Leveraging 1031 Exchanges And DSTs With Brandon Bruckman

Welcome to the Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by co-host Bob Fraser, and we're really excited about today's guest, Brandon Bruckman. He's an investment advisor at Insight Investment Advisors. So really excited to have him on. He's got a really cool background. We're going to really focus on the world of 1031 exchanges and DSTs. And just, you know, the whole kind of context for this podcast, Brandon, is, you know, we're looking at what are the strategies and tools that the ultra-wealthy are using in their investments and really around the world of alternative investments. So, you know, hedge funds, private equity, and real estate, which is the largest of, you know, the alternative investment world. And, you know, 1031 is an amazing tool that's been around for a while, and a lot of wealthy investors use this as a way to defer taxes and to kind of maximize their ability to invest in real estate.

So it's unique to real estate. Yep. And it's one of the main reasons why ultra-wealthy are in alternatives is to be in real estate and to be in the tax advantage strategies that we're gonna talk about today. Why is real estate so darn good just forget the appreciation or the income idea, but it's also the tax advantages. So we have expert here, Brandon, and walking us through some of these opportunities.

Yeah, so just real quick, I want to just give some context to Brandon's background. He's really focused on growing the 1031 and DST business for Insight Investment Advisors, and he leads the marketing efforts and investment due diligence. Prior to Insight, he founded West Chapman and Company, which is a consultancy that helped clients grow their businesses by getting insights through data. He's assisted large and small businesses in a variety of industries. And even prior to that, he worked at a prominent hedge fund as head of fixed income financing and also was a healthcare consultancy before that. So he's got a really broad exposure and cool career, including working in hedge funds and now into real estate and helping people place money. So Brandon, tell us a little bit about your background and just how you got to where you are and kind of the kind of story and path to get there.

I think the only thing I haven't done is be a lawyer or sell used cars. So someday that's on the bucket list at some point. Yeah, I'll put that on the bucket list. First off, thanks for having me on, guys. It's awesome to be with you. Someday we'll do it in person too, and it'll be even better.

Yes.

But yeah, it's been a winding road to kind of get here. And it's sort of interesting when you read that and I sort of like relive that and kind of do the movie in reverse about, you know, how I walk through some of those things. And, and, and when I think about why, like, why such a windy road— I mean, some of that is luck, some of that is intentional, um, but a lot of it I think is really based around I like doing stuff I find interesting. And I've gotten so much, um, sort of negative feedback from that at some points in my career of like, what is this resume that you have? This is kind of wild. Like, what kind of path are you on? And I'm like, I really don't know.

Like, I'm just trying to find something And speaking of reliving movies, you actually financed a movie at one point in there, right? We talked about that.

Yeah. So I think like, and we talk about when I mentioned luck, this is a big luck thing. So if I think about my experience of working at a hedge fund, it's probably my most valuable, like professional experience that I've had. There's a big difference of being inside the financial service industry and understanding how the machine works and being outside. I had such an exposure there about really how the sausage is made, per se. That was really interesting. No worries, nothing illegal was going on there. Actually, our firm had the SEC in by— we actually invited them in to audit the firm. It was a firm that was very high in regulatory standards, but it was just amazing to understand how it works. I had the opportunity to sit at that hedge fund through the financial crisis. So if you've ever seen the movie The Big Short, I lived that story because part of what I was doing was around the subprime mortgage market and trying to understand that and finance that for our firm. So I went and watched that movie in the theater with my wife and she was like, "Get me out of here.

I don't want to.

It's not entertaining." And so I looked at her and said, "Hey, these are the people who actually won." this race, right? In a big way, and it's still really stressful. So there's a lot of stress when you look back upon it too, but so many learnings. And Ben, you mentioned the movie thing and thinking about alternatives. A hedge fund is so wide open in what we can invest in. So yeah, at one point we did look at doing a movie deal, and that was very interesting to understand how that works. So there's no stone left unturned there that frankly, You just had to sort of learn about and find ways that you could help the firm.

So how'd your path kind of end up here at Insight?

