Be The Bank

025 - Audit Your Accounts

December 14, 2022 Justin Bogard Season 4 Episode 25
Be The Bank
025 - Audit Your Accounts
Show Notes Transcript

Be The Bank S4 Ep25 - Audit Your Accounts

On episode 25 of season 4, Justin Bogard and Richard Thornton talk about how to end the year!

Key Takeaways:

  1. Auditing your portfolio
  2. Richard's Disappearing Partial
  3. Xmas list??

Resources and links discussed

About the Host

Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!

Connect with the Host:

Narrator:

Interested in real estate. How about wealth? Well, they go hand in hand. And here you'll learn all about it. About it. Welcome to Be the Bank, a podcast where we discuss and debate the topics centered around real estate investing. Your host just at Bogar shares insights into investing in real estate to create real wealth and passive income for you and your family. He'll share stories of real estate investments done right, walk you through the process of owning a real estate note, and most importantly, educate you so you can be the bank, your bank. This is be the bank brought to you by Bright Path Notes. Now, here's your host just in Bogar.

Justin Bogard:

We're getting ready to close out 2022. Can you believe that this episode number 25, I'm Justin Bogar and it's brought to you by Bright Path Notes today. Let's talk about some of the end of year stuff and see what's, and see what's happening in, uh, the, your accounting world and your retirement world. Stay tuned. Richard Thornton. What is up dude,

Richard Thornton:

Mr. Bogar, it's a wonderful day here in California. Uh, we are between rainstorms and that's a good thing. Um, not that, uh, it's not raining today because we need all the rain that we can get, but that we're getting rain in general, so we need

Justin Bogard:

It. Yeah. Wildfires,

Richard Thornton:

Uh, yeah, keep the wildfires down, but mostly to, uh, replenish the aquifers and, uh,

Justin Bogard:

Aquifers.

Richard Thornton:

Most, most of the lakes are down about a quarter, uh, of where it would be so

Justin Bogard:

Nice. Well, it's FIFA country right now. Mm-hmm.<affirmative>. If you are a person of sports, like a fanatic of any sport, you should just go ahead and enjoy some FIFA football, or we call it soccer here in America. And, uh, the magic word is go, you gotta hold it as long as you can. Ah, it has to be very dramatic. Ah, on a goal score. Cause it doesn't happen often unless you're Portugal. Cuz they won their game like six to one. Mm-hmm.<affirmative> as they're recording this, it was like a day or two ago when they won their game. And that's a very high score for, uh, football or soccer. They mm-hmm.<affirmative>, most games are

Richard Thornton:

My neighbors are real, uh, sports fans and they've got one of these supersized, uh, TVs. When I say supersized, I mean it's like six or seven feet across and uh,

Justin Bogard:

Yeah,

Richard Thornton:

Two o'clock in the morning I hear them hooting and hollering.

Justin Bogard:

<laugh>. Yeah, that's what I'm talking about. That is what I'm talking about. I like that. Mm-hmm.<affirmative>, big old party out there. I'll come visit you in Petaluma so I can come watch the sports games on that big old tv.

Richard Thornton:

That's right.

Justin Bogard:

Awesome. Richard, we're almost done with 2022. Can you believe that?

Richard Thornton:

We are. It has been a very busy year for you and I, we've actually bought more, more notes this year than, uh, we have in previous years and we've done it on a onesie twos basis, which means it's been a lot of work portfolio. Yeah. As you know, we're trying to move into portfolios and we're, uh, building up a, a fund to do that, um, amongst other things. But, um, it's been a busy year.

Justin Bogard:

It has end of the year comes reconciliation, right? Yes. Reconciliation with your accounting. Mm-hmm.<affirmative> reconciliation with your portfolio, with your retirement account, with your wealth strategies mm-hmm.<affirmative>. And so us as note investors, we take this time to kind of just revisit and audit again, we should be auditing throughout the year very regularly. Probably more than just quarterly, but probably almost monthly. You should be auditing, auditing your portfolio. And so that's kind of what I'm doing end of year auditing for our business. And then, uh, uh, the business that I have with just me pause for a dramatic effect there. Nice. Nice. Yeah.

Richard Thornton:

Yeah. Little. So, yeah, I mean I, I find that that, uh, right. Find that, um, uh, there's challenges both on the just regular straight accounting side. Um, and also on the self-directed IRA side, if you have any, uh, funds there. Um, I had to go through quite a training, uh, experience with my accountant really in terms of, uh, income coming in, amounts paid off, uh, what happens when you sell a partial, et cetera, et cetera. So, um, be beware if you are a note holder.

