I have had a bit of time lately and have found myself pondering a number of different subjects, none of which is really long enough for a blog post on its own. So I've combined them all into one big post. I hope you find something here useful.
Why Not Combine Investing and Transportation?
Regular readers know I'm generally not a fan of combining insurance and investing using insurance based investing products like permanent life insurance (whole life, index universal, variable universal) or annuities. The whole idea of having to buy one product in order to get into an investment is kind of silly when you think about it.
My old Durango. Want to park it in your driveway?
What if you had to buy a car in order to get into an investment? In this case, it would be a salesman coming up and showing you something like my crappy old Durango. “But,” you say, “I already have a nice shiny A6, it works just fine and it's perfect for me.” The salesman replies that its the only way to get this awesome investment, so you either park that extra Durango in the driveway and use it once a year or worse, get rid of that A6 you liked so much in order to drive the Durango. Does that make sense? About as much sense as buying an expensive insurance policy you don't need. Don't combine your transportation and your investments.
I Don't Need More Income Right Now
I often get into silly arguments on the internet with people who are big fans of income investing, both dividend-focused stock investors and real estate investors. I've written before about the errors income-focused investors sometimes make but they seem to just be focused on income, income, income. Well, the fact remains that I have far more income than I need right now and its getting taxed at ridiculously high rates. In fact, I'm doing all I can right now to DECREASE my taxable income by investing in tax-protected accounts (both tax-deferred and Roth) and deferring as much income as possible. Exchanging current income for capital gains is EXACTLY what I'd like to do. Long-term capital gains are far more tax-efficient than real estate rents (taxable at my full marginal tax rate, at least after depreciation) or even qualified dividends (since you can defer the tax for decades on capital gains, or even avoid it all together with the step-up in basis at death or by flushing the low basis shares out of your portfolio by using them for your charitable contributions.)
Houses Really Do Depreciate
While we're on the subject of real estate investing, real estate investors seem to be under the impression that depreciation is some kind of free lunch. The government lets you depreciate the improvements (buildings) on your property, but not the property itself. That's because the building is worth less each year. That's why you have to spend money on upgrades, repairs, replacements, and eventually, bulldoze it and start over. It's a real expense, just like utilities, management etc, rather than some awesome tax break because the government loves you. Don't get me wrong, I claim depreciation just as much as the next guy to improve the tax-efficiency of my investment, but it's not a free lunch. The companies whose stock you buy when you purchase an index fund are also depreciating all their property and equipment and passing that savings on to the owners.
Many Roads to Dublin
Taylor Larimore, perhaps the wisest 90 year old investor I know, is fond of saying, “There are many roads to Dublin.” Sometimes people get all religious about their particular style of investing, whether it involves index funds, actively managed funds, individual stocks, trend-following, precious metals, cash value life insurance, or real estate. Perhaps that's because it usually represents a life-long commitment to be successful and requires at least some faith in future performance of the asset or method. However, it's important to remain somewhat agnostic on this point and consider not only the likelihood that you are wrong, but also the consequences of being wrong. Keep the principles of investing (such as keeping costs low) and the simple principles of getting rich (make a lot, save a good percentage of it, and invest it in some reasonable manner) in mind first and foremost, rather than getting bent out of shape about particular methods. There are many roads to Dublin, and if you judge your road as likely to meet your financial goals, more power to you.
Skipping out on IRAs/Roth IRAs
I still find it bizarre to see people missing out on the benefits of retirement accounts. Sometimes its a person who really thinks he will have a higher marginal rate in retirement than right now, whether it's because he's a super-saver or simply due to his misunderstanding of how the process works. Often it is a real estate investor who somehow thinks the tax benefits inherent in real estate (primarily depreciation followed by serial exchanges to defer capital gains) are better than those obtained in retirement accounts. It really doesn't make sense when you think about it though. You can buy most investments, including individual real estate properties INSIDE of IRAs and Roth IRAs. Might as well open up a SEP-IRA, fund it fully, convert it to a Roth IRA (one version of the Mega Backdoor Roth), transfer it to a self-directed IRA, and buy your real estate there. Tax-free forever, even without ever doing a 1031 exchange. It doesn't make sense to skip out on retirement accounts and buy real estate or permanent life insurance because you're afraid of high future taxes. Just do more Roth conversions. My favorite is the argument people make that “the government is going to put a tax on Roth accounts.” They might also make life insurance proceeds taxable, eliminate 1031 exchanges, or even just confiscate everything. But only a fool bases his financial plan on those worries.