Yeah, winding road there too. So unfortunately, when you're an average or at an average hedge fund, average doesn't cut it in that space. So needless to say that that firm— and folks can look it up, look my background up, it's called Stark Investments— at one point was a top 30 hedge fund in the world. And no longer ceased to exist. And so as that firm was winding down, I was frankly looking for interesting things to do. And that led me to working with some friends and starting a healthcare consultancy. And so another industry I didn't know anything about, but again, when you work at the hedge fund, people throw stuff at you almost every day that you don't know anything about and you have to go figure it out. So that's a— it's again, an invaluable skill for people to learn to do that and just kind of teach yourself. So we're very successful in doing that. But happening in the background and how I ended up at Insight was I got connected with my partner in Kansas City near you guys named Josh Wright. He was an investment advisor and he was doing a lot of strategies with the investment advising book that looked like a hedge fund. And he needed some help in doing some coding and thinking about those investment strategies. And we actually got connected through a firm in Australia, introduced us together. So, you know, go figure. Uh, it's a really small world and folks that are doing these things. And so we got connected and, uh, did a variety of projects together. And eventually I got exposed to Josh's ideas around 1031 and said, I got to be part of that. And so let's do this, let's run at this at Insight.

So, so Insight Investment Advisors, as I understand it, I mean, you guys basically, uh, investors hire you to find a 1031. So a lot of the, most of your guys come to you and saying, I've, I'm selling a deal and I want to roll pull it into another deal on 1031, help me out. And so you find good place, you help them place their money from the sale into another thing. Is that correct?

Yeah, there's really two parts of that that we sort of think about. One, if you think about the 1031 process holistically, top down, it's really complicated. And there's a lot of rules in there that are black and white. And if you break them and get audited, you've exploded the entire exchange. So we probably see, I would say, 2 out of 5 of our clients without our oversight on that exchange are doing something wrong.

Wow.

And so that's number one thing that we're looking at is to make sure that we're following the rules and executing that properly.

Gotcha.

And then two, it really is about investors that are an average investor, is someone who's managed real estate for 20 to 30 years. They want to perform a 1031 exchange, but man, they don't want to manage real estate anymore. They are done for a variety of reasons. That are pretty obvious in this environment. And so they say, okay, how can I do a 1031, earn money, and still defer tax? How do I do that and go passive?

So I want to shift from an active role to a passive role in the process.

Exactly, exactly. So how do I do that? What are the vehicles available to do that? And how do I know if any of these, you know, investments or sponsors that are running these deals, how do I know if they're any good or not? And so that's our job, is to figure that out.

So maybe, maybe at this point we just jump into just what is a what is a 1031 just real quick. So give us the snapshot.

Sure. So 1031 exchange is a portion of the tax code that allows investors in now just real estate, allows investors in real estate, it allows them to sell and buy a replacement piece of real estate or property. It allows them to do that in a tax-free manner. So they're avoiding or deferring capital gains tax, state taxes. They're avoiding depreciation recapture, and there's a variety of other taxes that are in that bucket. And so the average tax bill we usually see is in excess of 40% of the capital that's coming off of that transaction. Could be a big tax bill if you held the property for a while. So this is, as you guys mentioned in the beginning, a 1031 exchange is a tool that, you know, the real estate investor and wealthy investors have been using for a long time. And it's something that, you know, there wasn't a class in school about this. Like, I must have missed it because it didn't exist. I didn't know this was a thing when I was working at a hedge fund, right? So imagine that for a second, right? You really need to be in this business to understand it. So it's an amazing tool. And so what it allows you again to do is you can sell your property and then buy a replacement property. You have to do that in a certain time frame. So again, like I said, there are rules around this that make it that you have to follow. So the real basic rules here is you have 45 days from the time in which you close on the sale of your property to identify a replacement. And there's a couple different rules to do that. And then you have 180 days again from that close mark to close on your next transaction. So that sounds like a long time.

That's quick in the real estate world. 45 is definitely quick. So just take an example. So I bought a million-dollar apartment complex. I'm going to sell it now. I'm going to get $2 million. So I'm going to pay, I'm going to owe a million dollars $1 million in taxes on $1 million in income. I can 1031. If I take that $2 million from the sale and I roll it into another asset, I literally— it's a non-taxable event and I carry forward my $1 million basis. Is that pretty much the gist of it?

Spot on. And there's a couple of key points in there that she said that I think trip people up all the time is yes, you have to invest in order to avoid all— in order to defer those taxes. You do have to invest that full proceeds. That $2 million has to go from property A to property B. Gotcha. So you're allowed to go like, hey, why can't I just take a million out? Like, well, you can't do that. You can, you can do a partial exchange, but you're going to owe tax on a portion.