Justin Bogard:

Yeah. It's, it's not difficult. It's just you wanna be, this is where precision comes in, right Richard? You want to be precise with what you're doing because you really want to capture all the things that go on with your note. It's not just about collecting the monthly payment, it's about collecting the payment and understanding what's going out<laugh> once it comes in, what's going out, right? You have, you have some expenses. You have monthly servicing costs. If your loan has a little bit of a hiccup in it, you might have additional servicing costs or maybe some legal or attorney fees involved. And then you also have expenses where you may wanna check up on the property and send somebody out there. So all those expenses you wanna make sure that you're capturing in your accounting software, especially if you have many loans. I'd say probably, uh, when you get to the four plus window with loans, you, you definitely need to have some accounting software to help you at the end of the year. Right. To reconcile your accounts and to make sure that the interest that you are collecting is, you know, is gonna be taxable towards you and, and your accountant and your CPA can talk to you about that, specifically about your situation. I'm just talking about my situation and my experience. That's kind of what we're doing right now, which is going over all that to make sure we are accounting for all that. So we can look at the end of the year, Richard, and go, what was our profit and loss on each loan? Oh, we're actually making money. That's great. We made a good decision.

Richard Thornton:

Yeah. And, and one of the things that, that I constantly hear about from different, you know, fellow note investors is that, um, the discrepancy between what the servicer says your income was and what your principal pay down was and what your accountant thinks it's,

Justin Bogard:

Yeah.

Richard Thornton:

Uh, and that's, that's a tough one. Um, because in some cases, either one can be wrong, but services have got a lot of moving parts and I do, frankly, you're quite often wrong, so you've really gotta be on top of that.

Justin Bogard:

Yeah. It's, it's easy to make a mistake and a penny can roll into many pennies, too many dollars to hundreds of dollars to thousands of dollars and, and before you know what things get outta control. That's why we're constantly auditing the account. Uh, servicers are great and they're needed, right? But they are human and they can make errors and they can, um, they, they can make adjustments in their software that maybe weren't necessary or that were incorrect. And your accountant is gonna have your best interest in mind at the end of the day and that's who it needs to help you audit your accounts. If you just have a couple of loans, it's easy to do it by yourself, but when you have many loans, Richard and I, uh, it's tough to do it by yourself. So you definitely need a second set of eyes or an accountant or a bookkeeper kind of following you along, making sure that things are accounted for properly.

Richard Thornton:

Yeah. I wouldn't even begin to do it by myself. Um, I didn't even start out that way cuz honestly, you know, there's a whole concept of working in or on your business, right? If you're in your business that much doing the accounting, um, unless you're want to just be a very minimal investor onesie two Z year or something like that, you've gotta have help cuz it's just, uh, it's difficult.

Justin Bogard:

Yeah. So I don't have a lot of retirement account issues because we don't have very, uh, many loans in our retirement account right now today mm-hmm.<affirmative>. But you had mentioned something to me in the past about some of the, some of the partials that you've done. There's been some, some hiccups to to, to put it lightly as far as the accounting with your, with your custodian. So let's talk about what I'm trying to explain. I want you to explain it, Richard. I don't wanna steal your thunder per se with the topic, but, um, go ahead and drive us down that conversation.

Richard Thornton:

Yeah, so the problem lies, and this, this is where, um, you've, uh, usually sold a partial, uh, to somebody. And even though a lot of, um, self-directed I A R C A companies are overall very, very good. They have a lot of turnover in their sort of day to day, um, I don't wanna say accounting staff, but, but staff that keeps track of various, um, accounts. And so, um, if you're not careful, they will eliminate an asset in your portfolio. Um, if it's a note, how does that happen? What do I mean? Uh, I'll give you a a loose example. I bought a$50,000, uh, note, um, paid$40,000 for it, uh, sold it at a premium. Um, this is example one, uh, at 42,000. Okay. I only sold the first five years, um, of the partial I was able to cash out of it, bought, bonded a very high, high rate and sold it at like 6% or something like that with the rate differential. I was basically able to cash out my accountant or not. My accountant, my account manager on the IRA side said, oh, you know, Richard has, uh, sold out of this port out of this asset. Guess what, um, Nolan void void, uh, and it's out. And if you're, and actually that's happened to me twice now. Okay. Um, and uh, either that or um, if I happened to collect, um, see I had the, the, uh, asset in my portfolio for a year or two. So some of the upb was paid down and things like that. And then I sold a partial. Well if I sold a partial over what they think my basis is, um, they will, uh, eliminate that from my portfolio and then, uh, if you're not careful, all of a sudden when the into the partial comes along, you have to put it back into the portfolio and they say, well wait a minute, you don't have an asset. You can't put that back into your, your portfolio because it was never there. Well, guess what? It was there but they deleted it.

