EP 10 | INDECISION

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Hosted by
ANDREW LANOIE

 Let me ask you, are you the type of person that makes major decisions at the drop of a hat and comfortable within your own skin of decision making or do you fall in the other camp, the type of person that tortures yourself over the most minute of details? Over the most trivial of matters to the point of indecision, the latter group suffers from analysis paralysis, which is simply the inability to make a decision due to overthinking available alternatives, possible outcomes and data. 

In this digital age, plagued with information overload, more and more individuals are suffering from analysis paralysis. The inability to make decisions when faced with so many alternatives, so much information and too many tools for analyzing a course of action. 

All of this reminds me of the parable of the Fox and the rabbit who find themselves one day sitting at the edge of a pond discussing their various plans of escape in the face of hunters. Rabbit boasted of having many escape plans. He could climb a tree flee to the underground tunnels, hide in the bushes, Fox on the other hand only had one plan of escape and that was to climb a tree. When the hunters finally arrived, Fox quickly climbs a tree, but rabbit on the other hand begins to analyze all of the ways to escape that he knows, but unable to decide which one would be the best he fails to act and gets caught by the dogs. 

There’s one area of investment where indecision may not get you killed like rabbit, but it will probably cause you to lose money in make your retirement unpleasant. It involves self-directed IRAs, a valuable tax saving tool for the savvy investor, but could also be poisoned for the indecision. Because self-directed IRAs are required to be reported to the IRS. The US government accountability office or GAO gathers data and publishes relevant statistics and reports regarding self-directed IRAs. 

And according to a 2018 report on self-directed IRAs, 791 individuals have IRA balances between 10 million and 25 million while 314 individuals are worth over 25 million. There’s a common thread among all of these self-directed IRAs owned by ultra-high net worth investors. The preference for alternative investments, particularly in real estate. Contrast to successful self-directed IRAs with most other self-directed IRAs, most are not actively managed. In fact, most owners who open a self-directed IRA, don’t do much with them, never getting past the initial fund transfer and leaving funds in the default money market account. 

Here’s an example where I contrast the difference between what you would earn from doing nothing with a self-directed IRA and what you could earn if you follow 

the example of ultra-high net worth investors who earn an average of a cash on cash return of 12%. 

We’ll use $300 as the starting investment. Although the average money market return is close to a quarter of a percent, I’ll be generous and I’ll use 2% as the rate in this example, 2% being the high end of money market accounts. For simplicity interest will be reinvested and compounded annually. So here are the returns over a 30-year period. And again, starting with a $300,000 investment at 2% rate of return over 30 years yields $543,408. A $300,000 investment at 12% compounded over 30 years is $8,987,976. So in this example, what’s the price of indecision. It’s almost $8.5 million. So the difference between earning a 12% return per year and reinvesting in earning the default 2% money market return by doing nothing, $8.5 million, that’s a high price for indecision, and that’s not even taking into consideration inflation. Indecision could sink your retirement. 

Assuming an average money market return of a quarter of a percent inflation at the average rate of 1.85%, then that’s based on the last 10 years, this would actually erode your initial $300,000 investment. 

And at the end of 30 years, you’d be left with just over $187,000. That is not a retirement plan. That’s a poverty plan. With real estate investing it’s easy to get lost in the data and fall prey to analysis paralysis because there are so many factors to consider in evaluating a good real estate opportunity. 

Here are a few basic foundational factors to consider. Property details for example, number of units, square footage, purchase information, including purchase price, cost of rehab or capex, improvements, etc., financing details. For example, what’s the loan amount, down payment, interest rate, terms, closing costs, etc., income, expenses, demographics of any given market. Then using the foundational information, financial projections are formulated to determine the potential profitability of a project. Significant financial benchmarks can include cash flow, rate of return, that’s ROI, cash on cash, IRR or capitalization rate or cap rate as it’s called. The data in analysis required for evaluating real estate deals can be overwhelming. And that’s why most self-directed IRA owners don’t even dip their feet in the real estate investment pool. 

But how do ultra-high net worth investors invest in real estate when evaluating deals seems so time consuming? What is their secret? They’ve learned how to overcome analysis paralysis by learning to simplify their decision making. Instead of analyzing a hundred different factors, they narrow down the half dozen or so most relevant to their decision making. That is why most ultra-high net worth investors do not invest directly in real estate. They make private investments in 

real estate funds and defer to the expertise of others. Instead of going through the dozen factors I listed, they narrow down their factors to just a few. Number one, the experience and expertise of the people running the show. Number two, the rate of return and number three, the exit strategy. The most valuable lesson, a novice self-directed IRA owner can learn from a seasoned successful self-direct IRA investor is to simplify investment decisions. Don’t fall into the trap of many potential retirees who assume that setting up a self-directed IRA will ensure a secure retirement. The sad truth is just because you fund a self-directed IRA, which typically goes into a money market account by default doesn’t mean you’ll have enough to retire when the time arrives. This is dangerous thinking, especially when taking inflation into consideration where your initial funds will actually be worth less at the time of retirement. 

Being truly prepared for retirement requires being proactive, but it doesn’t require being able to analyze deals like a computer. It can be as easy as attaching yourself to seasoned and experienced professionals who have already been successfully investing in real estate. Finding promising deals suddenly becomes much simpler, which in the long-term will serve to grow your account and provide you with a kind of retirement you seek and deserve. 

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Episode 10