On the half. It makes sense. So we were just— there was just this article that came out about billionaires and how they avoided paying taxes. And of course, you know, a lot of them have these appreciating stocks portfolios, and they never— basically the trick is you let your stock appreciate You know, you're Jeff Bezos or whatever, you let your Amazon stock appreciate, you never sell the stock. And so you never pay taxes on those gains. And so you just borrow against your stock. And so this is the same thing. It's like, how are the rich not paying taxes? Well, this is a pretty powerful way. You just, you never, as long as you keep rolling it over into a 1031, you never actually pay the taxes. So it's quite ingenious and quite, it's quite a powerful way to do it. you know, with some challenges. And just to, you've thrown out this word DST a lot too. And DST is a Delaware Statutory Trust. And it's basically, it's just a wrapper for, it's a technical implementation of a kind of a best practices way to do a 1031. Is that accurate?

Yeah, that's right. So I mean, there's two ways, there's a couple different ways to think about this. One, the vast majority of 1031 exchange transactions are someone selling a building they own and manage buying a building they own and manage. That's most of the transactions. But the folks that hit our desk are going, I don't want to buy that next building. What can I do? The easiest option there to get passive is the Delaware statutory trust. And it's exactly what you described. It's a, it's in essence a trust that owns a larger piece of real estate. You become a fractional owner. However, in the eyes of the IRS, it's an exchange eligible asset. And from a tax perspective on an annual basis, it looks just like you own real estate.

So it lets you divide up an asset that you're going to buy, maybe 100 owners, and you buy 1/100th of that for $2 million. And it literally qualifies for an exchange even though you're not the sole owner. But the DST actually structures it so that you are the sole owner of a slice of that asset.

Yeah, Brandon, could you kind of break down a typical deal you guys see in the DST world? I think that's going to be a very new topic. If someone's familiar with 1031s, DSTs aren't always the first thing that come up as part of the option set.

Yeah. Every single speaking engagement I do, I ask folks if they've heard of or done a 1031. Invariably, every hand in the room goes up and I'm like, "Who's heard of a DST?" And they're looking at me like I've lost my mind. They have absolutely no idea. And these are experienced real estate investors. They have no clue that this exists. The typical items that we see in a DST, and these are designed and structured to produce income year 1, they're designed and structured to be conservative in nature. So I caveat that with the products have been designed to fit the folks that are investing in them, right? And vice versa. So 65%, 70% of the space is Class A multifamily in Class A markets. And so what you kind of see, what kind of return pattern you would expect out of out of those assets as opposed to you buying, you know, a C-class multifamily in an off-market and doing a rehab on it. Two vastly different things. So that's what we see the most of, but we also see a lot of industrial. We see single-tenant retail. We see triple-net lease type properties. We see self-storage. We see senior living. So there's a good variety of assets in this space. And the best part about it for someone like the $2 million example, that you gave. Minimums on these investments are $100K. So you can quickly turn one building into, you know, 5 or 6 of these DSTs. And all of a sudden, voilà, you have a diversified portfolio of real estate. So that's a good aspect of the asset.

So these 1031s can be daisy-chained, right? You can 1031 20, 30, 40 times, right? And you really never have a taxable event.

And even though some of our clients refer to it as swap to drop, but nevertheless, yeah, it's accurate. Yeah, you can do this, you can just kind of keep doing it forever.

Okay, so, so let's just, let's just hit this. So, so is the party over? You know, so the big, uh, the big news and the uproar in the industry is the potential end of 1031s. And so here, you know, obviously You know, you might— maybe this is the first time you've heard about 1031. You're getting pretty excited about it. And unfortunately, President is— part of his tax plan is to eliminate the 1031 loophole. And so that's on the table. It's not, you know, I don't think super far down the road yet, but, you know, what's your perspective on that?

Yeah, what a great 100th anniversary for the 1031 exchange. Get the ball rolling.

Yeah.

