Recession-Proof Cash Flow : How To Multiply Your Wealth In Any Market w/ Sam Prentice

Yes. And.

What'S up, 1 percenters? I'm Ryan Daniel Moran, and this is the second handsomest man on this. This video podcast right now.

Thank you, man.

How does it feel to be the second handsomest man in the room, Man.

I didn't know there was gonna be award given out today.

That's pretty. Well, the handsomeness is cardboard cutout Ryan understood over there somewhere. He is a great listener. Hey, so Sam is one of my economic advisors. You could say he is who I go to when it comes to buying cash flow. Comes to actually setting up the proper structure for my financial house. Is that.

Absolutely.

If I say anything that would get me in trouble with the ftc, can you warn me before we do that?

Kind of kick you under the table a little bit?

Yeah, that'd be. That'd be perfect.

Go a little bit off the. Off the radar.

All right, cool. We're not recording this at all.

That's perfect.

But today we're going to talk about cash flow. We're going to. Because. Because Sam does some really cool things when it comes to buying cash flow and structuring it in a way that is advantageous. But first of all, first, before we do that, what the hell is going on with the market right now?

No, it's.

It is.

It's a super interesting time because we have so many unique factors that are going on in the market right now. And one of them that I think is overlooked is just what the tax act is doing to the markets. Like, it's pushing a lot of dollars back into the economy because people are wanting to make investments to reduce their tax burdens. So you kind of have. How do you.

How do you measure that? Because I'm. When I say market, I mean stock market.

Yeah.

And so we just up and down, up and down, up and down. So a lot. A lot of people have said that the tax. The tax bill was negative for the stock market. And you're saying something different.

I think that. I think that honestly, the tax bill overall was positive. The market. Because what it's done is it's put a lot of money where businesses are reinvested back into their profits because. Because they're wanting to reinvest those dollars to create the tax cuts or to utilize the tax cuts, so they're putting more dollars back into the economy. Cause as a whole, like the way the macro economy works is one person's spending is another person's income. And so when one business spends money on marketing or acquisition and those sort of things sort of to Acquire more customers to be profitable, but their spend that they spend is making another business profitable as well. So the more people spend, the more the economy overall grows.

Of course. So again, what the hell is going on with the stock market right now?

So here's what's unique right now is one of the ways that we're spend money is you can spend money using, you know, a few different fashions, but one is cash, one is credit. So credit is the money you can borrow. So as we have right now we have the Fed is raising interest rates. So the thought is that as interest rates rise, people should be or will likely borrow less over time. If we, obviously if we raise rates tomorrow at 20% to borrow, no one would be borrowing money at as aggressive a rate as we are borrowing today because it's more cost prohibitive. Make sense? And so if those rates continue to rise, like here's, here's what we're trying to do is we had rates all the lever slammed all the way down to zero, very close to zero.

All right, I don't want to go into, I don't want to go there. I want to go what like where should I be buying right now? Or should I have my opinion and I'll share it. But you who is geeks out on this stuff, should we be buying or should we not be buying right now?

Buying into the stock market? Yes, I think right now I'd still be very, very cautious of the stock market. I think they'll be very conscious of the economy as a whole.

I think that we have because of interest rates and because of, because of the.

Exactly what I was getting into is if the interest rates continue to rise, here's one of two things happens. Either we deleverage where people slowly slow the role on borrowing a little bit, but we still maintain slight economic growth. Or if that rate raises and people really do start pulling back, people quit borrowing, people quit spending. That's what drives economies into recession and that's the fear that is there. And that's what would create a more significant pullback than the little bit we've seen here. Now just the thought of those rates rising and people slowing down was enough to give the market quite a bit of a waiver.

So here's, here's where I'm confused because as we're recording this market's up today. Market was up yesterday, market was up the day before that.

But right before then we just saw.

I mean just people were dying in on Wall Street. I mean it was a horrible bloodbath And I'm still fairly confident that the market's going to come back to about the Dow will come back to about 20,000 just looking at the overall trend. But when we have thousand moves, thousand point moves to the positive, it makes me go, well, was I wrong? So could you help me understand what is, what's the reason for all the crazy volatility and what do you think is going to happen? How is this going to end up settling?

Yeah. So I think the reason for the crazy volatility is what you have with the American public in general. And just think for a second, the market is not always right. So the market is not the only indicator we should focus on. I'm glad you said to the health of the economy. And so I'm going to give you a personal antidote here. I live in Oklahoma, and so we invest a lot in oil in Oklahoma, and I have family in oil, so I track oil pretty closely. And so in 2016, we had the big pullback in oil. That was a great pullback. Created a lot of value, a lot of opportunity. And one of the stocks that I've tracked for a while is oke. It's a, it's a dividend pipeline stock.

Oke.

