Ep 10 Decoding the Complexities of Alternative Investments for Legal Experts

Unlock the secrets to savvy investing with a legal twist on the Lawyer's Money Show! Todd Whatley and yours truly, Ian Weiner, bring our expertise to the table, guiding attorneys through the labyrinth of alternative investments. With a focus on private equity, private credit, and the concrete world of real estate, we dissect the all-too-tempting pitches that come your way. Our analysis cuts through the flash to reveal the true costs and potential pitfalls. Plus, we don’t shy away from the advantages, especially for law practice owners looking to make real estate work to their benefit, capitalizing on tax perks and strategic planning that can significantly boost financial health.

This episode is not just about cautionary tales; it's about empowerment. We're peeling back the layers of sophisticated fund investments to understand the realities of internal rates of return and the impact of general partner fees. With special guests weighing in, we clarify the crucial differences between fiduciary and suitability standards. For the entrepreneurial spirit, we're spotlighting the allure of office real estate ownership and diving into the tax incentives hidden within opportunity zones. Whether you're a seasoned investor or getting your feet wet, this episode equips you with the knowledge to craft a legal career that's not just successful, but financially astute.

Transcript

Speaker 1: 0:01

Welcome to the Lawyer's Money Show with your hosts, todd Wattley and Ian Weiner, where finance meets the legal profession. Here we dive deep into the economics of law practice, from managing your firm's finances to optimizing personal wealth strategies for legal professionals. Every episode we bring you insights, strategies and stories from leading experts to help you navigate the financial landscape of the legal world. Stay tuned as we uncover the tools and tactics needed to help lawyers make the right money moves so they can grow their career, manage their practice and optimize their wealth so they can focus on enjoying the life they've worked so hard to build. For more resources, visit us at wwwlawyerstotalplancom.

Speaker 2: 0:45

This is the Lawyer's Money Show, and my name is Todd Wattley, and I am here with my co-host, ian Weiner. Hey man, hey Todd, is this going to be a good show today? It'll be alright.

Speaker 3: 0:57

I've changed it up on you this time. You've changed it.

Speaker 2: 1:01

So anyway, yes, thank you for joining us. Today. We are here again to discuss some specific asset of finances with attorneys. I'm loving doing this because I am learning some. You're being a part of this business. I've learned some things, but I don't think a day goes by that I've spent with Ian that I don't learn something different or unique or a different approach, and so I am glad you're listening, and I think you'll be glad that you're listening after you finish this. Today, Ian, you want to talk about I think a good term is alternative investments for attorneys.

Speaker 3: 1:42

Yes, okay, we can as with many of these, we can and will do a handful of episodes on this topic, but there are a couple that I want to talk about. So I want to talk about private equity, private credit, real estate and some of the things to be thinking about here, and the reason I want to talk about this is because what I find is, a lot of times, folks get to a certain level of success and they start to get a lot of, I'll say, opportunities that come across their desk. I see this a lot when I work with doctors and physicians, surgeons those types of folks, folks that tend to have a higher income, and if they're business owners, that's an even bigger target on their back. I'll say that strongly, and so I want to talk about what to do when you get these opportunities that come across and how to evaluate them a little bit. We'll talk in more detail. This is a service that we can even offer to folks is helping to evaluate some of these and for our private planning clients. This is something that we do, but you're going to have the more successful you are in your career, you're going to get pitches, proposals, investment opportunities that come across your desk, and what I want to encourage you to do is to have a system for evaluating those, and I'll cut to the chase. The system can be us helping you to evaluate those, and this is an aspect of buying back your time and using your time well, and so you'll see where this comes around.

Speaker 3: 3:25

But I find, a lot of times, some of the worst investments that I review are these private investments that sound really great. They sound really kind of sexy and interesting and exciting. You know, hedge fund could be hedge fund could be private investments, private credit, private real estate deals, and we'll have I have a buddy who he works as a, he does these particularly in real estate, and we're going to have him on our other, our other podcast, for because he's local here and we're going to have a really interesting debate about this, and he doesn't quite know that I'm not going to be as as nice to him as he thinks I will. But look, I mean the point of this conversation is about transparency and there's a couple of things that we want to look out for here, and it really comes down to estimating performance, fees and expenses and liquidity and so when. You may not be seeing these things yet, but I want I want you to build in your mind almost a checklist of these are the things that I should think about.