No, it is definitely out there as an item on the block to be cut. There has been great lobbying efforts done by various organizations to maintain 1031 exchange. Because when we think about it, it sounds like something that plays well when you talk about it, right? Hey, we're going to close this quote unquote tax loophole for billionaires. Stick it to them, right? It sounds like great fodder for headlines, right? But in reality, the people you're really sticking it to are small landlords, or in essence, they're small business owners, right? Those are the people you're really sticking it to, in addition to farmers. Farmers utilize this, utilize 1031 exchange often to help build and store their wealth. And we all know the economic situation farmers have been facing over the last, let's say, decade. It's a real, it's a huge struggle. And so a lot of lobbying efforts have really been focused on Senate Democratic senators in states where there's lots of farms to say, hey, look, you're going to do a lot of damage to folks in your state. Moreover, there's a study done by, I believe, Deloitte, who actually said if you eliminate 1031 exchange, you'll have a negative impact on the tax bill, not positive. So even closing that loophole eliminates, you know, people like myself, frankly, from that industry. And I pay taxes, right? And there's a lot of people that work in that and around this industry who pay taxes as well. We're gone. And frankly, folks, if they don't have 1031 exchange, they're just not gonna sell, right? So the volume's gonna go way down. People will just do cash-out refis like you just talked about borrowing Amazon stock. They're just gonna pull a cash-out refi from the properties they own and they're not gonna sell them. So then think about, you know, lack of turnover and transactions there as well is very negative. So I think that message is being heard loud and clear. So we're very optimistic that 1031 is here to stay.

Yeah, yeah. And, you know, who can, you know, forecast the political winds, you know? But, you know, I, I would probably tend to agree. I think it's got an uphill battle, um, to, to, to win. But, um, so let's say it's here to stay. Hopefully it is. It's a great, a great way to defer taxes. And, and, you know, and one of the other incredible things about real estate and real estate investing and why billionaires focus on real estate with their core holdings is not just 1031s, but also depreciation. The fact that you can't— if there's a piece of land with a building on it and it's a commercial building, you can depreciate every year, I think over what, 27.5 years or something like that, the value of that building where the land doesn't depreciate. And it actually produces— offsets the cash flow income. And so you have more cash flow than you have tax liability. So cash flow is maybe $100,000 a year, your tax liability is maybe $70,000 a year. So it's very, very good. And one of the interesting things that's happening in all this talk about the 1031s is disappearing. One of the positive things that's happening is this idea of cost segregation studies. And so you've been kind of pioneering some of this work. So tell us, tell us how this works and, and kind of what, what the current thinking is here.

Yeah. So naturally, if you, you threaten 1031 exchange, you threaten a sizable portion of our business. So that's problematic. So naturally we're thinking about alternatives. If the 1031 does go away, and there's a couple different things that I think investors can sort of think about in doing that. Um, you can think about looking to sell. And then frankly looking to, you know, purchase another property or purchase a portion of what's referred to as a syndicated deal where you would own a portion of a partnership, that's not 1031 eligible. So that's problematic now, but in year 1, what we've seen is 2 things. One, the cost segregation study that is creating more depreciation.

Now explain what that is. Just back up, explain what that is.

Oh, sure. So in essence, at the very simplest level, and I'm not an expert in doing cost segs, But in essence, you're looking at every portion and item in that property and you're setting different depreciation schedules attached to them. And you're pulling a lot of that depreciation you do in year 5.

And the idea is to accelerate depreciation. What would normally— you could— this easy way to say, hey, we're going to depreciate, you know, over 27 years, you know, so we're going to depreciate 3% of the value of this property, you know, every year. But you actually realize maybe the wiring or the plumbing can be depreciated faster or the windows or whatever. So the idea is to accelerate as much of that depreciation to the front end of this investment. So maybe you're going to— her $100,000 income, you actually have a depreciation of, you know, of $90,000. You know, maybe that's too much, but the idea is you just can really eliminate a lot of your tax liability through accelerated depreciation.

We've seen some of these deals have 50 to 75 cents of every dollar that you're investing in the deal comes out as loss in year 1.

Wait, say it again.

50 cents to 75 cents of every dollar you're investing in that deal is coming out in year 1 as a loss, right?

So a $2 million property, I could see a million in losses coming out of that day, year 1. Wow.

Correct. In year one.

So the implication on, on the taxable liability there is it huge, almost wipes it away if not all the way, if there's enough, you know, juice in the squeeze there.

And now, and the, the caveat of this is that you got to find the right deal, right? They got to find the, the deal that can be accelerated, etc.

And yeah, I think, I think some of the, some of the rub that we're, we're struggling with for the, for the traditional— call them the traditional 1031 exchange investor who would just do a 1031 into Delaware statutory trust. What we're struggling with is really estimating exactly what that loss is going to be in year 1. It's hard to do unless you actually perform the study, and that doesn't happen until the deal is closed, right? So there's an element of risk, I think, that the investor is taking in doing that and performing that transaction. With that said, though, producing those kind of losses would be really interesting. In a year one scenario if you didn't want to do 1031. And there's some folks that advocate for that because you are carrying an asset in the 1031 exchange that has a very low basis. So they would say, hey, look, you know, even if 1031 exchange isn't eliminated in 2021, believe it's going to be on the chopping block again at some point. Do you want to take some, do you want to do some tax management around the asset that you own right now in raising the basis on your asset by investing in a new property? Maybe you might want to do that. So there's a tax mitigation or holistic tax management strategy here you can start to think about, um, that I think is valid. But, um, it is a good alternative, I think, to 1031. But what you said, the last point you said is the biggest point, is I just want great deals and I frankly don't care how they're structured. I want folks investing in deals that, that are really good, um, and that continues to be very hard.

