This week Bruce is joined this week by James and Lorraine Conaway. Their business helps people with money, whether strategizing how to make money, keep their money, and avoid taxes. Many of their services include wealth building, wealth protection, and wealth preservation. You don’t need a lot of these steps if you don’t have anything. Too many people concentrate on getting something first, but there is a natural gap in things they don’t know. Most people were good at obtaining something, but then realized they didn’t have it under the right hat or don’t know when they are supposed to sell it. It’s quite an educational process.
Bruce has been in the business for 30 years now, and a lot of the momentum starts after about 15 years. Everything starts kicking into gear, and a lot of their clients have been pretty wise in accumulating assets. However, Bruce talks to them on a regular basis, and there is a lot of tricks of the trade that James and Lorraine know that even Bruce has not heard. A lot of what Bruce has not even heard of are things people think they don’t necessarily need right away, but life can surprise you and you have things come up that you should have planned well in advance. Many times the James’ and Lorraine’s clientele are very surprised by what they found out they didn’t know. Many times people realize what they didn’t know and then ask why that’s the case, so the Conaways have to go through and prove where they’re getting the information from. In most of the cases they collaborate very tightly and closely with their tax advisor, attorney, and the other appropriate people. In one example, there was a couple who the husband was working as a W2 person at a job, and the wife was managing their property. They had four rental properties, and for years they never heard of professional real estate status. They didn’t even know they were professional real estate status. To qualify for professional real estate status, you have to spend 750 hours of your time, so more than 50% of your time is earning time, and you have to have material participation. If you qualify, you earn unlimited depreciating against all income. When the Conaways introduced the couple to this strategy, they contacted their tax advisor and, sure enough, they qualified, which translated to over $1,000 more cash flow in their pocket per month. One thing you can do if you qualify is if you have a loss on a property, which there have been a fair amount of people who invested in something they wished they hadn’t, and then when you sell it you have a write off against current profits. If you don’t have that designation, then you would have suspended losses and be taking it over the course of a very long time. These are “suspenders” you don’t want to wear.
Despite the fact that the average change of the Dow is 400 points a day, which doesn’t lend itself to a peaceful life, James said surprisingly their clients are fine because their mix of ownership is a lot different than most people. Lorraine said she and James have been business owners and real estate investors for the last 17 ½ years, so a lot of their clients take a lot of risk in their business and in real estate and therefore, they handle their portfolios in a very conservative manner. A lot of people don’t know what they don’t know, and they don’t know that you can have investments that are in the stock market and have either a guaranteed income or guaranteed principle or even that you can insure a percentage of your portfolio. When they tell their customers this, most of them say they have never heard of these things. James said when they are dealing with their clients; they spend an enormous amount of time getting to know them and their personal situation. This way they are sure of whatever recommendations are appropriate for them and their taste and level for comfort.
In 2006-2008, these years were not pleasant times for their clientele. Bruce imagined if they had real estate investors that some of them were blindsided and took losses. When you have a mood shift, which a lot of people imagined would not happen; they go from being what they considered wealthy and done to having to resurrect the whole thing again. That mood, unfortunately sometimes, makes overreactions or inappropriate responses. Bruce’s least favorite comment when he would speak was during that cycle when people would come up to him and tell him they just lost $1 million and had to find a way to get it back the next day. This is a formula to say goodbye to everything else you have. We have to understand that chasing returns can be the most devastating risk-taking activity that anybody can have in their portfolio. Bruce sees it in real estate; James and Lorraine see it in everything else. It’s horrifying to watch people take way more risk than what they’re really comfortable with to attempt to win back what the market has taken away from them or what real estate has taken away from them. Real estate normally does not do what it did between 2003 and 2005, as it normally does not gyrate $100 grand per house. At a time like this, you really think you’re a real estate genius and everything you touch is turning to gold. What is happening now is you don’t really have the capital gain likely to reoccur at that speed again. It’s going to be a much longer term project to get the wealth back, and Bruce really doesn’t know if people are ready to be patient yet.