Warren Buffett and “Diworsification”
I often preach the benefits of diversification, both among the various asset classes and within them. A frequent argument made against it is that Warren Buffett derides it as “deworsification.” At this point, it's worth noting that there are actually three definitions of deworsification floating around out there. The first is used by a stock picker, when he buys ten stocks. The first stock represents his best idea, and by the time he gets to the tenth stock, it's only his tenth best idea, so therefore it is probably a worse investment than the first stock. The more he diversifies, the worse his investments. The second definition was first proposed by Peter Lynch in his surprisingly useless One Up On Wall Street, and applies only to a single business whose management gets distracted by businesses outside of its core expertise. The third definition, which I actually agree with, is the investor who buys 5 mutual funds that all invest in the same stocks.
At any rate, this claim that “Warren doesn't diversify” seems to be a strong one at first glance. The logic goes like this: Warren Buffett is rich and the world's best investor. Warren Buffett doesn't diversify. Therefore, if I want to be rich, I shouldn't diversify. So I'm going to put all my money in one stock or I'm going to put it all into a rental property or two in the same geographic area. However, correlation is not causation. You cannot invest like Warren Buffett.
First, consider that most of Warren's outsized returns were earned decades ago, when the market wasn't nearly as efficient. Warren's mentor, Benjamin Graham, noted a major difference in market efficiency between the start of his career (in the Great Depression) and the end and concluded you were better off indexing. You can't go back to the 50s or 60s and invest like Warren did.
Second, what Warren does now when he buys a stock is insert himself into it's management. It's far easier to put all your eggs into one basket and watch it closely when you're on the board for the company. Unlike Warren, if you buy a stock, nobody is going to put you on the board of the company (although I suppose you could buy a small business or real estate property and take a management role.)
Third, Warren Buffett isn't even beating the S&P 500 lately.
Fourth, Warren Buffett actually does diversify quite a bit more than most assume. Berkshire Hathaway, Warren's company, owns large chunks of 64 different companies. Sure, it's not the thousands in an index fund, but it's a far cry from 1 or 2 stocks or properties. Apparently one of those companies is only his 64th best idea.
Fifth, Warren Buffett recommends that investors just buy a good S&P 500 Index Fund. So, while Warren Buffett might not diversify as much as some investors, it is what he recommends you do because he knows YOU CAN'T DO WHAT HE DOES.
Diversification protects you from what you don't know about an uncertain future. If you're honest with yourself, you'll acknowledge there is an awful lot about the future that you don't know.
What do you think about all this? Want a Durango with your investments? Are you purposely skipping out on retirement accounts? Do you diversify? Comment below!
Another form of transportation and investing includes people who buy classic cars to either fix them up and sell or hoping they will appreciate. I know a few people who fix up classic muscle cars as a hobby and generally come out ahead, but only if you don’t take their labor into account. Overall I think this falls into the area of if you have the money and want a toy then go for it. If it ends up selling for more than you paid at a later date then bonus, but I wouldn’t exactly consider it investing.
The thing about collecting cars with an eye to restore and flip them is that it’s the automotive equivalent of stock picking, only with much higher transaction costs (tax, registration, insurance, depreciation if you actually drive the thing).