Speaker 3: 4:37

Ian told me to look out for these things when this happens, and I want to finish up talking about using real estate as a strategic asset. I think attorneys should consider this, especially if they have the ability to buy real estate in their area where they can work, because there are some. There are some incredible tax benefits that can be utilized with real estate. If you have a business and there's some magic that we can do there, and I realized that as we're talking about this, the building that we're in, that your office is in, the people that own it have an extraordinarily high valuation of the business, and it's laughable.

Speaker 3: 5:14

And so this is a bigger, longer conversation for Utah, but so private investments, private equity, private credit you get to a certain point in your career where you become an accredited investor and it's becoming a more loose definition. But you've got to have a certain asset level or a certain income level and then you get access. I'll say it in a very positive way. You get access to these other investment opportunities that normal folks like the rest of us don't have access to. Now. I say that with a twist in my voice there, because I want you to.

Speaker 3: 5:51

When you get this pitch from your broker or from the guy at the country club or from whomever, I want you to be skeptical of this. Okay, I'm just telling you. I mean, these are situations where I have access to these. I mean, we have a platform where we have access to the top hedge funds in the world if we want. It's extraordinarily rare that we would use them because the fees and expenses are so high and the returns are not where they need to be.

Speaker 3: 6:22

Relative to that, the people who make a lot of money in these deals and the private equity deals, private credit deals, hedge fund deals and private real estate deals are the people that run the funds. I'm hoping when you're listening to this you're going yeah, of course, that makes sense, but this is what you should be thinking about. And so you'll hear things. Like you know, they'll start talking about the internal rate of return, the projected internal rate of return or the multiple uninvested capital, and so they'll start throwing these metrics at you Fancy terms, and it's like and what happens is people are like they want to be sophisticated and so they like kind of will go along with it. What a lot of times they don't realize is these are projections, you know.

Speaker 2: 7:09

Also known as guesses.

Speaker 3: 7:10

Yes, or we could even say fiction Someone. Where did I? Oh, the Jonathan Godwin, one of the CPAs that I work with. We were talking about projecting cash flow for his business clients and I love the way that he said this. He goes we project out cash flow for a year, because anything beyond that is fiction. And I was like I'm stealing that. That is magnificent, but that's what we're looking at, you know, and so you might get a nice pitch deck that has like, hey, you know, we've bought and sold these great assets over the last 10 or 15 years, and here are the big exits that we had and here was the internal rate of return and the multiple on the invested equity that we got. And you know, they have to tell the truth there. They're supposed to in those presentations.

Speaker 3: 7:55

They don't always frankly, and it's like man, it sounds really good and you know you lock the money up for five years and then you know I don't double or triple over that time period. Amazing, yeah. So at the time of this recording, this is 2024. What I want you to know is that in a lot of markets, real estate has an asset class, has been on a bull tear for the last 10, 15 years, and this may be a shock to you, but real estate investments don't always go up.

Speaker 2: 8:21

What I know Wow.

Speaker 3: 8:24

There are some, you know, and sometimes the fees in these can be quite complex, and so I just want you to become aware of this, because we're starting to see some of these that you know we're started over the last few years using, you know, previous returns and previous deals as an example, and they're not panning out as well as the brochure would have thought. These projected returns some of them are turning out to be fiction.

Speaker 2: 8:52

Truly being fiction.

Speaker 3: 8:53

Yes, Okay, and so it's just. I want you to be aware of these and the things to kind of think about. So the first thing that you want to look at is the internal rate of return that's projected, or the multiple and invested capital that's projected. These are projections, these are not guarantees. Okay, the second thing that you'll look at is they will have something. Typically it's going to be called a pref, or a preferential rate or a preferred return. That's the rate that you, as the investor, you have to get that rate of return before the sponsor or the fund gets their percentage. Okay, that could be 6, 8, 10, 12%. Okay, that's great. That doesn't mean that that's a guaranteed rate either. Right, so you could have an 8% preferred return on the deal. But if the return does 5%, guess what you're getting? Right? Yeah, so, and yes, the general partner typically in the deal to GP, they're not going to get anything in that case, unless they're collecting other fees which happens Sure, they're not.

Speaker 2: 9:56

No, they would be, investors to be treated first right.

Speaker 3: 10:01

Well, typically but not always Some of these if they're real estate deals, they'll charge a fee for an acquisition. They'll charge a fee for 1% of the capital that's in the deal, whether or not they buy anything or do anything. So these can add up to 1%, 2%, 3%. In some cases that's before anything is even bought or any expenses, and so you're like, oh man, that gets a little bit higher pretty quickly. And, yeah, the target internal rate of return might be 15%, but by the end of it, by the time everyone's taken their piece of the pie, you might have got 7%, 8% for locking up your money for 5 to 10 years, taking a ton of risk, arguably compared to other investments.

Speaker 3: 10:49

And all I'm trying to tell you is these things are a little bit more sophisticated than they appear to be and in a lot of cases they can sound really good and don't end up bearing out that. Well, now, there's great ones, there are great operators, there are great syndicators. We can find those. That's not a big deal. We do that, but just want folks to understand these things are complicated instruments when you have to be an accredited investor or a qualified purchaser to be able to get in the deal. You need to have a team around you that can help evaluate that deal with you, because these are highly sophisticated situations.

Speaker 2: 11:25

Yeah, qualified means they don't sell it to just anyone. You have to have X number of dollars, or invested, yeah, and that allows them to bypass some of the disclosure right, there are some kind of interesting things.

Speaker 3: 11:47

So I had a conversation with a real estate person recently in this and they were saying, you know, in the private placement memorandum document, which is like this is the document that you got to read and sign to be part of this deal, it said that him, his organization, would become a registered investment advisor if necessary in the future. And that's what he called me to talk to me about, because he knows that we work with one and how that works. And basically the way the conversation went I haven't told you this. Basically the way the conversation went was, yeah, you probably wouldn't want to do that and he was like huh, like yeah, you probably would want to try to be a broker dealer instead, because if you're a registered investment advisor and what really, you're registered and you have your funds that you're selling, you have to operate in the best interest of your clients.

Speaker 2: 12:44

God forbid, we can't do that.

Speaker 3: 12:46

And wow, in some of these situations I don't know that you can allocate this significant amount of money to these products, like if it's your fund. If Todd and I had a fund, and that's what our investment, that's what our investment company did we have a absolutely clear as day conflict of interest, because we would be recommending our fund and if our fund had higher fees than other comparable funds, it would be hard to recommend that in the best interest of the client. So what I told them was if I were you, I would not be setting up a registered investment advisor. You would want to work with a broker dealer, because broker dealers do not have a fiduciary standard. They have a suitability standard and so you can line that up with the rest of them and they can pick. If they need a real estate investment, it has to be a real estate investment that's suitable. That's suitable. Isn't that interesting? Wow, I mean, these they're.

Speaker 3: 13:48

And look, I'm not trying to say that everyone's doing shady business, but it's like measure twice cut once. That's really the idea here is be aware of this and the syndicator does not have to. The syndicator is the person who sets up this fund and is buying whatever this is, unless they are a registered investment advisor and you're a client, they don't have to operate in your best interest. And they and they have to operate in the best interest of their investors, which is them. Which is really, really interesting, that's, and there can be layers of fees and percentages that they get above. So if they hit the hurdle rate, maybe the hurdle rate's 10%, anything above that, they split with you 50, 50, 24. It's interesting. So these are complex situations and there can be cases for them, absolutely. But if this is like your first big investment, please let's have a conversation here.

Speaker 2: 14:44

Please call us. Yes, yeah, you definitely need a second opinion on that. You need someone who knows what those words mean in the underlying. Just like people hire you as an attorney and you can cut through the stuff and get to the meat of it and say, wow, this is not a good idea for you or, yeah, this is great, that's what we do for you. And again, you use your time doing what you can do, what you get paid to do, and pitch this off to us. Let us look at it, let us sit down, analyze it. We will send you back a report or just a phone call and say, hey, our recommendation is this and we don't have any skin in the game.

Speaker 1: 15:30

OK, that's what's important.

Speaker 2: 15:31

We work for you. We're going to, like Ian just said, we step into your shoes and say would we do this if we could? And how valuable is that to keep practicing law? And let us figure this mess out.