Justin Bogard:

So it's, it sounds like it's a, uh, a system issue on probably most custodians have probably run that issue because partials are not a big part of what they do transactions on, so they're probably not as familiar with it. I'm just, I'm trying to bat on their behalf here, Richard. Right.

Richard Thornton:

<laugh>. Right,

Justin Bogard:

Right, right. But I get what you're saying because the simplicity of it, if you bought something for 40,000, you sold it for 41,000, you have a gain and you've also recouped your entire investment back. So it, it appears that the investment has been liquidated and you're moving on to your next investment

Richard Thornton:

Plus Yes. Plus they no longer see any income coming into the account. You sold a five year partial, you're not gonna get it, it's just gonna sit there for five years.

Justin Bogard:

Yeah. So it's disguised as a liquidated asset and so that's probably why they do that. So this is a great point that you bring up to other people that have partials in their retirement accounts with these specialized custodians. To monitor that situation, again, you need to audit what you're doing. You need to audit your accounts on what's going on, not just your LLC portfolio, your personal portfolio, your trust portfolio, your retirement, whatever portfolio you have, you need to audit that. This is a good example of why. So you caught that after the fact, I assume or

Richard Thornton:

After the fact? Unfortunately, yeah. The first time it happened to me, I had no idea. And that's, that's part of the problem. It's sort of insidious because they delete it. They don't tell you they, they deleted it. Unless you are hyper, um, focused to look for that asset in your uh, portfolio, you won't know that they've removed it. Uh, and the only way I caught that the first time is that one of my partial buyers came back to me about a year later and said, gee, I'm sorry I've had a life changing experience here. Would you buy the partial back? And I said, yeah, sure, that's fine. You know, I had, I had honestly made money on the purchase, I was just gonna resell it and it was, it was fine. Mm-hmm.<affirmative>, but my self-directed IRA company, my custodian said, uh, you don't have anything to put this back into

Justin Bogard:

<laugh>.

Richard Thornton:

What do you mean? I don't have anything to put this back into. Yeah. So,

Justin Bogard:

So is it just a paperwork thing? You have to redocument it and prove that that assets should never been taken out and this is, you know, just something that you have to put back in there? Is that what happens?

Richard Thornton:

Yeah, they've gotta go back to their, you know, different supervisors levels and it's basically just a pain in the tail. You can get it done, but honestly, you know, I got that done uh, one year out if I had been five or six or seven years out and all of a sudden you've got new account executives and new supervisors, they may go, sorry Charlie, and they're not gonna let you just all of a sudden put that into your portfolio because that's seen as a contribution. Gotcha. They're limited to six or$7,000 right now as a contribution. Guess what?

Justin Bogard:

Yeah. Depending on the account that you have. Right. That would be for like a, like a Roth IRA type account.

Richard Thornton:

Yeah, exactly. And, and, um, so what that means is you can no longer put it back into your account. So you now have to, uh, claim that as a gain.

Justin Bogard:

So it is a administrative little stressful situation there. But the good news is for those of you listening, you know, this is, this is a bump in the road that can't happen that you have to stay on top of, but your servicer is really in control of what's going on of the deal. So you're not just because the custodian that he has says that they, he doesn't have that as anymore. It doesn't actually mean it's true. It's just the custodian side of it. And what they view is saying that, uh, the servicer still manages and controls the entire note situation. So Richard doesn't have to worry about losing the asset as far as in the eyes of the public setting in his retirement account. It's just in the eyes of his custodian.

Richard Thornton:

Uh, yeah. And it means I'm gonna get taxed a whole lot of money<laugh>.

Justin Bogard:

Right.

Richard Thornton:

And$40,000 left, I'm suddenly gonna be paying taxes on that$40,000, which I'd rather not do.

Justin Bogard:

Right. But you, you fix it through the custodians, I guess is what I'm saying.

Richard Thornton:

You mean you fix it through the servicer?

Justin Bogard:

Well, no, the custodian that's managing your account. Cause that's what you said the partial was disappeared from.

Richard Thornton:

Yeah. The service as far as the service is concerned, everything's fine. They've been doing their their thing as they're, uh, supposed to be doing. You're right, it's the custodian. Yeah. That has made the error and there lies the problem

Justin Bogard:

Right there. There lies the problem. Right. On<laugh>.

Richard Thornton:

Right.

Justin Bogard:

Right. So what else are you doing at the end of the year, Richard? Um, you know, we're, we're going through, we're auditing our files, we're we're uh, probably goal setting for the next year, the 2023 season. Is that what you're doing?

Richard Thornton:

Yeah. Um, e exactly. I mean I, I think that we have pretty ambitious goals for setting up the, the fund. Um, the range is uh, five to 10 million and I think just as soon as we get that put to bed, we're gonna open up another one. Cuz I do think this is the time to, um, to be perfect, time to be on the, on top of the market. Um, I think we're gonna change a format from a a 5 0 6 B to a five oh uh, six C, uh, which would mean that we can actually, uh, go bigger and larger. Um, but this is sort of the time to, to be looking towards, uh, taking that dry cash I think this coming year Yeah. That you had, um, looking around and visit. Prices aren't quite down yet, um, but they are coming back. I think it bears repeating, um, that we think a lot of the reperforming notes out there, um, are going to be much higher quality than they were before and they're really worth looking at. Yeah,

Justin Bogard:

Yeah. We're definitely taking a look at those. There'll be some nice non-performing loans coming through at a, at a higher price ban. Probably the one 50 to two 50 range would be a nice sweet spot to be in. There won't be a lot of buyers for it unless they're hedge fund buyers. And then, you know, the traditional seller finance, private mortgage, private carryback type of loans that we've been going after for the last several years, that's gonna be a big part of, uh, this chunk as well. So any, and by the way, a little side note, any uh, wholesaler fix and flipper what we called just kind of a, a seller financeer, if you're creating loans, um, connect with us, you know, connect with us, uh, through through our emails. I'm justin@brightpaths.com Richard is Richard at uh, richard am note cap.com and let us help you set up things the compliant way in the right way and give you some little advice and some experience that we've gone through so you can create some, some good notes. Uh, cuz we're interested in buying them. Uh, we've even bought them at the funding table before. Depends on the situation, but that's what we're, we're open to and looking at.

Richard Thornton:

Yeah. You know, another thought too, Justin, is for um, our listeners who don't wanna make his full-time job like you and I have and, and maybe wanna stay, uh, somewhat smaller because they've got family or day J job or whatever. Um, look towards, uh, just setting up a small llc, uh, with some friends and family and pulling together one tube, 3 million, whatever it is. Not, not a lot, but invest that as a pool because if you do that, you can move into larger assets. You can move into the 1 52 50 category. You're getting cleaner product, you're getting better product, um, it's easier to service. Um, and you can get the yields that, uh, you used to be able to get on, um, uh, let's say smaller stuff.

Justin Bogard:

Yeah. You buy in bulk, you get bulk pricing.

Richard Thornton:

Yeah, exactly. Exactly

Justin Bogard:

Right. Richard 2023. Um, the horizon is set. We noticed that interest rates have actually gone down a little bit recently and so we're gonna probably see that trend kind of bounce up and down on the rates, uh, for, for a while. I, I don't know, the Fed will do what they do, but I think it'll be up and down for a while. Um, I don't know if it'll go up as high as 8%. I don't know if it'll go up as high as 7%, but I think the five to 6% window is probably a pretty safe bet as far as interest rates will probably be hum humming around that point for a while. Mm-hmm.

Richard Thornton:

<affirmative>, you know, from what we can tell from the experts that we're talking with, that seems to be, it's gonna be, uh, pretty much steady Eddie up a little bit down, down a little bit, but there's, unless some huge thing happens, there's nothing going to send us to stratosphere. And if you, if you've noticed, one thing I think is very significant is job market still strong even though inflation is up and inflation is starting to, I don't know if if you've experienced this, but gas prices have dropped a dollar a gallon here in California, which is pretty significant. Oh yeah. I was paying 5 95 a gallon, um, for gas. And so now that's dropped significantly.

Justin Bogard:

That's over 20%, right?

Richard Thornton:

Yeah. 20% drop. And so, um, the fact that the economy is still strong, um, in light of that, uh, those rate increases and things like that speaks well for I think what's gonna come with us next year.

Justin Bogard:

Yeah. It's an interesting time that we're in every cycle that I've seen since I've really started paying attention to the real estate market and the economy probably since early two thousands. It's, it's been different. And a lot of the people that are mentors and have been doing this sort of thing or real estate in general since the seventies, they've, they've never really seen this type of market either. It's just unique how, uh, we have good job situations and we have uh, you know, good, good real estate, uh, growth even though it looks like some are proceedings just cuz they're overinflated. We've talked about that in previous podcasts, but yeah, it seems like a really good market, but then inflation is up too, so it's just an interesting time, you know, how to adapt to it.