Especially like the point about the Roth…Doesn’t make any sense what-so-ever for a high income earner to not at least put $5,500 and spousal $5,500 into a Roth. No matter what else you want to do with the rest of your money or your Roth money for that matter, I can’t undertand anyone not maxing out the Roth. I would add the same about maxing out the “stealth IRA” with HSA for physicians and anyone with decent health (if you have crappy health it may be wiser to buy better health insurance and not qualify for the HSA).
Thanks,
I’m not really disagreeing with you, just wanted to point out some reasons why someone might not max out Roths.
My wife and I have ZERO in Roths. But that’s because we can’t legally put anything there because of our high income. Can’t do backdoors because we have individual IRA’s from previous employers, and our current 401k programs won’t allow rollovers.
Well, that was true until a few weeks ago. My employer just made changes allowing rollovers from IRS into their 401k, and started allowance for mega back door Roth conversions!
I haven’t taken the plunge yet, as I don’t want to be the guinea pig. I also need to do some serious calculations. I turn 50 soon, so I can now put $23k or so into the traditional 401k. I’ll probably stick with that, since we’re currently in the 33% marginal bracket.
I expect to early retire in a few years as well. I plan to do some massive conversions from the traditional to Roth at that point. But I’ve got to balance that with taking some long term capital gains from a large taxable account.
There are lots of moving parts to consider. All in all, the taxable account hasn’t been much worse than a Roth (and better in some ways). But a Roth would have been much simpler.
Also BTW, we have zero in HSA’s too. Our current health insurance makes us ineligible.
Just curious, is an HSA still a good idea for a 2 resident couple in perfect health but considering 3-4 children over the next 5-6 years? I always wondered how much you would roughly have to pay for a normal vaginal delivery having an HSA. Our current plan covers the entire cost of having a baby for $500 no matter if you’re in the hospital for 2 days or 2 months (as long as we deliver at the University Hospital).
That’s a very difficult question. You’re weighing lower costs now for the possible long-term tax-protection placed on investments. The question is really not an “HSA” question, but a HDHP vs regular health plan question. But decide that first, then if you go with the HDHP, be sure to use the HSA. If you think $500 is a cheap baby, consider that my first was $10 and the next two were $0. This one will be thousands on my HDHP.
Baby #4 announcement? Congrats!!
I don’t count my chickens before they’re hatched!
I bike usually everywhere. Saves me gas, maintenance, insurance, and depreciation (other than minimal costs on my bike). Figure I save 10k a year versus buying new every few years, especially the luxury cars that my office assistants drive. (Yes, my office assistant who makes 15 an hour who lives with her folks drives a BMW 3 series 2010). She tells me that the parking attendant and everyone else now treats her a lot better that she is driving a luxury car. Thankfully my wife is not into these things and also takes the bus to work.
I disagree about the dividend investing. I buy stocks that pay ever increasing dividends. There is capital appreciation as well.
Agree about Warren Buffet. For most of us buying an index fund is going to make us wealthy enough to retire early.
Warren Buffett didn’t beat the S&P 500? That is the most encouraging thing I have heard. Why would we even want to do what he does at this point. 😉
Funny that you took the third choice definition for “deworsification”.
It is very liberating knowing that I need all the diversification I can get since I know so little. And it is easy to buy thousands of stocks.
Skipping retirement accounts? Not at all. *shudder.
stupid Question, can I include repairs on primary residence (like a new roof or plumbing or furnace) for depreciation for tax purposes?
No. Your home expenses are not a business expense. But you also don’t have to worry about the capital gain tax when you sell, up to $500,000 for a couple, so it works out in the end.
Sorry. No dice. Although keep track of it. If the house ever becomes a rental, different story.
I did remember though, if you are in the the boat where you have appreciation above the 500k mark, you can use the expenses to offset that gain, basically resetting the basis as purchase price + eligible expenses. Maintenance doesn’t count, but upgrades do.
http://www.houselogic.com/home-advice/tax-deductions/tax-breaks-capital-improvements-your-home/
Good point.