Yeah, and I mean, they've got a lot of cash chasing, you know, fewer deals in today's market. You know, isn't it shocking how, you know, what, 15 years ago, you know, it was the exact opposite. Didn't matter how good your deal was, you couldn't find money for it, you know? Now it's the opposite. Everything—

Yeah, can you talk a little bit about the market just right now, especially in 1031, you know, 3 years ago to now? You know, what are you seeing and what are the drivers behind those changes?

And just before he does that, just follow up on my last question. So just, Of the deals, so you're saying that, you know, how many deals, you know, what percentage of deals do you think that are out there could be good cost seg, you know, where cost segregation could really get you those kind of numbers? Is it 10%? Is it 50%? Is it 90%? What do you think?

That's the rub is I just don't know. Okay. That's the biggest issue is I just don't know exactly what those losses are going to kick off. In year 1. The other important point, not just cost segregation, the other important point that's driving a lot of those year 1 losses is through 2016 Trump tax cuts, the bonus depreciation, accelerating depreciation even further and faster.

Wow.

Combining that with the cost seg is producing the sort of environment that we're in.

I see.

But in 2022, that bonus depreciation has to come off the books. It is scheduled to come off the books in 2022. Ah, so it's over. It's not a vote, it's off in 2022. So it'll be up to the House, the Congress, in resetting the law that would continue bonus depreciation. That's what's really driving a lot of what's happening there. But again, it's very hard to estimate exactly what we're looking at in year 1 loss. And I don't know exactly how many, what percentage of properties would really qualify well for that.

Well, one of the things I love that you guys do at Insight is it's very holistic. It's not a one-size-fits-all. Because you guys have that kind of financial planning background with this kind of alternative and real estate edge, you're looking at the whole picture, right? You know, like you're saying, a tax mitigation strategy for down the road, you know, where are you at in your investment life cycle and your, you know, earnings in your career, those kind of things. And so I love that you guys are doing that with kind of building a strategy around, around your investors, um, you know, just assuming that everything worked out perfectly with kind of transitioning from selling a property at a nice gain into a deal that worked with the cost segregation. I mean, this is something that can't be emphasized enough if this works, because what you're saying is you're essentially getting a jail out of— or get out of jail free card, right? Where, you know, your basis now can increase without the huge tax liability that you may have.

The only aspect to think about that on the negative is once that next deal sells and looks to roll, when you're looking to invest again after the initial deal, you are facing a tax liability on the appreciation of that asset. You have no 1031 exchange possibilities, right? So that is something to think about. Before, when we mentioned sort of the swap till you drop mentality of doing the 1031 exchange with the DST, that's valid. In doing and stepping away from 1031, you've eliminated your ability to do that. So you will—

at any point in the future—

right, exactly.

Wow, okay.

So it's something for folks to think about. So I think folks need to kind of balance that out. And when they're thinking about, you know, if I do want to pay taxes, when do I want to do that? The emphasis seems to be earlier than later. But still, it's a sort of a decision to make. I have some folks that come to our desk and say, I don't ever want to pay taxes on this. Well, and then we're going down the 1031 exchange route until— and we're going to ride that horse until it throws us off.

And just to kind of clarify here, the swap till you drop, I mean, because once, once you pass and you pass on your assets to your beneficiaries, basis steps up at that point, correct? Am I right in that?

Under current laws, yes, it does. And this is the aspect of of frankly current laws that we're more concerned about being eliminated is the stepped-up basis. There seems to be a lot of momentum around eliminating that aspect from the tax code. So the swap till you drop concept might get blown up with or without the aspects of 1031 exchange being there. So that's another aspect for investors sort of to think about is, you know, what is this going to look like at end of life for our heirs? Do I need to—

Wait a minute. So you mean if you do a 1031 swap till you drop, And then you drop. Uh, you mean your heirs don't pay your original basis? They either— there's no taxable event that happened? Oh my gosh, why?

This is better than this, right?