Speaker 3: 15:46

And really what that is is. That is, building a team of other professionals and experts in their field that specialize, so that when these opportunities come, you can delegate them to your team and know that your team has it handled. You don't have to worry about it even longer than that. If it's relevant, we'll bring you back into the conversation. But how freeing is it to know that, whether it's a pitch for one of these, it's another offer of something else, a partnership opportunity, whatever it is, that you have a team that can evaluate. It's so much easier than to duck the calls. They're going to send you all this stuff. Yeah, I'll forward it to my team and we'll get back to you. It's the easiest way to diffuse a salesperson, just to put it that candidly.

Speaker 1: 16:30

Talk to my team.

Speaker 3: 16:31

We'll talk to my team if they think we need to deal with it, we'll let you know.

Speaker 2: 16:35

Done Boom.

Speaker 3: 16:36

Done.

Speaker 3: 16:37

You're back to work that saved you. I mean, what's your effective hourly rate? There it is. That's one simple example, but so that's an example of the way that we help folks outside of some of the other things that we've talked about, outside of just doing investments or taxes or coordinating this other stuff. We will help you evaluate those opportunities that come to you and help you decide whether or not it makes sense to allocate some of your capital there. And in a previous episode we talked about investing in your business, and in a lot of cases, probably it's going to make more sense to invest in your business.

Speaker 3: 17:14

Even then, a really sexy real estate or private credit deal and private credit's the hot thing right now, in 2024. I'll say it this way If you are extraordinarily sophisticated, your family office has $100 million, you can make a killing in private credit. You really can. But what private credit is is those are the deals that the regular banks passed on, and so they go to private investors who are more sophisticated and have way more money to lose in certain situations. And so what I want to ask you is because I talked to an attorney recently who they just became an accredited investor and they got. Their broker was like, hey, you guys are accredited investors, we can use alternatives. Now here's a cool private credit from Blackstone. They're the biggest, baddest one around and it's like, oh man, that sounds really cool, sounds fancy Kind of sounds, kind of sexy and it's like OK.

Speaker 3: 18:15

But what you've got to understand is you are a creditor and when you think about who makes the most money in any company, is it the creditors or the investors, the equity holders? It's the equity holders In the long run. And if you had to choose, pick any company. Let's talk about Apple, let's use Apple as an example. Would you rather be a creditor of Apple or an investor in Apple? Creditor, I mean, you're going to get paid. You're going to get paid a fixed amount, okay. Or an investor, you have unlimited upside. Yes, you have unlimited downside.

Speaker 3: 18:57

But here's what I want to ask you If you're concerned about the downside and if you think you wouldn't get paid as an equity investor because the company goes bankrupt, like, yeah, the creditor is going to get paid first in a bankruptcy, but if you think that there's a reasonable chance the company is going to go bankrupt, don't invest in it at all.

Speaker 3: 19:17

It's so obvious, but people miss it. And so, like, private credit can be great for family offices, and if your family office has $100 million or more, we should have a conversation because we've got some great opportunities for you, sure, but for most people, that's not their situation. It's like, yeah, they look at a couple of years worth of returns from these funds and they're like, okay, those are really great. Yeah, the next 10 are going to suck and guess what. You're locked up for that period and the guys who are going to make the money in this deal are the ones that were in it at the beginning and, by the way, they're the partners in the fund and they left that out. Sorry, I'm tipping over sacred cows today, but it's important.

Speaker 2: 19:57

But what is a typical investment in this $50,000, $100,000?

Speaker 3: 20:02

Typically minimum is $50,000 or $100,000. Yeah, and even then it's like, okay, you know, cool, make that investment. But you know you're giving up liquidity in a lot of cases and we need to have an exit strategy for this. We need to know when you're going to get that money back, because that's a big piece of this. You got to know the other stuff that's going on. So I want to close out and talk about real estate separate from funds. Okay, and I think this is important and I want to. I just want to tease this as a conversation for later on a little bit more.