When Lorraine hears the word “mood,” it makes her think of her mood back in 2008 and her mood today as a real estate investor and several of the people with whom she spoke. She remembered speaking to a woman in Northern California who was a very sophisticated long-time real estate investor. Her mood was she literally could not work for two days straight and would lie on her bed and cry. Today, her mood is that she cannot get into real estate yet. It defected her that much. Yet now we have the opposite where people’s moods are they lost a lot of money and need to get it back, so what is the fast path to getting it back. James and Lorraine like to take a look at the lessons learned from clients’ experiences so the same mistakes are not made again. They can then create a sequential plan to how the money is going to be made back in a much better way. This is what they call strategic planning. Otherwise, you would have to read a long disclosure to your clients every day telling them who securities are offered through and how they are not affiliated with Conaway & Conaway or Bruce Norris. When you are talking about mood shift, there really has been a shift in their clients’ behavior. What it really comes down to is they have gone from a performance mentality to a cash-flow mentality. People don’t care what they earn, they care what they see showing up in the mailbox.
If you have $1 million and don’t want to risk principle, this might be tough because people are dealing with a ten-year t built pace, 2.1, or the stock market going down 400 points so they had $1 million and now only have $950. This is the scope of products most people know, and these are actually scary times for people who just have a standard product type in front of them. Interestingly, the company slogan for Conaway & Conaway was developed after they interviewed their clients and the two words that kept coming up were “clarity” and “confidence.” Therefore, the company slogan was changed to “Build Wealth with Clarity and Confidence.” These two words were what people have so ardently sought, and this is why the strategies make such a huge difference in their lives. When you have confidence, it really comes down to that you have some measure of control. This is why the product types that Bruce chooses to invest in are things that he has personal knowledge of and at least somewhat knows how to get out of it if it turns out to be lousy. Back in 2000, Bruce invested $260,000 in penny stocks. He studied all kinds of penny stocks, and it just happened to be the right 45-day period when he turned it into $800 grand. Unfortunately, he made every classic mistake as far as thinking you are Mr. Stock picker. What he had done was he had followed the mood of the crowd and said he needed to throw investment money into stocks because he had a lot of real estate already and had enough of it, so he didn’t sell at $800 grand but rather at $100 grand. He lost $150 grand, and it only took 16 more days. However, he said it was the best thing that ever happened to him because he went back to a control piece with which he was familiar. There can be experts in other things, but the aforementioned is one of the things he really thinks most people don’t do, especially if they’re on this course of saying that they have to go aggressively and get some super return. Then, they’re really likely to make a very aggressive mistake with a product they really don’t understand. This is something they see at Conaway & Conaway almost weekly. At least weekly they come across a situation where somebody did some research and thought they could really make a great amount of money; so they bought an asset, and it didn’t go the way they thought it would. One of the things that they talk about is how much money is the right amount of money to put in a strategy like penny stock, real estate, and other things. You have to decide what your overall strategy around the tactic of picking a particular asset class is.
One of the things James and Lorraine loves about what they do at The Norris Group is Bruce teaches people the tools so that they can then choose for themselves their own strategy, tactics, entry point, exit point, holding costs, holding time period, the whole nine yards. What is interesting about this product type and why Bruce likes using charts is mood would dictate that you don’t do real estate right now because every article you read is about real estate going down, you’re better off renting, and the ownership of it is really to be shunned. Bruce, as a contrarian investor, uses charts so he does not have to make emotional decisions. When he looks at a market like the one we’re in now, it is so ridiculous that on the front cover of Time Magazine they literally tell people that they probably really need to rethink home ownership. Home ownership is locking in a guaranteed monthly payment at this point at 4% interest. The equivalent would be if you can negotiate a 30-year fixed rent with your landlord. If you can’t see the benefit of owning right now, it is completely a mood decision. In investing, it has really helped Bruce to have charts to look at and say, “I don’t care how anyone else feels about what I’m about to do, I know this is correct.” This included selling 100 pieces of property back in 2005 and 2006. The mood was euphoric. When he got in front of the builders during that timeframe and debated one of the economists about how if he was a builder at that time he would sell every house, every project, every lot, because you could buy them back for $0.5 on the dollar. The mood was beneficial if you realized that you had the tools to be a contrarian and say that people have overreacted and forgot that real estate could ever be great.
What is interesting about the cycle we are going through is that the assumption had been that if someone had lost a home, they would become a renter. This has not happened. People sometimes become a non-household, so you really have a reduction of household entities. This could be people moving back in with mom and dad or people living with three pieces of family together. We’re going to get through this cycle, and those people will not like that arrangement for very long. They will reemerge as a household and be demanding somewhere down the road exactly at the point where somebody that takes the risk and is a contrarian in 2011 and 2012 will say that the aforementioned people will reemerge and want to own their own place again. Now is the time to own real estate and take advantage of the low interest rates. One of the things people ask is how people handle a situation if they foreclosed on or short sold a home and don’t have the credit. One of the things they talk about at Conaway & Conaway is when you pick up the local paper; you see that people are willing to do rent-to-own. You could lock in the price today, even if you may not get the 4% interest as the Wall Street Journal said the interest rates were going to stay low until 2013. There is an opportunity to do a rent-to-own where you are building up your down payment. Lorraine even sees in the paper where people are willing to do seller financing, so there are ways to have ownership.
Bruce talked recently to a couple people who are doing some of selling houses and carrying notes for people. They are buying and holding some of them, as well as doing buy-sell and renting properties. This is not necessarily something they go in immediately with. They may give the owners an option or an option-to-purchase, which are a technicality and not a lease option. The decisions that investors are making now go back to the cash flow instead of capital gain slot. It really needs to go there because you don’t really know how long a hold period is going to be, so you have to be happy the whole journey. Fortunately, we have been handed this ridiculous market where a lot of properties in counties such as Riverside and San Bernardino are on sale for such a price that they make sense as rentals. California is not really known for this, which is why you have people running into other states. However, California has had a history of aggressive price when it is our turn since we get migration of people and excess demand, so this will probably replay itself in some form again, which you’re not going to get in other states. Lorraine loves the fact of having positive cash flow in our own backyard and having appreciation because there are many states out there that do provide positive cash flow but no history of appreciation. A lot of states do not create their own headwind. California creates their own headwind and then effects places around it. When California explodes, what ends up happening is there is a lot of extra money and people start sending off some of the money to places like Nevada or Arizona. Therefore, you can get there early and follow the progression, but it happened because of California’s growth, not because the other states’ markets grew by themselves. This is one of the things you find as an investor. There is this trail that if you can literally say that while we’re booming in California so you are going to go option Phoenix dirt. It’s perfectly sensible because that would be next. James and Lorraine just went to Phoenix, and it was almost like California because nothing there is expensive. Bruce also went with a group to Texas, and one of the first things they noticed was to leave your California brain at home because they were not in the same environment.
Both the Conaways are Certified Specialists in Planned Giving. James and Lorraine have taken a long course with Cal State Long Beach and have been certified to do charitable planning. They also have a Charitable Remainder Trust, which is the simplest form of a split interest trust. It is also the simplest form of saying, “I’m going to own part of it, and part of it I’m going to do something charitable with.” What normally happens is people will transfer a property into a CRT and then sell the property. This trust is tax exempt, so it pays no tax, but you have liquidity. Now you have a liquidity event inside the trust, and you can reinvest it. The advantage of it is now you’re reinvesting 100% of the proceeds instead of the 75% of the proceeds for whatever your tax burden is. The income can be turned on for one life, two lifetimes, a period certain, or a lifetime and period certain. In other words, if James and Lorraine were old enough, the might have a lifetime income guaranteed for them and then 20 years for their children. Another thing you can do with this type of trust is you can design it to have the income turn on and off or up and down. It does not simply just have to roll as income. That part is called a net income makeup provision. Now we get a thing called NIMCRUT, which stands for Net Income with Makeup Charitable Remainder Unitrust. This means that it is designed around what it’s worth, and as it earns money it owes to the person who set it up if it doesn’t pay it out. There are ways to customize that trust so that you can have the income on, off, fixed, veritable, or set for a number of years or a lifetime. It really is customized to the person’s needs.
To find out more information about Conaway & Conaway, you can visit their website at www.conawayandconaway.com/.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.