Real Estate Underground

From Active to Passive: The 1031 Exchange Revolution with Ben Carmona

• Ed Mathews • Season 2 • Episode 165

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Ed Mathews:

Greetings and salutations. Real Estate Undergrounders. It is Ed Mathews with Real Estate Underground. Thank you so much for making us part of your day. With me today is Ben Carmona of Perch Wealth, coming from the West Coast. We were just playing the name game of the folks that I know, and it turns out we don't know a lot of the same people, but all good. So, Ben, welcome to the show, and I'm really excited to have this conversation.

Ben Carmona:

Thank you, Ed. It's a pleasure to be here. So your line of business is something that I'm totally fascinated with, because I'm one of those people that have sold real estate in the not too distant past, and you know what? I just paid taxes on it. It was the right decision for me, but at that point, writing the check last April was but again, what do you do? So then, for those folks who haven't discovered you online or know you directly, why don't you tell us a little bit about who you are and what you do?

Ben Carmona:

Sure, absolutely. Yeah, I live in Rancho Mission, viejo, southern California, orange County, married. Two kids Went to school in San Diego State From a very young age. I grew up in a real estate investment type of family, if you will. So I knew I wanted to be in real estate investments. I didn't know exactly what, but I wound up in this very.

Ben Carmona:

I'm in the financial services industry, so I'm a financial advisor, I'm securities licensed, but I'm in a niche part of the financial services industry and so, as I was sharing with you, ed, I'm not your traditional advisor. I don't do stocks and bonds and mutual funds and insurance and annuities. I don't want to do it. All I've always been involved in is real estate syndications or, broadly speaking, within the alternative investment world and alternative investments. For a lot of investors or your listeners, they may not be familiar and they've never heard of it. They don't have a good understanding, and that's the case with 95% of folks nationwide. But we help, support and guide accredited or high worth investors with their 1031 exchange investments.

Ben Carmona:

Our clients are those that are a little bit older, that have worked their tails off to acquire and accumulate and manage real estate for all their lives, right, 20, 30, 40 years. And they're sitting back today and thinking, man, they've done well and they do not want one more single phone call from a tenant, they don't want to deal with anything anymore. And they're thinking what can I do? What are my options? I don't know if you want to touch on 1031 exchanges a little bit, but essentially those are our clientele. If you're sitting back thinking, I've amassed this real estate, it's done well, I don't want to manage it anymore, how do I move in such a way that allows me to defer taxes If I sell? How do I defer taxes and then be in a position where I'm passive? Right, I have to deal with tenants. I don't have to deal with the toilets and the termites and the trash, whatever the triple T. What can I do? Those are the folks that we help.

Ed Mathews:

And if you want to have me go into the 1031 exchange or any other questions, so tell me the difference in terms of how they're handled and when it's appropriate to do just a straight 1031,. When is it appropriate to contemplate a DST?

Ben Carmona:

Absolutely so. First I'll just say 1031 exchange has been in the tax code for a hundred years. Right, an amazing well builder. The 1031 exchange just for the audience maybe it's folks that don't know you own investment property, you sell that investment property. The 1031 exchange just for the audience maybe it's folks that don't know you own investment property. You sell that investment property. The IRS says you can defer paying taxes on the gain as long as you take the proceeds and you buy other, like kind or other investment property. So, generally speaking, that's what a 1031 exchange is.

Ben Carmona:

Now. The DST is simply a structure that is conducive within the 1031 exchange arena. So it's not one or the other, it's an option that qualifies within the 1031 exchange. So a traditional investor you, for example, ed, you buy properties, you've held them, you've sold them. If you want to do a 1031 exchange, you sell your property, you go out and buy another property on your own or with the help of a realtor or broker. You do have your diligence, you secure the financing, you find the right properties and you close and you do the 1031 exchange. The DST is turnkey 1031 exchange, replacement property solution.

Ben Carmona:

So I'm just going to start from the top and I'll keep this brief. Dst is a trust Delaware Stocks Torted Trust. They were created in the 80s at that time but it's an entity where you have one trustee managing the trust on behalf of up to 499 beneficial owners. And so when you take this trust and you wrap it around real estate, it creates a situation where you can have fractionalized ownership. You have a lot of investors own a single or multiple properties. In 2004, the IRS came out and validated this fractionalized ownership structure as a real property ownership and therefore eligible for 1031 exchange purchases. So that's just high level, the structure, and I'm going to walk you through. I'll give you a real life example.