Holy smokes. Yeah, no wonder.

Yeah, so the value of that asset then is, is marked at, at that, at that transition point. Um, and then they can— that's their basis.

Wow, that is— that's insanely rich. That is insanely rich.

Hopefully remains that way. So, so Brandon, kind of transition here, kind of talking about the current market environment and just what you're seeing from, you know, deal flow and, and just appetite for, for deals.

Um, we're probably seeing more demand from investors in the 1031 exchange passive investing/ESD space than, than ever in the history of the space. So I think what's driving that is a variety of factors. Of one, I think property owners are just generally getting older. And ultimately, this is really a lifestyle choice for them to make of saying, hey, I just— I want to do something different than managing property. And that's what we hear very often from our investors. So I think the desire to do that is ramping up. This is a hot real estate market. So the numbers that I think some investors are seeing on selling their properties is very enticing. And so that's driving a lot of folks. Um, if it wasn't hard to be a housing provider before, it's getting even harder now with eviction moratoriums, especially we have in continuing here in Milwaukee. In my background. I'm not sure if that's the same thing in Kansas City, but different all over. What a challenge it is to, to deal with that as well. So you kind of put all those factors in, and a lot of folks just want to sell. So we see a lot of demand from that perspective. On the other side of that, supply is constrained. So we're seeing a lot of money chasing the Class A assets in multifamily that are prominent in the DST space. So this is creating a problem, right? So we're watching DST sponsors purchase multifamily assets for lower and lower cap rates, and it's challenging. Holistic economics on here aren't the same as what we saw 3 years ago. That's a problem. So what we're doing here and the way we're advising folks, they, hey, let's look at the best of multifamily that we can, right? If that's an asset class that you're really interested in, and then let's look beyond that into self-storage, industrial, senior living, where we can find better economics.

Yeah, right. Basically, it's the, the problems everyone's having right now in this market is the deals are getting worse, right? The cap rates are getting lower, prices are getting more extended. Um, same thing, you look at the stock market, it's just, you know, it's, it's just like a, uh, the tippy top. And, uh, you really, you want to buy right now, you know? So, so it's, it's that kind of thing. And too, too much money chasing too few deals. There's not a lot of deals that you look at and can say, "Boy, I love this deal." Right now.

Yeah, it's rough. There are deals. With that said, there are deals out there that I really, really like. Gotcha. Would I like other deals that I liked? Are there more deals that I would have liked 5 years ago? Yes. I mean, there's probably, at any given time, there's probably maybe a dozen deals that I like. I would say that's more like 5 or 6 at any given moment that we're comfortable investing with. So it makes it tougher. It's definitely more difficult.

And what are you finding that you're liking right now? What, what, you know, what kind of— is it certain geographies, certain classes of things? What are you liking?

Really like storage, self-storage. We really like in off markets, not in primary markets. So we like the idea of a good self-storage operator competing against sort of mom and pops in tertiary markets. We think that's a good idea.

Gotcha.

We like senior living with a great operator behind it. That is a business you're running inside that's extremely sensitive. If you're good at it, we think there's going to be— the senior tsunami is coming to that space. There's just more old people, and demographics always win. So we like that space a lot. And there are certain— like, I don't think I would have said this 5 years ago, but there's certain single-tenant retail deals that are very interesting in the space from some tenants that are extremely strong. And so we really like those. And of course, there's a rush of Amazon distribution facilities that are coming to the space as well. And everybody likes Amazon. So that, that's a good— seems like a good default. We like those in good markets. But that's sort of what we're looking at that, that is interesting.

Yeah, those are great, great insights.

And I think, just to clarify for those that may not know, so if you had a multifamily asset that you're now selling and want to exchange, you can exchange because it's considered like-kind into a different asset class as long as it's real estate-backed, correct?

Almost any real estate is considered what's referred to in the 1031 exchange code as like-kind. So for example, there's no reason that you can't sell a farm and buy an apartment complex or vice versa. So it's really a broad definition of what, what is eligible for exchange across asset classes.

Yeah. Talk a little bit about how you vet these sponsors and providers of these opportunities, whether it's a DST or kind of more standard syndication. You know, you're saying, you know, that the number of good deals you're seeing is fewer and fewer. How do you determine whether a deal is good or not? And I think you talk about what you guys at Insight do a little bit, because that's kind of your value-add here, right? It's your being a third-party objective, you know, viewpoint of these deals on behalf of the investors.