I’ll second the depreciation thing. All my RE friends think that it’s free money, but someone has to pick it up eventually. That’s why most homes have some repairs to complete either before or after the sale. I don’t know anyone that hasn’t spent money on home repairs either before selling or after buying a house. That’s where the depreciation comes in.
Until age 40 I traveled the cash-value-life-insurance road to Dublin. That’s what my mother-in-law taught me. In those years, I highly valued the life insurance, and even more, I UNDERSTOOD IT. There is some value to a comprehensible route for a financially naive doctor. Now, at age 57, I’ve dropped life insurance altogether and self insure with a diversified basket.
“Houses really do depreciate”. This resonates strongly with me. I live in a broke-ass city , so my house depreciates faster than most. The cost of ownership on my primary residence is 8% of its value annually; the cost of ownership on my vacation home is 5% of its value annually.
The cost of ownership is never offset, long-term, by appreciation, despite any promotional opinion of the realtor associations. I’ve read that geographically, Houston real estate has appreciated the most over the past 30 years, at 6% annually ( don’t remember the source). Always consider the short-term reporting bias when home owners brag on their appreciation. If you own homes over 30-50 years, the appreciation will not exceed the cost of ownership.
This may be generally true…but I there are exceptions.
Like here in the SF Bay Area.
Example:
My House Cost: 450k
18 yrs later worth: 1.2m
That’s 42k/yr gain.
Also: anchoring my property taxes to 18-yrs ago (due to Prop 13) is a big advantage as well. I pay 8k/yr, my neighbors pay 20-30k/yr. And since property tax isn’t a write off under the AMT, that’s another important advantage.
Now, my vacation home…yeah, definitely losing a ton on that every year…
And if I’d bought my house 30 years ago…it sold for 105k.
I always wonder how hard it might be to find a buyer when you’re ready to sell given the dramatic increase in property tax he will face.
That’s really not an issue. If the buyer can’t afford the property tax, then he can’t afford the neighborhood. Also: any house he buys will have property tax at the present value…it’s not like he can somehow buy into a house with 20-year-ago property tax.
I thought it was unfair when I bought from people paying 400/yr and I was jumped up to 6000/yr on the exact same house, but as time went on and other people in the neighborhood started paying 10k/yr, then 20k/yr, then 30k/yr…my property tax didn’t seem so bad at all. Ditto for my mortgage, seemed ridiculous originally, now it’s less than I would pay for an apartment.
SF Bay Area Real Estate is crazy…but you have to just adjust to norms of here, and go with it…there is no other option if your job/life is here.
Brian, thanks for sharing.
To my calculations, you have a potential 167% return over 18 years, i.e. a 9% annualized potential appreciation on your home.
You bought your SF home in 1997? The S&P 500 was 966 on Jan 1, 1997.
This week it is 2100. Investing in the S&P 500 in 1997 would have returned your investment 117% over the same 18 years, annualized at 6%.
A 30 year FRM in 1997 was 8-9%; you’ve probably refinanced it down over the decades. If you haven’t paid off your mortgage, it may be down to 3%. Perhaps your midrange mortgage interest was 5%.
I’ll speculate that the total costs of ownership for you have been 4% the value of your home until now. It was initially high; today it is a very low.
9% appreciation subtract 4% cost of ownership is 5% annualized appreciation. Congratulations on a long-term housing appreciation.
It costs money to shelter from the rain and wind; whether we’re paying rent or owning.
Your’s has been a +5% number. Mine is definitely a depreciating number, primarily because of the city I live in. On the other hand, my husband and I never spent more than 8% of our income on housing costs. We’ve stashed the discretionary money into the S&P 500 and have enjoyed returns there.
We’ve spent other discretionary money on a vacation house; a very costly luxury to our lives.
Pretty awesome appreciation rate. Sustainable going forward? Seems unlikely to me. If it appreciated at 6% over general inflation for another 10 years, who could afford to buy it?
Pretty likely to sustain.