This is not a stock pick time, but yeah, okay, keep it keeping it out. But so, but so, for example, that is a midstream pipeline. And so what you do is your profitability, the dividends you make on that, like how profitable that stock is, is going to be based on how much oil flows to the pipeline.

Sure.

And so when oil pulls back down to, you know, 29 bucks a barrel or whatever it was at that point in time, that really doesn't have a huge effect on the amount of oil that flows to the pipeline. Because somewhere, somehow, unless we are in a recession as a whole in the US we're still consuming that oil.

Right.

So someone's going to produce it. They may not like to produce it as much, but it's going to produce, it's going to flow through the pipeline and you're going to receive your dividend.

The dollars don't affect how much oil.

Has no effect or no significant effect on the value of what's being produced there. So, for example, like that, that stock took a massive hit during that time frame because everyone said, okay, oil's going down, therefore we need to jettison everything.

Related to oil, but the production is still the same. So Uncle Sam comes in, you, Uncle Sam comes in and says, this is a good time to buy this because the production is still correct.

The metric they should have been looking at is are we in a recession or not in a recession? And that's why I think, like the macroeconomics are so important to know is when you're making these decisions of what companies do you buy, where do you put dollars? Is we want to look and say, okay, what factors should we be focusing on? Should we be focusing on the price of the commodity or the other factors we should be focused on?

Right. So instead of factoring in the price of stocks, what are you factoring in? Interest rates. You mentioned what else?

Interest rates are a big piece of the puzzle because that's one piece of it. There's, there's some other data points of just overall economic health of growth, like jobs reports are one thing that are factored in there as well. And that's going to be interesting. That's. That's something with this government shutdown, which we're all.

Well, the most recent jobs jobs report was fantastic.

It was really fantastic. This next one will be interesting to see because technically I read someone now, this was cnn, so you have to take with a grain of salt. But I believe that when they do the next jobs report, it will, those that are on furlough may be factored out of that. And so, like, it could, it could create some skewed numbers there, which to the average person may look at that and not think twice because it really should make a huge effect on the economy long term. But for the, for the short term, it could show a skewed job.

Well, let's just hope it's up for the long term and the government just stays shut down forever. Let's just hope that that is the case.

Maybe a little smoother transition than that.

I'm on team shutdown for as long as possible.

Someone gets the red button and that's enough.

Yeah, shut it all down. If I'm elected president.

I would come in and be like, all right, so bring me the list of things that stayed open during the last shutdown. Could cut everything else. That seems like an appropriate size of government for me. Anywho. Okay, so.

The way that I'm kind of internalizing all this is all right. If we stop being so obsessed with the numbers of what the market is doing, then we just look at overall production. And it seems to me like production's pretty darn good.

Absolutely.

So why stay away from stocks?

So the reason behind this is, so here's where we sit is so the Fed has had the same kind of deduction that you've had when it comes to what they can do. So when they are raising interest rates, that means the Fed is indicating that they believe that the economic health, or the economic health of the US right now is strong enough to raise interest rates, which may reduce the people borrow. But they do believe that the economic health is there. And so with that, you know, part of the, part of the reason that I think that stocks are a little bit of an issue right now is they're overvalued. You look at what you have to pay to get. It's just like, just like buying real estate. The reason stocks, I think are difficult is people have trouble, you know, disseminating back down to the individual what you're actually buying. Because you buy a stock, what are you actually getting? Like, why do you get a dividend? How does that actually work? It's much simpler. You break it down to something very, very simple. Break it down to a home. You say, if I want to go buy a $100,000 home and I can get $1,000 a month in rent, you know, my home will appreciate and I'll get my cash flow. Kind of the same thing of buying a stock with a dividend. Your stock will appreciate and you'll get your cash flow.

And if the value of the house goes way down, you're still getting $1,000 a month in rent. So, so, so where, where, where I'm concluding kind of affirms what I have decided up to this point, which is I think that in 2019, you're going to have a significant correction of prices. But that does not mean that there's.

A recession to realign prices with value.

Right.

I think that that's exactly what needs to happen. What will happen is we had a lot of economic growth that happened due to hope and excitement and all the things get people going. That's great.

I mean, when, when Apple was valued at a trillion dollars, it went up past a trillion dollars because it was like, well, new threshold in 2019, no company is worth a TR is actually worth a trillion dollars worth of production. So it has now cratered. And at the time that we're having this discussion, it's at about half, a little bit more than half of what it was. Now we're in almost reasonable valuations of a company with $100 billion sitting in cash reserves.

Think about the challeng. How do you actually get to those valuations? How do you get to that point? To evaluate that, you need to have a certain amount of data to look back at and what data do we have to look back at on Apple? I mean, think about how quickly technology has advanced. Technology is an exponential curve right now with how quickly everything's growing. You think about 10 years ago where technology was and where it's at now and think where it'll be in the next 10 years. So evaluating what is going to happen with the company over the future is just very difficult because it's not like we have 100 years of retail history to look at. Like, we have a lot of things that are rapidly changing the economy. And so that's why these valuations, I think we have some, some, some pretty.