Oh, absolutely. Yeah, that's kind of, that's kind of the whole deal of where we're adding value, um, is doing that. And it's, is, for us, it's two-part. So in every deal, the deal is just as important as the sponsor. And so we will start that work on the sponsor. And the number one most important thing, and this eliminates a lot of sponsors, is an audited track record. Show me what you've done and how you've done. And surprisingly, there's a lot of sponsors that aren't able to produce that, and that immediately eliminates you off the table. So that makes it really easy for us to, to X people out when they're unable to provide a detailed track record of how they've done before. So we are looking for that, um, how they've done and what they've done. And then beyond that, we're doing, you know, third-party due diligence checks on, you know, background of management there. We're doing deep, even on-site interviews to walk through their philosophy, who's on the team, what sort of experience they have. So we'll run the whole gauntlet there to understand the sponsor at a really deep level. And then on the deal, we're digging into that just as deep as well. So then we're reviewing, you know, appraisals, they're reviewing property assessment reports, reviewing the demographics of that market. We're reviewing in the case of single tenant, We're reviewing the creditworthiness and actual income that tenant's making at that location we think is critical. We don't think simply, oh, investment-grade tenant, it's all good. No, it's not good enough. We need to go beyond that and understand that this location, this store is making money, is going to continue to make money. We need to understand that. So we'll take that a step beyond to sort of look at that asset. But again, like, it's really important that Because the sponsor's making all the choices here, right, about when they're going to sell this and how they're going to manage it. So it's a huge hurdle for our investors to get over, is to sacrifice control. So they've got to know that we've done our work on them, and they got to be comfortable with that sponsor, and then we'll get to the deals.

Yeah.

So if you have an investor and they're kind of comparing, should I do a DST, should I try and get into a private syndication, talk about kind of the decision process there. And then, you know, I think we've talked before You know, generally, you know, if you find the right deal and the right return profile, you know, private syndication might produce better return metrics, but there are also some challenges there where a lot of the sponsors won't take the 1031 funds. So have you guys overcome that?

Yeah, I think, I think the thing about the private deal syndication and away from the DST marketplace, a lot of what we're seeing from the private syndicators is not doing Class A multifamily. So they're doing Class C. Right? And they're doing a lot of value-add to that property, and that's producing economics. So it's, it's just not an asset that's offered in the DST space. It's not there. So we're looking for access to that. Um, to get over that, there's a couple things that we'll do. Um, one, from a syndication perspective, uh, we would love if sponsors would take 1031 money. There's ways for them to do that. They can do that, what's referred to as a tenant-in-common structure, which would make you a partial owner of that property. Tenant-in-common is sort of a precursor the DST before DST was 1031 eligible for existed, a lot of people did tenant in common deals. And so, we'd love sponsors to be able to do that. What we've seen from sponsors more recently is that they'll do both. They'll actually have a deal where side by side tenant in common money and there's typical what's referred to as GPLP or partnership money. They'll operate that structure side by side. Those are really forward-thinking sponsors that have been able and found a way to have both best of both worlds in a deal structure. We love dealing with them. And for some of the smaller sponsors who haven't done that before, we'll actually help them structure that.

It's a great idea. Yeah, there's really no reason not to do a TIC structure and divide your asset up on however the money wants, wants to, uh, you know, wants to invest it. Let them, let them do that. Um, so you guys would actually advise a sponsor who wanted to set it up, a TIC DST structure, to take multiple classes of money? Uh, you would help them advise them how to do that?

Yeah, we would point them in the right, um, the right directions to sort of do that. Um, we have to be very careful of conflicts of interest there where we're making recommendations and we might have pre-existing relationships. So we'll point them in the right directions to structure that. Um, I think some of the pushback on the tenant in common structure from the sponsors is they do have to sacrifice some level of control there, right? So in that TIC structure, the investors in the TIC do get to decide when to sell the asset. And so they don't really, they don't really like that. They prefer to do the GPLP structure, but it becomes a kind of, it becomes a battle between, hey, do you want this money or not? Do you want to raise a significant amount of money to go and purchase a deal or not? And so the desire to raise that money kind of outweighs that sacrifice the control. Yeah, I think it's really ideal for them to split it and to take a portion of 1031 money and take a portion of non-1031 money. That will allow them to kind of stay in the driver's seat.

Makes sense.

Yeah. What kind of final question I had is, you know, when does it make sense for someone to not do a 1031 exchange, if that even does exist? Because I'm sure there's some people, if the number's too small or something where it's, you know, what, what do you guys kind of see is like, hey, this is probably better just to Yeah, not trying to pay the government here.

