future. 

Am I going to be back to the future too? You guys remember that where he goes away and he comes back, uh, and the image might be an alternate universe, but the nice cush neighborhood, the neighborhood to live in all of a sudden. It’s not the nice neighborhood. And I think we’ve seen that in a lot of, a lot of cities around the world. 

So just because you do think the neighborhood is nice, you have a risk that, that, you know, some kind of regulation, uh, some different politics gets involved, get involved and all of a sudden it’s not the nice thing. So you  

Charlie: have that risk. Yeah. Just be ready. I think too, you know, people say it’s good. 

Passive income. Well, I don’t know. That’s debatable even though it’s maybe classify that as by the IRS. Um, Hey, I’ll tell you what, let’s talk taxes. It’s always fun to talk taxes, taxes, and real estate because that’s why people get into it. Right? Hey, your CPA says, I should, you know, I’m getting paying too much taxes. 

I need to buy some property. Well, let’s talk about that. So the biggest advantage tax advantage for real estate is depreciation. And so depreciation is exciting, right? We get to it’s, it almost creates, you know, re uh, real estate properties. Almost can be like an investment inside of an IRA because the depreciation allows me to defer my either gain or I can even defer some income. 

Right. So that means, right. It’s almost like tax free growth, right? Well, that is the one advantage as really pretty good. But, but you gotta be careful because once you start making $150,000 or more, you lose the ability to deduct passive losses against your active income. Okay. So now if I make a 500 bucks a month in rent, uh, then I can deduct that rental income. 

I can deduct my expenses and depreciation against that income, right? Because that’s passive income, uh, that I’m, that I’m getting rid of with my expenses from the rental property and appreciation. However, let me transition into this one. This is what most people want. I want to deduct my rental expenses and appreciation against my airline income. 

No, no, that’s a no-no that’s not going to happen. And let me explain the rule. For real estate. This is right out of IRS publication, nine 25. If you’re going to do rental real estate, read that publication and get familiar with it. So here’s the deal. If you make less than 150,000, then you can take up to $25,000 and let me correct that a little bit. 

It starts to phase out at a hundred. So the phase out starts at a hundred thousand of adjusted gross income, and it ends at one 50. So you make less than a hundred thousand. You’re able to take 20 up to $25,000 in losses in your real estate and deduct them against your passive income. Excuse me, against your active income, your airline income, your whatever you’re doing. 

That’s tremendous. However, above a hundred thousand, it starts to phase out above 150,000. That’s gone. Now, if you have losses, you can roll over those losses. There’s a more technical word for rollover losses. I can’t think of it right now. Kevin would know. Yeah, you can roll them over and definitely into the future. 

So that one day, when you make less than that limit, you can then take the losses. So what a lot of people try to do and way before I move on, are y’all tracking with me so far. I’ll try to throw out some tax stuff there and it gets convoluted at times. Am I being clear so far? Yeah. So the crystal crystal that’s right. 

Um, so that’s the holy grail, right? People want to deduct their rental law. That’s why I want to lose money, man. I got to lose money so I can do it. I pay less taxes on my airline income. Well, it’s not going to happen pretty much unless you’re making less than a hundred grand. Now you can roll over those losses indefinitely in the future. 

When one day you might make less than then you can use them. So how can I, is there a way to possibly take these losses against my airline income and you have to be a real estate professional to be able to do that. That means you’re. Active in the business, you are a real estate professional. Then you could take your real estate, losses and deductions and deduct them against your airline income. 

That’s what most people are trying to get to or think that you can get to. So that’s, that’s where some confusion lies, and that’s also where the opportunity lies as well. If you’re willing to go down that road.  

Rob: Absolutely. I think that, uh, Charlie, that the term we were looking for there was you can carry forward the losses carry forward. 

That’s it? That’s the,  

Charlie: that’s the phrase. Thank you. Not roll over. Carry forward. Thank you very much. Um, so, so I know you all are dying to know. Right. You’re dying to know how do I become a real estate professional? Aren’t you done to know that? Of course, we’ve got to know how to just do it now. Let’s just end the podcast there. 

That’s it. All right. So last night we were talking at our meeting. Ben, me, you and Kevin Rob didn’t show up, but anyway, so we’re talking about being a real estate investment professional. And Kevin had the good quote and, and, uh, he said the, uh, help me out ban the trail to real estate professionals is littered with bodies of, uh, tax, fraudulent people that have tried to cheat on something he’s like doctors, lawyers,  

Ben: pilots. 

So it’s  

Charlie: littered with those people. Yeah, exactly. Oh yeah. That’s  

Ben: the, like, that’s the main story they talk about. Uh, they talk about that story all the time and like every CPAs, uh, conference, they always get the final story of somebody getting, getting in trouble, claiming their real estate. Oh yeah.  

Charlie: So it’s pretty, you know, it’s interesting if you go online and you, you Google, I would Google. 

If you’re going to be a real estate investor. Or farmer pretend I’m doing air quotes for farmer. Cause we have some real farmers, but we have some fake farmers as well. And um, if you want to do that stuff, go Google court cases and look at how some of these people got, uh, kinda got burned. In fact, let me give you an example. 

One court case was, I don’t know how to say it. Edgar E G E R Gregg Egor versus the United States. First of all, do you want to, do you want to go to court against the United States that even if you win, is it really a win, but anyway, maybe if you want to stick it to the man, you could, but basically all of his deductions, all of his care for losses were disallowed by the us government because, because he didn’t pass the test of actually. 

And this is not just being a real estate professional. This is the very first test of, is it a rental property or not? You’ve got to meet some tests there that you’ll find in publication nine 25 as well. But basically he did not forego his ability to use his own property. So therefore they disallowed it as a rental. 

They said it was yours. You had access to it. And he had to essentially pay up, I guess. And again, when you’re going to court in the first place, that’s really, probably not where you want to be, but you can go on laundry, all kinds of court cases and of what not to do. Um, one, one story real quick is when I moved into our last place, it was 12 acres. 

We had a horse barn, we had a couple of rentals and we had a couple of chickens. Somebody said, Hey, you’re a farmer. I was like, really? I’m a farmer. You got two chickens, you’re a farmer. You collect some eggs, collect eggs, dude, you’re a farmer. You can deduct all this stuff. And that’s, that’s brilliant. So I’ll go to Google being a Spartan dude that I am, I go to Google and guess what? 

I find a court case or a pilot claimed he was a farmer because he had chickens. Ah, so I was like, no, I think I won’t deduct those costs of the chickens Charlie’s trailers and chicken or yeah, there you go. Or, or the tractor, I think I’ll just pay the taxes, you know? So anyway,  

Ben: oh, you got two chickens and you’re trying to deduct a tractor. 

That’s that one’s going to be hard to pass.  

Charlie: It makes perfect sense. Yeah. I need that tractor for those chickens. Um, but anyway, so yeah, you get the idea of, we’ve got to be careful. We don’t want to go to court with the U S government, even if we won, I still don’t really want to do that. All right. So faster funnier, as we say, the holy grail is being a real estate professional. 

Here are the, you know, some of the requirements. 15 hours a week and that’s actually 750 hours per year. I just said, Hey, 50 weeks, you know, you’re going to get a couple of weeks vacation, but you be able to better be able to show that you’ve got to log it. Um, that’s not terrible. Hey, 15 hours a week. 

That’s not much right. Well, now there’s the 50% rule I’ve got. Uh, you know, let’s say I’m an airline pilot and I fly our work. I don’t know how you quantify this, but I work a 40 hour week. Then I’ve got to be doing 20 hours or more of rentals, real estate activity. So there’s a 50% rule, more than half. I’m going to read it because I may have been confused, but more than half of the personal services you performed in all trades or businesses during the year were performed in real estate trades or businesses. 

So that’s a big one. These are big hurdles. And then like I kind of alluded to in that court case, it must truly be a rental. You know, in other words, if you’ve got certain access to the property, it’s not really a rental and those are losses will be disallowed. If you get audited by the IRS. Yeah. What now? 

Rob: A place you want to be. Yeah, that’s a lot of work that looks like a lot of  

Charlie: work, right? It is. And in this publication again, it’s some really good reading in here. There’s a lot of stuff. Hey, there are ways to, again, to be very profitable, but, but again, you also gotta be careful not to open yourself up to court cases and, you know, audits and you know, people say, well, can I do this? 