Our property market is geographically-constrained by the ocean, huge bay, ringed with mountains, very limited buildable ground left and constrained commute routes/distances/times.
Add to that laws restricting growth and limited water supply.
Into that very constricted market dynamic, all you need to do is inject several thousand IPO multi-millionaires every year to make the housing prices continue to grow at that rate.
On top of that, throw in a large set of wealthy asians parking their money away from the grasp of their home governments in homes here (there are literally real estate tour buses for asian buyers going through my neighborhood on a weekly basis) and wealthy europeans (who love SF) and a smattering of wealthy russians as well.
Each of those buyer segments (IPOs, wealthy foreign buyers) are paying all cash (so they don’t have to deal with bank appraisals) and are not sensitive to price.
And underneath that you have a silicon valley “middle class” that hasn’t hit it big yet, but still makes 200-500k household salary per year and has RSUs on top of that, which even if they don’t hit big, still allow them to add another 100-300k per year at Cap Gains rates. Plus they likely have a house/condo, which has appreciated greatly and they are “trading up” every several years, extracting 500k tax free.
So, while I 100% agree with you in general. I think there are a lot of dynamics at play here that make for a very specific real estate case.
Real World Evidence:
Home prices here held up throughout both of the last crashes.
Caveat:
Once you got outside the commuteable to SF/Silicon Valley distance, price dropped 65% during the housing crash.
But within the commutable distance, they paused a bit and then kept climbing. In SF, they didn’t even really pause.
Interesting numbers, Brian. An intrusive question, if you don’t mind: what portion of your net worth does your primary residence comprise? For my husband and myself, our primary home is 4.7% of our net worth. The remainder is in stocks/bonds. Again, we live in a broke-ass ( love that ghetto term) city, our home is luxury but depreciates and cost of ownership drags ROI negative.
Interesting question, whose answer is going to change every year. If you just keep the buying cost same and dont count the appreciated cost, then the number would keep dropping every year (hopefully). Mine is 21%, but I am in the first decade of my career too.
I’d guess roughly a third. But it’s a complicated calculation with pensions, deferred compensation, etc.
current pensions and deferred compensation are easy to know and add.
It’s certainly unique, but trees don’t grow to the sky, even in San Francisco. Hard to argue against it though, since they have so far!
I agree, trees don’t grow to the sky.
And it is in my personal puzzlement over the Bay Area real estate market, that I have come up with the explanation I provided above.
– Geographical constraint
– Limited supply
– New buyers (foreign) injected into market who have no price sensitivity
– New buyers (IPO) created who have no price sensitivity.
– Very highly-paid “middle class” to put a very strong floor under the market.
That’s my best guess at the dynamics of this marketplace.
I’d love to hear other better (or just different) theories.
That’s my best shot at it.
Weird to think of half a million a year as middle class eh. Strange place that Bay Area.
It’s not what you earn, it’s what you keep.
After you subtract out all the taxes (Fed, CA, Business, Property), cost of living, and the immense amount of your net worth you need to sink into your house…you might very well come out ahead making 200k in Omaha.
When facing off against the tax code, it’s much better to be sub-200k vs 400-500k.
Your assumptions are spot on: bought house Jan 1997 @ 8% interest rate. No-cost re-fi’ed many times over the years. Currently at 3%. Only major costs to-date: new roof 30k, painting 2 x 10k.
Brian, I suspect your “major costs” also include property insurance, property taxes, water access (as you mentioned), utilities, repairs, landscaping…in addition to your mortgage interest.
The CPI inflation calculator tells me that $1 in 1997 has inflated to $1.46; an 2.5% annualized inflation. At a 4% post-cost appreciation rate, you have a home that has appreciated slightly ahead of the inflation rate.
Insurance: 800/yr
Prop Taxes: 6k (1997) slow prop 13 climb to 8k now
Utilities: typically 1500-2000/yr, this year 3000/yr (1600 of which was water, thinking of going to synthetic grass)
Repairs: did all myself
But it’s more complex than that, because have large house, using 40% sq footage as business, so that covers a bunch of the utilities.