Crazy, well, very unreasonable.

Like you have, you have perception to change that valuation very significantly based on.

The change and that would cause a lot of these crazy swings that we're.

Seeing such a difference in.

So, so me as, as somebody who is, you know, I, I have a minor in economics. I geek out on this stuff. As somebody who is probably more sophisticated than most, I still only feel like I get a sniff test of what is going on overall. And so the average person knows so little. And so what I've concluded and what I have encouraged my other amateur, not financially savvy peers to consider is buying by using cash flow as the indicator of if you're going to enter into an investment or not. Just like you made the decision on the oil investment, if, if cash flow is your production, you're buying the production rather than the value of it. So when, for example, AT&T fell to $29 and it's paying a 7% dividend, I am like, give me all that AT AND T stock, please. I will take a 7% dividend. Do you agree with that type of an approach?

Well, first off, I hear if you buy enough ATT stock, your coverage will actually work.

But no, very much because what you want to do is. My rules for investing are pretty simple. Like, I really do believe, like number one is you should invest in things you understand. And so if you don't understand, at least take the time. Like we live in the information age. Go to YouTube, go to Khan Academy, learn how stocks work. Once you understand something, then you invest for cash flow. Like, cash flow has to be a priority. The reason people go bust, the reason people lose money is they don't have sufficient cash flow to lash through a variety of different situations that might happen. So for example, if you go buy all your money in AT&T stock and, or not AT and T stock, but a stock like AT&T that doesn't have cash Flow, you know, you're just looking at just the equity growth down the road. So you go buy ETFs or index funds or things like that without a cash flow component. And then you need to have access to cash flow because cash flow is how the world goes around. You end up having to fire, sell assets because you sell at a loss, you go bust. If you have cash flow, you can weather those storms. So even if you buy it at 29 and it goes to 24, you don't have to exit at 24. Probably buy more because your horizon is long enough. Like horizon how long you can hold the asset and cash flow helps extend that horizon. Perhaps if the cash flow is consistent to infinity. Yeah, that, that lowers your risk significantly for like a safety aspect. Not having to liquidate something is so, so key.

So here, here in my analysis is why this, this time is so scary to a lot of people. And for me, when the economy is going up and down and up and down, I'm getting excited while everybody else is scared. It's because most people, when they're buying index funds or they're using an advisor, they're just banking on the dollar value of the investment going up and they're afraid that it's going to go down. Sam and I are both under the opinion that it's probably going to go down over the next couple of quarters. But on a smaller basis, when you're looking at something like the cash that is coming in from the investment now, you can be more strategic about, oh, there was this big drop, I'm going to buy Apple, which Now has a 2% dividend, or AT&T which has a 7% dividend, or IBM which is a 6% dividend. And to me that's smart and long term thinking rather than getting emotionally involved.

In all of this roller coaster, without a doubt. And the fear is like there's always that fear of loss when you think about investing. One of the reasons you don't people sit on money or sit on opportunity and miss opportunity is because the fear is that if I put money in AT&T today, I can get it in a week, I can get it cheaper, or I put money in the day, I can get it in a week and get it cheaper. And so it's that fear of what if I buy it now and miss out on something or I put money in AT&T and now I can't put money somewhere else. And so of course that's part of managing the overall your portfolio. Just want to keep certain Amounts of liquidity. And so as a general rule of thumb, I would be deploying capital right now to a certain degree, but I would try to maintain a good healthy percentage of liquidity on my balance sheet. And there's a lot of ways to maintain liquidity.

But liquidity meaning cash, cash or access to cash.

Like for example, if you have gone, you bought your AT&T stocks or whatever and you have other liquidities that are out there, you could use margin calls to be able to a margin accounts, be able to get access to capital and not tie up and have to sell and liquidate a point in time. At an inopportune point in time you could use, you know, there's home equity that you can use, like as lines of credit sort of things. So you can use credit to manage that liquidity or you can just use straight up cash and cash holding things. So capital warehousing, savings accounts, other liquid vehicles that are not exposed to volatility. So that way when the volatility happens, the assets you bought may lose value, but they still cash flow. Then now you can go in here and you can go buy at a value and you have liquidity.

So the way that I'm doing that is I did just borrow against one of my homes right before interest rates, great, you know, continue to go up. Because I can see that happening.

It's a, it's a.

And check this out. I ran the numbers and I was like, can somebody tell me why I shouldn't do this? Because I borrowed against my house and I saw and I'm taking advantage of the volatility by selling naked puts, which is a way that I generate cash flow. And also if there's another, like I can still buy the stock at a lower price if it goes continues to go down story for another day. It's my favorite way to buy stocks. But so I borrow against the house. I'm now selling naked puts, which is generating enough income to pay the mortgage. And then when I actually buy the asset, I now have the dividends as on like free cash flow, we might say. So that's kind of my way that I'm doing it. And I have the capital warehouse with you, of course, as like my umbrella to make sure that if I'm not doing anything, I'm still participating in the upside of the market without any downside.

Absolutely.

So besides stocks, what other interesting cash flow plays are you making right now? You always have like a cash flow trick up your sleeve and you're like, I can dig holes and fill Them and it produces cash. Like you always have an interesting way that you are generating cash flow passively. So what are you hustling right now, Prentice?

I can entertain you for a bit here. No, it's one thing I've been really fortunate is just with my network of the clientele that I work with a lot of high net worth individuals, I get to see deals all the time. And so I offer that as kind of one of my value adds to my clients is I say anytime you have a good deal that you're interested in investing in, bring it to me and I'll look over and give you my opinion on it. That's all it's worth. It's an opinion. Not going to advise on what you should or shouldn't invest in. I mean, I do give that out on occasion. If I say this is, this is dog me, don't go there. But for the most part I get to see a lot of unique things. So one of the ones that I've invested in here recently.

Well, I'll go boring than interesting. So boring.

Just go great trip in the end for interesting.

Trade for interest. Okay, all right. So trade for interesting. So we bought a saltwater disposal well. And so what saltwater disposal is, is when you go produce oil, you, you bring up, in addition to the oil, you also bring up a lot of wastewater. And so the wastewater has to go somewhere. And so when they produce the oil, the oil goes in one tank, the wastewater goes in another tank. Someone dries up with a truck or they use a pipeline and they take this wastewater, this nasty gunky crap, which has still got a little bit of oil mixed with it as well. They take it over to a facility, it goes into some separators, it sends the sand and junk to one spot, it sends the water to another spot, and the oil that's, that's mixed with the water to another spot as well. And then that water then gets pumped. Now that's been treated, it gets pumped back down hole and gets dispersed back into the formations. So basically you're buying a facility that is a peripheral tool to the oil industry. So basically they pay X number of cents, 50 to 60 cents or whatever per barrel of water that gets disposed. When you produce oil, you normally produce three to five barrels of water with each barrel of oil at the same time. So there's a need for it. It's a real need. It's actually just, it's basically a commodity to the oil production industry. So we bought one of those disposal wells and we, it's a really, it was a really unique deal. But long story short, went in there, bought a distressed well that had been hit by lightning. The facilities.

Literally hit by lightning.

Literally hit by lightning. And so they had to. The whole facility had to be wiped out. It had been out of operation for two or three years. But the wellbore was in good shape. And so we were able to still use the wellbore, which is where the water goes. It's the hole in the ground. And so we literally bought a hole in the ground to dump water into. And now we built a state of the art facility that's up. So you build the facility and we are able to take water in at that point in time.

So when you're buying these, I mean, I know your overall strategy is you park cash in a warehouse that goes up in value, that never goes down in value, and then you buy cash producing assets with that. And because of your network, you have these cool cash flow plays.

Correct.

So here's what, what I want to understand here when this opportunity comes to your desk. Are you buying a business? Are you buying a piece of land? What are you actually buying that is producing profit? It's fun to say, I bought a hole in the wall that we put wastewater down. Great, okay. But what are you actually buying that's producing the cash flow?

It's actually, you're buying, you're buying a, it's technically a business because you, well, there's a lot of moving parts. That's a great question. Like, you know, you lease the, you lease the wellbore typically. And so that's at least a sell in perpetuity based on sending stuff down it. And then you buy the, you build the assets, you're actually buying the facilities. There's pumps, there's things to operate, you know, a pretty significant amount of, of equipment that is used to operate this. You purchase the equipment and then after that you're, you're building the business off of that.

And is someone coming to you with like, I want to build or buy this business? And then eventually, yeah.

So right now, and actually this is unique, is you can look it up and look up saltwater disposal, wastewater disposal. Look at Mark Cuban, because they had a pretty good buy of wastewater disposal wells here recently. Some of their headspuns. And so it's really, it's an interesting market space because it's an aging demographic. So a lot of these, these wellboards where they're disposing were owned by, you know, older, like older farmers, older builder operators. There's a lot of deferred maintenance. So deferred maintenance is a glorified way of saying don't take care of your crop. And so, and so like, but they said it's cash flow and they may operate at 30 or 40% of full capacity. And so that either people have to drill a new wellbore, which is like a million dollar expense, or they just drive further away to get to it. So they may not go to the most efficient routes, like a lot. There's a lot of inefficiency in that market space because as people have aged up, they're not taking care of their leases the same way and therefore they're not able to operate at capacity. And so that's where some of this value is coming into play, is you're able to go in and buy, renovate and take in some of that cash flow by how efficiently you operate. Because that's what they're looking for when they dispose of water, is they want an efficient facility they know they can predict and count on to go disposal.

So if I'm understanding somebody's basically in the business of buying up distressed holes in the ground that produce money and like, that's their business.

Absolutely.

And now you get to participate in that type of a business. So your financial strategy and what you talk about publicly is you park your money in a warehouse and then when the right opportunity shows itself, you're then going, oh, holes in the wall that produce cash flow, or holes in the floor or ground, whatever the term is.

Right. Fast forward about a year of research. Because at first, when that deal first came to me, to be honest, right now I heard it, I thought that's probably not going to work. And so it was interesting enough. And then I saw, actually it was maybe a month after that I saw the article come out with Mark Cuban Purchase and I thought, well, maybe I should pay a little more attention to this. So I dug into it for about a year and after, after going through looking at all the different risks and the pros and cons to it, I found an attractive business model. So at that point I. So I probably did a little more digging on that than I needed to.

More digging holes in the ground. So here's a question. How does the average person who, you know, is, is waiting for the right opportunity, looking at the market going, I'm probably going to sit on cash for a bit. Unless they're buying like we buy, which is looking for cash flow, they're waiting for the right business or deal or something to Go into how do they put themselves in position toward these types of opportunities are flowing towards them.

Great question. That's one of the things that I feel like is very, a very underserved sector of the market today. Sort of the financial services industry.

I hate to like you mean like the opportunity market.

The opportunity market. So people who are looking for places to invest capital typically get very limited exposure to what all is actually out there. And so that's one thing that I think is really important that I'm looking to improve in 2019 is I want to offer some resources to investors where they'll be able to go look up and just see even if it's not in deals you invest in, just see what else is out there. When it comes to alternative assets to just what is mainstream. Because there's a lot of things you can do with mainstream with real estate and stocks that'll get you to a decent spot. There's a lot of other alternative assets that are very unique that have impact on your balance sheet that are, that are attractive. You know, like for example, you can you buy cash flowing websites. Who would think of that? That's not something you see. That's not something you hear from Morgan Stanley or something you hear from Edward Jones. But it's an asset which you.

Why do you think, why do you think that's the case?

It's all about, it's all about what is scalable, what's profitable in my opinion.

Meaning Morgan Stanley can't go out and buy institutional wealth a whack ton of websites because they need to be managed and they're like tiny small businesses and they're individual deals. But average guy on the street could go buy a website and write the thing off and enjoy the cash flow.

From that and potentially active involvement that as well. And in which case you may be able to have some tax benefits from that. And so and same thing with you know, like, like the oil investing or buying real estate. Think about buying real estate. You know, there's a reason why REITs return less than individual real estate typically. Or I guess that's, that's debatable. You either usually have one spectrum. If you're good at real estate, normally individual purchases are better than a REIT because you're able to provide your own unique value into the decisions we made. Your active involvement helps boost your returns because that's kind of one of my.

Other rules on a. I see what you're saying. Yeah, there's either time or there's passive returns.

If you have the Ability to be active in the decision making process of your investments or to be active in the operation of the investment. So for example, like if you're deciding where you put your money and you have not maxed out what you can do, invest in your business, I think you're potentially making a big mistake. And actually I had a conversation with the person in the back room here maybe six months ago because they were routinely doing all the things that you would do as a good upper middle class person and say, okay, I'm going to save money into my 401k, I'm going to save money into my IRA, I'm going to put money into the stock market. I put 20% of my income into, you know, general regular big old school long term investments and target date funds, those kind of things, which I'm not here to argue whether or not those are good or bad. I'm just saying in their case right now, they were going over here and borrowing money from other institutions at an annual rate of probably 17, 18% is what that boiled down to. So, and it's to finance things in their business they feel like has a very high predictability. So the question is, is it's very simple is would you rather save the 17% you're borrowing and paying interest and just use that money for yourself or would you rather go pay the 17% to be able to invest? So someone said I'll give you money at 17% and you can go, I.

Have no idea what you're saying right now. There's way too many numbers.

Let's go back here real quick here. So for example, they have a business, they can put money in their business and they can create cash flow. Instead of using their own cash, they're putting their cash into the stock market and these target date funds.

Oh yeah, that's.

And borrowing to fund the business. So it's almost like they could use their cash to fund the business. And instead they say if someone gave you money at 18%, would you go put it in the stock market? The answer is probably not. You're probably going to be better investing your money and saving the interest you are paying as opposed to putting in the market. That's just me and my personal opinion.

Yeah, I would actually, I might disagree with you. And, and the reason for that is if you can predict that that 17% debt is going to roll into buying more inventory now sell through.

Oh, absolutely. No, no, I get that completely. But my point is, is why would you not do both? If you could, why would you not try to utilize. Why would you utilize your capital to go over here and tie it up in the market when you are limiting how much? Because they were, they were running into credit issues with how much they could borrow. So they were hitting limitations of how much they could invest in their business because they had their liquidity tied up over here in the market.

So let's talk about. We were talking about some of the interesting things that you buy up. I love that you can buy up holes in the ground and they. And they cash flow. I'd be curious if there's any other stuff that you're considering in lieu of the tax changes. Yes, because you are among the three people I go to that is very in tune with some of the strategic advantages in the new tax code. And you mentioned earlier that a lot of investors are changing their investment habits based on what's going on with the tax code. How has it impacted yours?

This is, this is really unique. So I feel like this is. There are some quantum leaps made in how effective real estate is when it comes to mitigating your tax burdens over with the tax cuts and Job Act. So let's go through just like one of the biggest things that happened here that I think took place that is underutilized by investors right now. But any properties that were acquired post like 9-21-22 of 2017, you are eligible for the new bonus depreciation rules. So depreciation is where you buy an asset for X number of dollars and then you get to write off and you depreciate its value over time as you hold it. Well, what bonus depreciation is? It says that anything under a lifespan of 20 years, you're able to write that off in all in year one. So you can accelerate that depreciation. Write it off all in year one. So when you buy real estate, typically you depreciate real estate. If you do flatland depreciation, you normally do it over 27 and a half years or goes to 40 years for commercial.

And it's like 2.9% or 3 point something. Yeah. Per year.

So you're depreciating usually a very slow decline. With the new bonus depreciation rules, what you can do is you can go in and do what's called a cost segregation study. So cost segregation is where you divide out the different parts of the property. So there's flooring, there's piping, there's concrete, there's roof, there's windows, there's, et cetera, electricity, electrical. And so you go in and you do this cost segregation study. So each cost has its own box. And now you're able to depreciate those at different rates. So you may be able to depreciate the flooring at 10 years, you may have to depreciate the copper wiring at 15, you may have to appreciate the roof at 30. So you go through, you do this whole cost segregation study. Well, now maybe 30, 40% of this property on single family, it can go up more. Other types of real estate, you're able to wrap that off in year one or able to depreciate that in year one.

And is that improvements made or is that just pieces of the house?

That's pieces of the house.

So if you, if you bought a house after, let's just say October 1, 2017, after the new tax law came into effect, you could segment certain parts of the house and take all of the depreciation for the year one?

Absolutely, absolutely. So what you really take the property and so say it's a million dollar property, you now take 300, $400,000 of that property and you're able to depreciate that all in year one. Now that is depreciation you have to recapture when you sell. But if you're buying something for long term cash flow, you can take that, you can build it up and it can carry forward if you don't use all of it this year.

Yeah.

So what I think is going to happen is over the next five years you're going to see a lot of money going into real estate because they want to build up these tax, you know, these tax offsets. And so, I mean, the numbers on it are really pretty impressive. So you buy a million dollars of real estate, how much money do you have to put down to buy a million dollars of real estate?

Typically 150 to $250,000.

So $200,000, 20% we put $200,000 down and now we've gone and acquired this investment property that's a million dollars in value. So we put $200,000 out of pocket to create a $400,000, 300 to $400,000 tax bracket. And if you're at a 40% net tax bracket with some state tax, everything else mixed in there, now all of a sudden we're getting, we're actually literally saving real taxes, you know, 150, $160,000 of real taxes we're not paying.

And if it cash flows, if it.

Cash flows, our risk is very limited. So here's the thing, like mechanics. Yeah.

I mean that justifies the down payment. You're actually saving money by buying the house. And so what you are saying is you think there's going to be some money flowing into real estate.

It makes for that reason no brainer. So just think like you take this to institutional levels, you have a lot. And the thing is, first off who this is for is if you're not paying a significant amount of taxes right now, it means you're probably, if you're watching Ryan's show, it means you're probably building a business that's excellent. That's one of the best places you can put your time and your capital right now. So you're not paying taxes because you're reinvesting everything back in your business. That's exceptional, that's wonderful. Keep doing that. Don't stop that. But once you get to the point where you have those dollars, you're trying to, you're trying to reinvest in other things outside of your business and you are paying taxes. Taxes, huh? Paying taxes. When you're paying taxes, then that's when these become really attractive, these strategies become attractive. So you want to know like, do you have a high tax burden? And that's, you know, something that would make this attractive to work with. And then also are you able to use real estate losses to offset because you have like passive loss limitations, are you able to use those to offset your ordinary income or just other real estate gains? And so that's something you want to look into based on what you qualify for from the tax status. So if you're married and you have the ability to have one of you qualified as a real estate professional, you already invest in real estate. There's some really unique things we can do to actually use this to offset your ordinary income. So there's some limitations on who all can participate in it, but there are, I mean, it's just, it's when you, when you fit the criteria, which is a very basic criteria to fit. When you fit that criteria, it does make it a lot of no brainer. Which is why I think there'll be a lot of people who will be dumping money in a real estate.