Yeah, yeah.

I mean, there, there are some prospective clients we get like 20 minutes into the conversation with them about all these details, all the stuff we've talked about, and then I simply ask, what's your tax liability? You know, like, oh, I don't really know. Like, okay, let's go to— let's pull our website up on the fly. We have a very, we have a very rudimentary, you know, siloed sort of calculator on there. Can give you a rough idea of what it is. And lo and behold, I'll spit a number out at them and they'll say, oh, that's not that bad. Or, oh, I have this other net operating loss that I can offset that with. That's not that bad.

Hmm.

Okay, fine. You know, that, that might be a situation where you don't want to do it. The other situation too is when we see folks that really need liquidity. And so then we'll kind of try to sneak that financial advising conversation in there. A lot of our real estate friends don't want to have a financial advisor. They don't want to have a financial planning conversation. So we'll kind of sneak it in there on them in their benefit, right? For their benefit. Say, hey, what, what is sort of your liquidity situation? Like how many liquid assets do you have? And they're like, ah, not much. Right. A lot of these folks, all their wealth is wrapped up in real estate. It's like, ah, you may want to take some money off the table there. So at the very least, we would recommend maybe a partial exchange. And in some cases we recommend, hey, you kind of need this cash. You might want to take that out and skip 1031.

Yeah.

You know, there's also an argument for, hey, if long-term cap gains tax rates, disappear, right? Pay the tax man, take your long-term cap gains rate at 15%, and, and, uh, and, you know, sing a hallelujah as you, as you pay the tax man, you know. But those rates go up, so there's an argument to say, you know, let me, let me get my, get my asset out of jail, pay my taxes, and move on before the rates go up to the moon.

I'm seeing more of that. I'm seeing more of that sort of mitigation type strategies for the long term than I have before. I'd rather roll the dice, but that's just me. We'll see what happens.

Swap to your drop.

I'll keep as much of my money as long as possible. We'll see what shakes out.

Yeah, sounds good. Well, Brandon, what's the best way for listeners to kind of get a hold of you, to get more kind of resources that, you know, we'll put a link to that calculator in the show notes that you just referenced. And again, just who's your kind of ideal client? Who are you looking to, uh, to work with?

Yeah, I think the best place to— people can give me a call and I threw that number on the, uh, on the background there. Thanks to, thanks to our intern. Um, yeah, go to the website. There's tons of resources on there in terms of articles and other podcasts that we've done. And then the calculator as well, the website's investwithinsight.com. So I encourage people to check that out. Our typical investor is a real estate investor. That's been doing this actively and managing property for 20 to 30 years. And they just want to go take a vacation. They just don't want to deal with the hassles of managing that property anymore. That's our typical investor. But I would say there's a subset of our investors too that they may own a business. If you own a business and you're selling it and there's real estate inside of it, guess what? That's 1031 exchange eligible. If you own a farm, we have a handful of farmer clients, We'd love to talk to them about long-term strategies, especially if their kids don't want to manage that farm on a go-forward basis. There's things we can do there too that frankly are putting more cash flow in their pocket than doing all that work that they do. I feel so bad when we make those on-site visits for our farmer friends that are doing all this work and we look at the P&L and we're like, man, we can do better in some of these assets. Those are the folks that we're really aiming at, but vast majority of folks are real estate investors that they just need a way out and we help them find it.

So you see, you guys, there's really two sides of your business. You do the financial advisory work as well as this 1031 DST work. So it's really kind of a subset of your financial advisory business. You do real estate advisory really is what that is. So it's really awesome. And I just want to say that both Brandon and, and, and his partner Josh are some of the sharpest people I've ever met in, in the financial advisory space and in the real estate space. So, so, uh, you know, good job, guys.

I'm blushing. We like, we like you guys too. You guys are super sharp too. And these are, these are great interviews that you guys are doing. I appreciate you guys doing this and diving into these topics. Um, not a lot of folks are going this deep on some of these strategies. And it's frankly, like I said earlier, it's just stuff I didn't know about either. So it's really enlightening for folks.

Awesome. Thanks so much, Brandon. We loved having you on. I'm sure we'll have you back down the road. So appreciate it.

In person, fellas. We'll do it in person version 2.

All right, man.

Thanks.

Cool.

Thank you, guys.

This is the Invest Like a Billionaire Podcast, where we uncover the alternative investments and strategies that Billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors.