Secret Trick of How the Ultra Rich Buy Real Estate w/Ben Semmes
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Episode Description
Welcome to the Freedom Point Real Estate podcast! Today, Ben Semmes joins Drew McWilliams for a discussion on financing transactions, leveraging investment assets, managing risk strategies, and understanding SBLs and IRAs.
Benjamin (Ben) Semmes joined Morgan Stanley in June of 2022 after spending 9 years with Merrill Lynch Wealth Management. His focus is on providing a customized, goals-based planning approach for his clients that emphasizes the importance of risk management, tactical asset allocation, tax efficient strategies, and asset preservation. He is patient, informative, and transparent with his clients, firmly believing that a strong relationship with well-educated clients will foster the best investing decisions. Ben grew up in the DC area, on a 100-acre farm in Loudoun County in Virginia and now resides in Arlington. A dedicated Capitals fan, car aficionado and self-proclaimed foodie, Ben finds balance in his life through dedication to exercise, and can be found coaching and playing lacrosse, running with his black lab named Oshie or sweating it out at the local gym.
CONNECT WITH BEN SEMMES!
LinkedIn: https://www.linkedin.com/in/benjamin-semmes-cfp%C2%AE-cpfa-74906116/
CONNECT WITH DREW MCWILLIAMS!
Website: https://startingpointcapital.com/
LinkedIn: https://www.linkedin.com/in/drew-mcwilliams-cfe-3b041a5/
Summary
Tip #1: Leveraging Securities-based Line of Credit (SBL)
Ben delves into the mechanics of leveraging Securities-based lines of credit (SBLs), allowing investors to pledge non-retirement investment assets like stocks and bonds to borrow against their value. This liquidity stream provides flexibility for various investments without triggering capital gains taxes.
"One of the huge benefits to this is it's really easy to set up... Instead of having to sell those assets, stocks, and bonds in your portfolio and potentially have taxes that are due by doing that, right when you sell in an account like that, you do have to owe capital gains taxes."
Tip #2: Advantages of SBL
SBLs offer numerous advantages, including quick setup, ease of access to liquidity, and flexibility in borrowing against different types of assets like stocks, bonds, and cash. With competitive interest rates and no prepayment penalties, SBLs provide a versatile tool for financing real estate ventures and other investment opportunities.
"It's as good as cash... You can write checks, and it's really easy to get... And again, you don't have to sell any of your investment assets to do this. There's no taxes at all due from any of these transactions."
Tip #3: Considerations with SBL
While SBLs offer significant benefits, investors need to exercise caution regarding borrowing limits and market fluctuations. Maintaining a buffer below the maximum borrowing threshold and diversifying asset holdings can mitigate the risk of margin calls in volatile market conditions.
"You cannot borrow above the 50% of your equities' value... If the market takes a turn, that could trigger a maintenance call... You have to be a little careful when you're borrowing on a Securities-based line of credit."
Tip #4: Exploring Real Estate IRAs
Real Estate IRAs present an avenue for investing in real estate within a retirement account, offering tax advantages such as tax-free growth and income. However, investors must navigate limitations such as the inability to use leverage and the requirement to cover expenses from IRA funds.
"Owning real estate in an IRA is nice because when you sell real estate, you do not have to worry about any capital gains at all... Also, any income that is earned, rent from the investment property, goes directly into the IRA."
Tip #5: Pros and Cons of Real Estate IRAs
Real Estate IRAs offer tax benefits and potential for long-term growth, but investors should weigh the drawbacks, including the lack of leverage, inability to deduct expenses, and potential liquidity challenges. Understanding these pros and cons is essential for making informed investment decisions.
"You cannot use financing in an IRA, so you cannot go out and get a mortgage... Also, you cannot deduct expenses, and you also cannot depreciate the real estate inside the IRA."
Tip #6: Reflecting on Professional Journey
Ben shares insights from his professional journey, highlighting achievements like being named to the Forbes best in state list and overcoming challenges such as navigating corporate transitions. He emphasizes the importance of providing exceptional client service and prioritizing clients' interests for long-term success.
"If you go out of your way to provide fantastic service... and truly just put the client's interest above you as your fiduciary for your clients, then no matter what, you're going to be successful in what you do."
Tip #7: Assessing Market Conditions for SBLs
Ben advises investors to monitor market conditions when considering Securities-based lines of credit. Understanding interest rate trends and potential market volatility can help investors make informed decisions about leveraging their investment portfolios effectively.
"As rates were moving up... we went to our clients that had balances on SBLs and said, 'Hey, look, what is your plan for this SBL? How quickly are you planning to pay this off?'"
Tip #8: Evaluating Long-Term Investment Horizons with Real Estate IRAs
Investors should assess their long-term investment horizons and financial goals when considering Real Estate IRAs. While they offer tax advantages and potential for growth, investors must weigh the lack of leverage and potential liquidity constraints against their overall retirement strategy.
"I think for most real estate investors, I think the biggest drawback is not being able to use leverage because that's your greatest weapon in real estate, in my opinion."
Tip #9: Diversification and Risk Management
Diversification across asset classes and investment vehicles is crucial for mitigating risk in real estate investment portfolios. By spreading investments across different sectors and strategies, investors can reduce exposure to market fluctuations and enhance overall portfolio resilience.
"The other part of that is that all of the maintenance and everything has to be paid from the IRA dollar... If there's not enough money in the IRA, then you might have to force money into the IRA, and the IRS would hammer you for that."
Tip #10: Continual Learning and Adaptation
Ben underscores the importance of continual learning and adaptation in the investment landscape. Staying informed about market trends, regulatory changes, and innovative financing strategies empowers investors to navigate evolving market conditions effectively and seize opportunities for growth.
"If you go out of your way to provide fantastic service... you're always going to be successful in what you do. And I think that goes a long way in life, too, right? If you just make sure that you take care of people the way that you want to be treated by them, too."