Can I do that? And Kevin, and I will say, you can do anything you want. Is it legal? Is that really what you’re asking me? No, you can’t do that. You know, but, but people say, well, I can do it unless I get audited. Right. So I don’t want to go down,  

Rob: not down that path. Don’t  

Ben: most people want this as a, you know, rental real estate. 

I mean, I guess obviously the returns, but the passive, the passive income. So if, if all of a sudden you’re having to create. A side business or, or do a side business just to get this passive income. That’s really active that you can then deduct against your airline income. I mean, it’s just, isn’t really think about what the point of getting into it in the first place. 

You want to have to have a second job just to get the, save some taxes. I don’t  

Charlie: that’s right. And how many days you go fly? Like a, you know, I pretty much calculated that, Hey, I’m going to get rid of these two trailers. I’ve got to get rid of Charlie’s trailer park and the chickens, chickens get eaten, by the way. 

I’m very sad to say, um, not about Hawks coyotes Bobcat’s, but anyway, um, I would just, I was flying at the time. I was like, I’m just going to fly a two day a month. You all and get rid of all this stuff. So anyway, that’s something to think about, right.  

Rob: Something to think about for sure. Yeah. Now speaking of, uh, you know, flying and 401ks and IRAs. 

How does this play in to a, an IRA or a 401k? Can you, can I take this and just go, go crazy with my 401k woo. Go into real estate. Wow. At least at Southwest airlines. I know that. Yeah.  

Charlie: Yeah. Ben, you T you, you had some great points at the beginning, you know, about. This topic, what were you saying? Those are, well,  

Ben: I don’t know if they were great points, but I appreciate you. 


Charlie: they were mediocre. Sorry. They were very mediocre at best.  

Ben: There we go. There we go. Um, yeah, I mean, I, I’m trying to think of where I started this, uh, with those points, but, but basically you can invest in, in real estate, in a self-directed IRA. Um, you know, that’s a big thing. I’ve seen it. There’s a lot of stuff out there right now about it. 

I don’t know if it’s just some kind of a trend or some tic-tac video must’ve gone viral or something talking about it, but, but yeah, you can, you can. Um, but it’s, it’s very complicated. And as we talked about with that, the real estate professional. Tax advantages that you get there. I mean, to, to get the advantages of, of investing the self-directed IRA, and I guess really the advantage would be that you get to use your money, that, uh, from your retirement accounts to invest in real estate, but there are so many rules that you have to follow to be able to do this. 

Um, and you, you can get in trouble very easily by doing this the wrong way. So if you did want to invest in, in an alternative investment in your IRAs, it’s definitely something you want to, you want to think about a lot and, and consider all the alternatives. Um,  

Rob: and one of the biggest things I think about is the lack of leverage. 

You can use it going back to, uh, those points. Charlie was making them about. You know, if you’re just buying a cash, which in a self-directed IRA, you got to have that you got to pay for a cash, you can’t use the leverage. So you, you kind of forego all the higher return on investments that you could have, uh, if you’re leveraging outside of the software. 

Ben: Right. That’s and that’s where I had heard, like a lot of people trying to do the real estate and self-directed IRAs, at least from my, my understanding is that, uh, you know, if you can, if you can just get traditional loans from the bank or access to, to leverage through the banks, then you really don’t need to do the self directed IRA, uh, rentals in there. 

But it is a good, maybe it’s a good way for people who don’t have access necessarily to traditional leverage, maybe you’re you’re young, or you’re just trying to start out and invest in, uh, in real estate. You can’t get the loans, then maybe it’s an option. I know people will go around. They find other people to help buy into the, put money into the real estate, but. 

But, yeah, it definitely seems like a lot of work. Um, you know, I did, I did think about as well, just as far as diversification, you know, we talk a lot about that. Um, obviously real estate, you already having that in your IRA. Um, I like to think of my IRA is diversifier having it in, in equities. If you want to invest in real estate, you know, don’t spend all your money in your IRAs to, to invest in real estate when you can do that with, uh, with your, your own cash. 

Uh, I don’t  

Charlie: know if that made any sense, but  

Rob: yeah, I think too with that is, that’s just talking to IRAs when you start talking 401ks. I don’t think there are many 401ks out there, Charlie correct me if I’m wrong, but, uh, I don’t think there’s many 401ks that allow you to do what you can do in the self-directed IRA, which is use it for real estate. 