What should the average business owner be doing in 2019 in lieu of or in note of the fact that market's very volatile? We both think it's going to go down. We don't know, we might be wrong. But we both, I think Dow is going to 20,000 in the next quarter.

I like another bold prediction. Ryan that's good.

I won't shy away from them. And Amazon's going to make another acquisition. That's my other bold prediction for the year.

We've got a new tax law. We've got uncertainty in D.C. we've got all kinds of uncertainty. What should the average business owner be doing right now in order to maximize this year and this time? I love and acquire passive income.

I love general questions like the average business owner, because we all know that average business owners fit in this perfect little box.

So, no, I think. And when you think of average business owner, it's really, what should they do, Sam?

I'm gonna get what should they do? No, what do they do?

I'm not gonna lie to get there. I'm just kidding. But no. So we will. We will. I will get there. But what I'd say is the average business owner, when you think of business owners, there's different stages that go through. So if we're gonna define average as a business owner who has passed the point of putting every dollar they possibly can, you know, they own and every dollar they can borrow and every dollar they can think about borrowing into their business, they're past that growth stage. They're into the point where they actually hold and run reserves. That's the average business owner. So just kind of use that as your metric is if you are not at the point where you are consistently holding reserves in your business, this is probably the advice I would give would be different for you. You should be still in growth mode. You keep working on that. That's your job. Come talk after this. But for where we're at right now, if you're the average business owner, you have those reserves. What I use personally and what I think makes a ton of sense is the capital warehouse strategy. So we use a capital warehouse strategy when we're in a coin flip environment where things might go up, things might go down. Now, right now, we can play both sides of the economy. And what's so beautiful about this? Like this last year, for example.

And that's. That's where you park cash.

Park cash.

And it's tied to index funds. So it'll go up, but it doesn't go down correct.

So it's tied to stock indexes. And when the market goes up, we gather the upside. When the market goes down, you just get a 0% credit. And so there's some mechanisms for how they get that done. But basically what we're doing is we now have a place to store capital. So when you don't, when you don't have the headspace to go figure out exactly what you want to invest in or you're not positive you can tie that capital up. You really need a high level of liquidity. If you say, I don't think I'll need this capital, but what if. And then if that's your thought, if you.

Or what if the right opportunity comes and what your I can buy up wells that produce cash flow.

I don't care what your what if is followed by if you think I would like to invest money, but what if. If that is the way your mind works right now, then you need to talk and look at a capital warehouse.

And that's.

That's common because your what if could be what if my business needs it. What if the better investment opportunity comes along? What if? You know, I list any list of the what ifs that are out there. This is a great stepping stone because what it lets you do is it lets you invest, lets you have the upside but maintain all the liquidity. So it's kind of the, it's the friends with benefits of investing because we're able to, you know, go have all the upside, limit the downside, but stay liquid the entire time. So that's where I would start with on that side of it.

So should you say full disclosure, like honesty, transparency, that's part of your business of what you do for people. And I'm a client of Sam's using that strategy. With Sam specifically, I've told my nightmare story of hearing about it on the interwebs, thinking it was cool, and then having a salesman kind of take me to the ringer and take all kinds of fees and commissions. And I thought I was doing something financially healthy and it wasn't.

The story of what is your goal? Well, here's my goal. The best way to get that is to buy whole life insurance.

I do not ascribe to that theory in the least.

That was a joke, ladies and gentlemen.

In case we didn't catch that is very much a joke. And the thing is, insurance is very useful when it's structured properly. What it does, it helps you manage cash flow, it helps you take advantage of upside, limit downside. There are a lot of really positive things to it when it's structured properly, but it's equally as good as it can be when it's structured properly. It can be equally abrasive to a balance sheet when it's structured improperly. So you really just, you cannot be too diligent in that.

So you've got this Pool of cash now which grows but doesn't shrink. And what should people be looking for? And we're looking for cash flow plays. Obviously I buy dividend paying stock at opportune times. You have deal flow that comes in all the time from. But what should, what should people be looking for? Like great, I'm going to park it here and wait. What should they be looking at While we're waiting to see how the market is going to go?