I’m in AMT and have marginal tax rate over 50%, so mortgage write off is much more valuable to me than most. Property tax cost is 40% transferred to business instead of being a write-off erased by AMT. etc etc
I did a complicated all-costs in calculation a few years ago and my house paid for itself and covered all of my living expenses (I’m very frugal: 0-300/month food (0 when work travelling), do all vacations with FF miles and hotel points, get my entertainment at the library, my hobbies are all free, etc), driving same used car I bought 20+ years ago, only car I’ve ever owned.)
jz says: current pensions and deferred compensation are easy to know and add
Not really:
Pension – you have to factor in probability of pensions paying out (and at what amount) or PBGC paying out (and at what amount), when you take the pension (major escalators ages 50-60) vs when you die vs tax impact (especially in context of other tax planning you’re doing – for example rothifying your entire 401k at zero cost from age 45-70), COLAs, and your ability to geographically arbitrage against those COLAs.
Deferred Comp is similarly complex. Depending when you take the comp vs when you’re forced to take some it vs your tax rate and strategies in those time windows and how it messes up the other strategies your pursuing.
Not to mention how when you quit early to execute all of this stuff, you walk away from 53+ k year of mega-back-door roth and pension accruals…but then begin COLAs, and rothifying, but then trigger deferred comp payouts (some of which are growing at guaranteed 8%), etc etc.
If you think this stuff is easy to “add up”, you are far better at math and model building than me.
I’m jealous. Your property taxes , property insurance, and utilities are cheaper than mine. You have a home that provides shelter, accommodates your business , and its value has kept ahead of inflation…….a rare true investment.
I got my house strategized right.
Now I’ve got to right the ship on the vacation home.
Did well on price (up 31% after 5 years) and mortgage (2.5%), but the other costs (maintenance, utilities, taxes, etc) are dragging my ROI negative. Going to have to look at maybe renting it out some to make the books balance. Also it’s a time/attention sink…which takes away from relaxation time and time/attention I could put towards earning.
If I had it to do all over again, I would not buy a vacation home. Even done well, it’s going to be hard to make any actual money (after expenses, inflation, subtracting for my time/attention/effort, etc).
Good post. There really are many roads, it just goes to personality type I think. I dont even worry about being wrong as obviously people have done it every way. You do what works with your abilities, risk profile, and personality. The only odd thing is when people get religious about their particular way, makes no sense.
Housing outside of bubbles(where luck determines your fate) only barely tracks with inflation, it is best thought of as a consumptive item. This is true over centuries and all over the world and has been researched intensely if you care to go into the details. While it can give you more cash flow and particular and complementary tax benefits compared to the market, it cannot touch the long term compounding power. Obviously, do both and dont take sides…join em.
BRK.A is exceedingly diversified even more so than you alluded to. A superficial glance at anything is always dangerous. Diversification does have diminishing returns at some point, and agree that when I see portfolio biopsies I find it odd that so many confuse number of funds for diversity as opposed to their holdings. I think its a misunderstand of what it is and what its supposed to do. Lots have 10-15 funds with so much overlap it makes your head spin, of course many of these were set up by advisers with nice fees on each so that explains a lot of it.
Remember the return of real estate and the appreciation rate on housing are very different things.
Yes, I did kind of ramble the two together sloppily.
The differences (tax and return wise) between the two types of investments are what make them complementary imo. While it can be safe and reasonable use leverage in the market, its a far cry from doing so in real estate where its so standard people dont even think of it in the same category. Then the usual pro/con of each type as they are so different.
Stocks are (in comparison) set and forget, but usually take a much longer time before you realize the outsized amazing gains people dream of from a one time investment. Real estate is in comparison much more hands on, but you see much more money immediately. This makes them a great balance to one another which is why I find it so odd that people take such polarized positions on either. The real question is how hands on and “second job” you want to get I think, that will limit the depth of/if your foray into RE.