Richard Thornton:

It one thing I'm hearing about here in the Bay area too, and I know, I know this will affect because more people are working from, from home now. Yeah. It will affect other markets. A lot of people have said, oh, you know, tech is laying off here and there and da Well that's true. A lot of the giants are, but what I have found interesting from the different, uh, networking events that I'm going to here is that the larger companies, uh, you know, not Google, but Facebook and everybody like that, uh, did Overhire, they are laying off, but there is still such a dearth of, uh, and such a need, uh, for tech workers in the smaller tech companies, um, that they think they're gonna get absorbed. So they're really not looking for a, a huge, uh, blip there. Yes. You know, a person may not be, um, at Facebook or have someplace that's got quite the status, but they're certainly gonna be employed and they're certainly gonna be making, uh, significant money.

Justin Bogard:

Right on. Awesome. This is episode number 25. It's brought to you and sponsored by Bright Path Notes. So Richard, uh, we're gonna switch gears a little bit here and, uh, what's on your Christmas list, man?

Richard Thornton:

Christmas list?

Justin Bogard:

Yeah, you going, did you go see Santa yet?

Richard Thornton:

Uh, we have not seen Santa yet, but I, I, you know, I want some new toys. I want

Justin Bogard:

<laugh>

Richard Thornton:

New computer. I want do, uh, camera to do videos with. I want some toys. Okay,

Justin Bogard:

So you are going to be going on a special trip pretty soon, aren't

Richard Thornton:

You? I am. I'm gonna be in Vietnam for five weeks. I'm gonna be trying to do part of that as a workation work and test out this note investing and you can do it for any, from anywhere, um, uh, theory and I, um, transferred my phone service recently to Google Phi and for those of you who don't know that, and I'm not pitching Googley here, but uh, you can go to you hundred 50, uh, countries and not, um, change your cell phone number so you can call me wherever I am, um, on my San Francisco number here and it'll still, you know, go, go straight through. I don't have to change sim cards, I don't have to do anything. I just pick up the phone now and maybe three o'clock in the morning when you call me. But that's a different

Justin Bogard:

Issue. That'll be awesome. I'm gonna plan that. I wanna know the exact hour difference so I can plan that. And just 15 blowing you up,

Richard Thornton:

15 for you and 12 for me. Big guy.

Justin Bogard:

15 hours time difference.

Richard Thornton:

That's right. So six o'clock in the morning, um, two o'clock in the evening. Your time will be six o'clock in the morning my time. Uh, so we are gonna have some, uh, different meeting. You'll be, uh, you'll be sipping a beer and I'll be sipping coffee

Justin Bogard:

<laugh> or it could be the vice versa. You could be a beer and I could be sipping on a tea. Could be.

Richard Thornton:

Yeah.

Justin Bogard:

Well that's awesome. I know that you're gonna be going, uh, with your significant others. That's gonna be great. Have a little bit of, uh, fun out there. Have you been to Vietnam before?

Richard Thornton:

I have, uh, I've been to Central and Southern and this time we're going to go to Northern and uh, down to, down to Central. So, um,

Justin Bogard:

This is gonna, this is gonna be interesting when you get out there, if there's a delay on the phone, I'm kind of curious if there's a big long delay on the phone or on the internet between, you know, wherever you're gonna be at on, on internet connection, wherever I'm at. Uh, so it's gonna be interesting.

Richard Thornton:

We'll see, I did not have that happen last time. Uh, I was there, but, um, we'll, we'll see. I I think if you, as you and I discussed a little bit, um, most of the Asian countries did not have the legacy problems that the US have, meaning that they didn't lay a whole bunch of hard wire so they're not beholden to that system. When cell phones came out, they went straight to antennas. So a lot of them actually have much higher internet speeds than we do. Nice. Um, because they're all working off of cell towers.

Justin Bogard:

Very nice. All right, Richard, this episode's gonna come out right before Exus, so everyone wish you a very, very happy holiday and holidays to come. We got one more episode in the year. It's episode number 25, brought to you by Bright Path Notes. I'm Justin Bogart and the, due to my screen, I guess my screen right on my left here. Mm-hmm.<affirmative> is Richard Thornton, the, the one and only

Richard Thornton:

One and only. So have a good trip or good, uh, holiday everybody. You too, Justin. I'm sure I'll talk to you before then, but, um,

Justin Bogard:

I have a friend. Take care guys. We'll see the next episode.

Narrator:

Thanks for listening to Be The Bank. We hope you learn something from today's show. If you enjoyed this episode, please rate and review us. Plus check out our Bright Path Notes channel on YouTube and follow us on Facebook and Twitter at Be the Bank and on Instagram at Be the Bank podcast Be The Bank is sponsored by Bright Path Notes. Thanks again for listening.