I was thinking about how many, I was trying to decide how many fingers to hold up for criteria I wanted to give because I want to be like 10, but I'm going to limit it to four. So number one, something you understand, so something that you can understand, you feel like you understand the business model, what you're invested in. Number two is it needs to prioritize cash flow. So those things and the reason I'm not giving you a specific investment is because if you understand the criteria, the investment will, will be much easier to find with business owner situations. There's such a variance there. I want to be a little bit more vague with that. So number one is something you understand. Number two is something that prioritizes cash flow. Number three is something that you see value in this that you believe has long term value or value for the horizon. You may like to or need to hold the asset. So for example, investing in Sears right now may not be the best investment for you because you might not see the horizon long enough to outlast your investment. I mean I drove by one on the way here with some boards on the doors. So that's probably not ideal. Not a good sign invest, not a good sign. Want to invest in things that we think are likely to get there. And then lastly would be is understanding your individual situation and looking for there's macro value, this value to the overall economy and then micro value to you individually. So for example, if you're paying, if you're already way ahead on taxes and you need more liquidity, you may need a certain kind of investment that focuses more in your specific needs, that time frame as opposed to someone who's got a high high tax burden. So someone who has a high tax burden when they go and a high tax burden and they understand that they can offset regular income with real estate losses because they qualify for that. Well that person that becomes a no brainer for what they invest in because now they have a 40% discount on their purchase price. So they have a micro value that is unique to their situation. Does that make sense?

Not at all.

Okay, so let's go back here real quick.

No, I don't want you to explain it or I want you to tell me what people should be investing in. So here's, here's like real estate meets all those criteria. Businesses could meet those criteria. Real estate dividend paying stock could absolutely. But it's like, it's all dependent on that first piece is like what do you understand? Like you took a year to understand the investment that came to your desk.

What I would look for doing when it comes to that is the reason you diversify is you don't diversify to make more money. You diversify to mitigate risk. So that's kind of piece number one is when everyone thinks I want to go diversify, you diversify to mitigate risk. So if your goal is you want to grow your capital, you want to grow it as efficiently as possible, you're probably going to feel more comfortable if you're able to diversify to some degree. Makes sense. And so being able to diversify, part of that is it's just like building a business. You don't go do everything yourself. You go do you go find quality people.

I completely agree.

And so when it comes to invest in those things, I would say try to diversify your balance sheet into various cash flow plays that hit the guidelines I was giving you. But use quality people to get there. So instead of you having to go spend a year learning each thing, you go find people who you believe have the right, you know, they have the right competency, the right character, you know, all those things you would want out of someone who's going to be taking over control of your money and.

Use them to manage those assets. So if you want to go invest in real estate, go find someone who the type of real estate you like, the geographic location, figure out macro, what you want to do and then find someone who's an expert in that particular field.

Yeah. So for example, one of our backroom members had a huge exit, tens of millions of dollars they received and they decided they wanted their next business to go into to be commercial real estate. Right. I trust this person, I trust the strategy. And this is going to be their now full time focus. And I've invested in their business, which now buys up real estate, which is fantastic. I know that he is all over that. I'm not going to go try and buy a commercial property. That's not my business.

I understand completely. I actually think I know you're talking about. And he's bought some properties in Oklahoma.

Yep, yep.

There we go, so you know, it's an absolutely you now go have a quality person who knew who had at least enough wherewithal to know how to go build a multi million dollar business. So I mean that's not that money is the only better you need. It does help a little bit so that you were at least successful in this area. And so, and then you take that over. Now you say you have someone who's a quality person, who's got character, who's competent, is intelligent, who's going to go, who's going to dig into this and they're going to put their full time energy, effort and skill sets into going and building your wealth. That's outstanding.

So this feels like a really good place for us to wrap this up with a pitch for our stuff. So, so here's so, so obviously like we, like we covered a lot. We covered what the capital warehousing is. We covered, you know, what we absolutely know is going to happen in the economy this is this year because it's going to be so predictable and we're going to get every prediction right. We talked about like little ways of producing cash flow that a lot of people don't know about. What the heck do you do with this now? I have spent my life answering that question. I've spent my life trying to figure out the question of I know a few things now what and trying to find the next thing. And this is what we compile inside of the 1%. So we break down the capital warehousing strategy with Sam. We look at other plays to put that I'm specifically myself personally interested in for cash flow plays. We talk about when to buy stocks and when to utilize things like naked puts. This is where we apply this stuff. And that's, you can get that over@capitalism.com and it's called the 1%. That's our monthly program. We're going into each one of these individual strategies and actually applying them so that you can use the ones that are right for where you are in the stage of your journey as an entrepreneur. Sam, where do people find you?

If you want to look me up, go to wealthwarehouse.com so wealthwarehouse.com or email me sameealthwarehouse. And I don't know, I don't have a whole lot of social media. That's one of my goals for 2019 is I'm going to actually get a little bit more of a social media presence. I'm going to get one of those Instagrams and some Twitters. And, I don't know, whatever it is.

But in the meantime, you can just keep dropping gold on the capitalism podcast.

That's the plan.

All right, Sam.

Appreciate it, bud.

Thanks for your predictions.

Thanks for hanging out with us.

Sam.