Ben Carmona:

So within this industry, the DST industry, there are sponsors or syndicators. Right, those are synonymous. I'm going to name some big ones, just so the audience may. It could be Aries, apollo, starwood, invesco, cantor, fitzgerald. I'm not talking. This is not an industry that is in its infancy. The big boys are here and these sponsors or syndicators, the big real estate platforms, they go out and they'll buy a $100 million multifamily project in Dallas, texas, $150 million medical office campus in Orlando, florida, $50 million self-storage property or portfolio in Raleigh, north Carolina. They go out, right, they use their resources, their relationships, their capital and they close on these assets. The assets are stabilized, they're income producing, and then they turn around and they offer ownership interests to everyday mom and pop retail investors like you or I.

Ben Carmona:

If little Mrs Smith is selling a $2 million duplex in Orange County or LA or New Jersey, what is she going to do? And of course we didn't touch on this and maybe time doesn't permit, but there are restrictions with the 1031 exchange. The IRS has blessed us with this ability to defer taxes, but they don't make it easy. So little Mrs Smith. Here she's ona property she's owned forever. She's got to complete the exchange within XYZ timeline 180 days. You have 45 days to identify and then you have 135 days to close on the properties that you've identified.

Ben Carmona:

Little Mrs Smith either either can't find something or, going back to the premise of what we do, she doesn't want to manage it anymore. She could take her proceeds from the sale and exchange directly into these DSTs. And then let's just say I said 2 million bucks, she could put 200,000 into Cantor Fitzgerald's multifamily. She could put 500,000 into Jones Lane DST in Orlando and she doesn't have to worry about finding or potentially not finding replacement property. The DST is our own stabilized income producing, managed by these big behemoths, and she could slide right in close quickly a week or so, start accruing income paid out monthly, satisfy her exchange, defer the taxes. You can diversify. Right Now you can have up to 499 beneficial owners per offering. You can diversify and mitigate risk. Where are we today in the country, baby boomers and seniors control the majority of the wealth in the country. A lot of it is in private real estate that they've owned and operated and they're tired of active management.

Ed Mathews:

Interesting.

Ben Carmona:

Right. They're looking for links to not only get out of active management, get into a passive position, but also to mitigate risk. Two million in one location, on one property, or five million, whatever it may be. We could spread that out, diversify it not only by geography, but by sector and operator. It's a beautiful thing. This is gold.

Ed Mathews:

So where are we going to take it next?

Ben Carmona:

So, these same clients that we work with every day. You may not want to manage, you're over management, you want to get out of management. But it's also important to know that that if you've owned real estate for 20 or 30, 40 years not only chances are, unless you are very disciplined and have kept up with market rents, you're not earning a whole lot of money on the property that you own. Most of our clients are like look, I don't want to deal with anything. Anyway, if this tenant's been paying for 20 years, I am definitely not going to rock the boat to get a few extra bucks. And I say that because what we find eight out of 10 of our investors they're earning between one and 3% income relative to the values of their property today. So you may have been getting 10 or 12 and 20, 30 years ago, not today and you're getting very little. And most investors don't even know, they don't even realize what they're getting today, how small it is relative to when the properties were today.

Ben Carmona:

Sure, the folks that have owned for a long time. As Ed, one of the big benefits of investing in real estate is the depreciation benefits right, you're able to shelter the income that you're generating from tax purposes. And so these folks are not only earning 1% to 3% very little, but they're also many of them have no basis left. They're fully depreciated. So you're paying 100% ordinary income tax rates. So I love and I'm passionate.

Ben Carmona:

And then I'll touch on my background a little bit. But I love what I do because the DSTs, broadly speaking, are widely unknown the CPAs attorneys, your most sophisticated real estate investors. Like yourself, you have no idea that these products actually exist, and this is all I've been doing for 20 years. And so we're really able to help people which is number one and take them from active to passive management, mitigate their risk, increase their income, add back depreciable basis in some cases to shelter more and give them more time to spend with their families or do what they love instead of fielding calls from tenants. So that's my in a nutshell. That's what it is.

Ed Mathews:

And, yeah, you nailed it In terms of the math right.

Ed Mathews:

So you were talking about your typical baby boomers earning one to 3% relative to the value of the property.

Ed Mathews:

Let's explore that a little bit, because most folks would say a lot of folks would say who are as highly educated and experienced as you are that over the last 30, let's say I've owned the building for 35 years right Over the last 30 years my income has been going up.