I don’t think you can do that many 401ks. Yeah.  

Charlie: Yeah. You’ve got to kind of do like an individual 401k, which we love individual foreign case for self-employed people. And if you’re a real estate professional, then you, you could open an individual 401k. And so there’s some things there, but, you know, uh, you know, I think the big P there’s a lot of complexity, you know, a little bit of nuts and bolts on these self-directed IRAs, lot of complexity, a lot of moving parts, you better cross your T’s and dot your I’s because in other words, you go to pay for a maintenance cost, you know, on your rental property. 

How do you do that? You know, do you pay for it within the IRA outside of the IRA? Is it a qual? Is it a non-qualified withdrawal? Are you going, gonna be penalized? Um, again, very, uh, very, um, you know, you get kind of highlighted when you do stuff like that with the IRS. So it better be advantageous. I think the biggest point is what you said, Ben is, Hey, wow. 

We need diversification in our 401k. We need diversification in our IRAs. Do the real estate stuff outside of it, because that’s the whole purpose is diversification. You get to use some leverage, you get some, some built-in tax deferral through the depreciation. If you get to take advantage of it. So going inside your IRAs or even an individual 401k is, you know, I don’t think that’s a, may not pass the sniff test for most people. 

It can be done. There’s higher expenses. So a lot of, uh, a lot of pros and cons just like anything else, but the man, I have a hard time finding, you know, a lot of good reasons to do that. Quite honestly, just my opinion and the other.  

Rob: Yeah, absolutely. The other thing I think of too is. Uh, when you’re, when you’re thinking of your overall investment strategy and your risk analysis, and we can help you determine what that is, but you want to think about where you’re living. 

Are you already, do you already have quite a bit of money in the place you live or are you already invested quite a bit in real estate in your hometown? Uh, REITs are great. You’re not using leverage leverage for REITs, uh, but they can be a great investment. That’s inside your 401k, inside your IRA. It’s a lot easier to take advantage of, and you’re not betting the bank on, you know, what Denver, Colorado, or any certain town you’re, you’re you’re most of those REITs are diversified in some or even overseas. 

And you can take care of, you know, you can invest in those a lot easier and diversify away that risk. And, uh, in a, uh, perhaps smarter, you may not get the returns on investment. You could, again, if you’re, if you’re just taking the risk with one, one town or one city or one house,  

Charlie: Definitely. Yep, absolutely. 

Yeah. A lot of, a lot of good stuff there. Um, you know, in the end, uh, again, I don’t want to beat up the rental stuff too much because it can be a good thing. Just know what you’re getting into, know if, if it fits your, you know, if it fits your preferences and I’ll be honest with you, I’m done with, I’m done with it. 

I don’t want everyone. And we moved and I’m like, it’s so nice to work on my own house. Even if it needs lots of work, at least I’m working for me, not somebody else, that’s just going to trash it. And, uh, but again, that was my experience. I did have some other experiences with higher income rentals and they were less maintenance, but I made less money, you know? 

So, um, so it just depends, but yeah. Pros and cons just like any other investment pros and cons.  

Ben: Yeah, definitely. This one’s a little more hands-on though, than some of our other investments, you know, a little, a little more hands on than some stocks and bonds. So  

Charlie: definitely it’s a big,  

Ben: I don’t know. You definitely have to love it. 

I would  

Charlie: say.  

Rob: Yeah. Yeah. You’re going to want to totally in there and get familiar and getting a mentor. Like you talked about Ben and yeah, that’s really important. I think when you get into this is having people who’ve been there done that can walk you through and sidestep those politics,  

Charlie: right. Leading edge is a good, good mentor. 

We can tell you, uh, give you some pros and cons and talk. Make sure you’re doing a realistic analysis at least.  

Rob: Absolutely. Yeah.  

Ben: We’ll definitely make you reconsider it. 

Rob: Well, think about it each their own. Some people really love it. Some people hate it. Like there’s just no, what you’re doing before. Yeah. Before we get into it. Anything else? Anything before we wrap it up?  

Charlie: That’s it  

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this Podcast will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 03/31/2021 and are subject to change at any time due to the changes in market or economic conditions.