Good post and a nice way to summarize some of the back and forth debate on the recent real estate thread.
I enjoy this forum – I have learned over time, as WCI states, “there are many roads to Dublin.”
I used to think that my way was by far the best way (and for me, it has proven to work well), but I am also now very much interested in the stories of others, what they are doing, what is working for them and why.
There is too much to know to even try to be an expert in everything – WCI does a great job bringing a a wide array of relevant financial topics to this forum with transparency and good filters. That’s hard to find out in the wild, wild west of finance and investments.
Who knows, maybe I’ll buy some index funds…eventually. 🙂
That’s funny that you think this post was written in response to the other one. This one was written last November. It’s just that I keep having these similar conversations with various investors like real estate investors. Eric and I have had this same argument 3 or 4 times already.
I thought so. But you have to agree that it is a beautiful bridge from the previous real estate guest post.
Anyone who reads the literature knows there is one true way to financial freedom, index investing using modern portfolio theory
I can’t decide if you’re serious or not. Based on prior postings, I think you are.
“one” = “a” way.
I am reading in your 2011 post at this moment and you wrote this: “What would you think of a doctor who didn’t consider the evidence when prescribing therapies? Why would you look at investing any differently? It has a body of evidence and peer-reviewed journals just like medicine. A physician familiar with a handful of the basic theories is likely to end up far more wealthy than one who never considers the evidence.”
Of course, there are several ways to treat a patient…
Well, you can save 20% of your income and invest in index funds or you can save 30% of your income and invest in actively managed funds or save 40% and buy individual stocks or save 50% and buy gold and end up in the same place. 🙂
One does not need to invest huge sums to become wealthy. Time is ones greatest asset when it comes to stock and bond Investing. Nothing nicer than compounding and the rule of 72. Even a lazy mans portfolio would work for most. No reason to make investing any more complicated as its really simple.But most md’s lose previous years until they start making big bucks and start to invest. They should start in residency with Roth IRA at a minimum
WCI,
Can you clarify-
In the “Skipping out on IRAs/Roth IRAs” section you stated:
“You can buy most investments, including individual real estate properties INSIDE of IRAs and Roth IRAs. Might as well open up a SEP-IRA, fund it fully, convert it to a Roth IRA (one version of the Mega Backdoor Roth), transfer it to a self-directed IRA, and buy your real estate there.”
This sounds similar to a segment in the first section with the Durango (these vehicles really seem to drive forever though, don’t they?! A lot of upfront cost when purchased, but man they seem to keep trucking like ole reliable) metaphor, “The whole idea of having to buy one product in order to get into an investment is kind of silly when you think about it.”
Except in the IRAs/Roth IRAs section you seemed to condone, by explaining the steps, using an investment vehicle (IRAs and Roth IRAs) to buy or get into other investments, including real estate properties.
So, is it a good idea to funnel money through a vehicle (whether it be IRAs/Roth IRAs or Cash Value Whole Life) to get to other investments or not?
There are really 2 separate things here. The investment and what you hold the investment in. Holding an investment in a Roth IRA allows it to grow tax free, weather that is a REIT, Gold, single stock or index fund. Passing on the Roth IRA to do real estate would be similar to investing in a taxable index fund before holding those same funds inside the Roth. That would be silly!
Exactly. What you’re getting out of a converted Roth IRA is simply tax treatment. You’re not forced to buy insurance. You’re not forced to pay interest to get the money. You’re not forced to rely on the insurance company for your rate of return etc. That’s why it’s different.
When you buy, say an annuity to guarantee your income for life and take mortality risk off the table forever, what part of the annuity is “the crappy Durango that has to sit in my driveway”?
There is no other investment that does that other than a defined benefit pension plan that are as rare as a unicorn these days and social security if it lasts.
Were you expecting me to take that bait?
I’m a big fan of SPIAs for the right person, but most annuities are products made to be sold, not bought, kind of like a crappy old Durango.