Speaker 3: 20:37

But if you're a business owner particularly this is who I'm talking to and if you're not, you can still own and operate real estate and it can be an attractive investment. But if you are a, if you're a business owner and you can own real estate, especially like, let's say, it's the building that your office is in, man, there's some cool stuff that we can do. So you can lease the office to yourself and pay yourself rent. You can hedge against some risks with that. You know, if you're paying yourself rent, you could lower the rent if you needed to yeah, which would be helpful, you know, but you can get some pretty significant tax benefits for that. And so what that looks like is typically it's depreciating the property and the assets inside the property and what that depreciation does. Depreciation is simply an accounting tool used to lower the value of an asset over time, but we can accelerate that upfront, and so you can. You can use that depreciation to offset other income, and this is a cool tool if we, if we use it the right way, right. So you're, you're, you know, 37% tax bracket income can be offset with the, the depreciation from the building that you own, and Because you own the building, you have a business associated with it. We get different, we to play by different rules. This can be a great way to support your practice and to diversify a little bit outside of just your practice, while still investing in something that you have some control over.

Speaker 3: 22:10

Interesting a lot of attorneys, this ends up being their retirement plan. Sure, on accident, yeah, that's not bad. You know, you still lease the building to whomever you know. But, man, if we go into it knowing that we're doing this and make a plan, this can be a very powerful strategy. And if that business is in an opportunity zone at the time of this, this recording opportunity zones are probably the most interesting. I'll say opportunity in the tax code right now. Oh yeah, I mean people and people don't realize it, but you can get a full step up and basis on the depreciation which doesn't happen at any other time but death, if you own a Building in an opportunity zone and do it right, after 10 years and I mean that could mean that you get a significant tax-free income for a long time and get money out of your, out of your business, in a very tax-advantaged way. I mean this could be hundreds of thousands of dollars over your, your business life.

Speaker 3: 23:09

And so every town have those every state does, for sure, and I am hoping and and you know, if you're Active in this, please, you know, talk to your congress people about this. I'm hoping that they expand this program because it's designed to stimulate investment in, you know, underdeveloped areas, right, but in typical government fashion, some of the things are were either designed extremely well or design Well on accident, the current ones would go off of the 2010 census, and so areas that were kind of run down or hadn't had a lot of Of economic activity over the period of 10, 12 years, could be great, great assets, and so you can get extra tax benefits for building real estate in.

Speaker 2: 24:01

Yeah, where do you find that Information?

Speaker 3: 24:03

so each, each state will have a list of the tracks that are available. You just type in opportunity zones in your state. You probably come up with syndicated opportunity zone funds. Those are probably not don't make sense, but there's one publicly traded one that's interesting to me right now. But you know, if your office happens to be in an area that is an opportunity zone, these tend to be, you know, smaller towns or areas where you know the median income is lower than a certain percentage of the average in the state we can do some really cool things there, and so that's something that we need to talk about.

Speaker 3: 24:38

So we'll bring on a specialist For that episode. There's a, there's a guy that I'll he's probably the most knowledgeable person I know in the country on these and he's he's great. He'll come on and talk about this, but this is a huge opportunity for folks. I just wanted to tease this. You know, subscribe, share this and and stick with us as we continue to develop these, these ideas for you. And if you own your business and you own the real estate that your your business uses or you're thinking about that, let's have a conversation, let's determine, you know, what's the best strategy to use there, because there could be hundreds of thousands of dollars in tax savings in there if we, if we play this the right way. Wow.

Speaker 2: 25:19

That's worth a phone call.

Speaker 3: 25:20

Yeah, I think that's worth a phone call and that phone number is 479 485 1911, okay.

Speaker 2: 25:26

Ian at lawyers total plan large total plan, calm. And Todd at large total plan, calm. Thank you for joining us today. Please like and or subscribe and and share with friend. If you have no an attorney who owns real estate Basically anyone. If they're a business owner in their own real estate, but particularly attorneys have them call us, email us and we would love to talk to you or if you had a Investment opportunity, come across your desk and yeah, looks really good.

Speaker 3: 26:00

We'll take a look at it and see if there's anything that just you might not have seen, because you don't see these all the time. Sure, good idea.

Speaker 2: 26:07

Okay, thank you. We'll see you next time.

Speaker 1: 26:13

Thank you for joining us on the lawyers money show. We hope today's episode has provided you with valuable insights and actionable advice to enhance your financial well-being. For more information, to access show notes or to explore further, please visit our website at wwwlawyerstotalplancom. We look forward to guiding you through your financial journey. You can give us a call at 479-485-1911. Until next time, keep striving for excellence in both law and finance.