Ed Mathews:

However, you point out something that's really important, and that is that capital, that income, isn't growing as much as quickly as the value of the property itself, as quickly as the value of the property itself. So you are basically losing out on potential returns because you have yet to unlock the overall value appreciation of the property. You buy a property for a million bucks and over 30 years that property grows to be worth 5 million bucks, but your rent's only grown it at best through three 5% a year over that same 35-year period. There's no way that your income, your revenue, actually has kept up with the overall value of the property, and thus you're missing out on getting compounding interest on the overall value of the property. You're just relying on rental income, and that's where people are missing out. Can you comment on that?

Ben Carmona:

You said it you laid it out very succinctly. That's exactly right. Using your example, you bought a property for a million bucks and you're getting $100,000 or 10% and you're still getting. Maybe you're getting $120,000 five years later, but the property is worth 5 million bucks. We could take the 5 million and get you into a diverse portfolio. We could take the $5 million and get you into a diverse portfolio. Increase that. Your income would go from $120,000 to $300,000 in that.

Ed Mathews:

So it's significant in a tax-advantaged way also.

Ben Carmona:

And so maybe we touch on that too For the client. You bought it for a million, you sell it for $5,000, and you pay tax depending on where you live. I'm here in California, but I'm going to pay 40% or a little bit more in taxes on that gain, right? So I'm going to pay call it, 2 million bucks on that sale, the 1031,. You preserve that 2 million. You don't pay tax. You redeploy that full 5 million into income producing real estate, and that has a compounding effect.

Ben Carmona:

The beautiful thing about 1031s is you swap until you drop, you exchange and you exchange and then you pass away. And when you pass away, unfortunately your kids or your beneficiaries inherit those assets at the cost basis, and that's why real estate is so attractive as an investment vehicle, because it's the only structure I don't want to say the only but you can again defer. That 1 million that you started with 30 years ago could be 50 million today, and if you passed out and didn't do an exchange, your liability may be 20 million, but you pass away and your children or your charities, or whatever it may be, inherit that asset at 50 million. So for those folks that don't understand stepped up basis.

Ed Mathews:

basically, Ben did a good job explaining it, but I'd like to drill into it a little further. So, basically, if an asset is worth 50 million bucks, to use Ben's example, today, and it's my asset and I go to the great beyond today I originally bought that property for, say, 5 million bucks 30 years ago. My children and my wife are not paying taxes on that growth. My heirs, my two girls and my wife are basically the asset. The value of that asset is the value it was the day I died. So today, and so all of the deferred taxes, recapture of all the depreciation, all of that goes away. You pay $0 on all of that and you basically pay taxes on what it's worth the day I died versus what it's worth the day you sell it. And hopefully my family is smart enough to put it on the market.

Ed Mathews:

45 seconds after I've done it, there's two phone calls, one to the funeral home and one to the broke. Just go, get rid of it. And, yeah, it's a tremendous opportunity for you to grow wealth without having to pay taxes along the way. And then, when it's time to meet the great beyond, it's a great way for your heirs, your family, your beneficiaries, to avoid taxes and live on the fruits of your hard work over the last however many decades. It's a really interesting thing. Now let's talk about why this exists. We always talk about tax policy and is designed to cause or elicit specific behaviors. Why does the government want or allow?

Ben Carmona:

this to occur. Like so many vehicles or structures, it's to promote investment in real estate, right, it's just like REITs, right, REITs? They set up the REIT structure real estate investment structure to avoid the double taxation of corporations. And you can avoid the double taxation as long as you invest 75% of the money that you take in into real estate and you distribute 90% of the income to investors. So they set up all these vehicles, right, it's not just real estate. There's other structures, but essentially what it comes down to is to promote investment within our country, within real estate, within other businesses, right, and that's really the reason behind the 1031 exchange. You want to go deeper back? It's probably because some of the founding fathers were politicians put a bunch of real estate.

Ed Mathews:

I agree with everything you just said. I would add to it that it's also the government incenting people like you and me and the folks listening here to create housing for the rest of the population. And because the government if you go through a city and you look at how the government runs housing, they're not really good at it, right? And so I think part of the 1031 exchange, part of the Delaware Statutory Trust and all the other tax advantages that the government provides are so that folks like you and me will go out there and provide good, clean housing for other folks to live in. Hey, man, right, man cool, all right, man. Hey, I have really enjoyed this conversation, but I think I want people to talk about that.

Ed Mathews:

My feedback has been that I can talk for days about this stuff and they're not wrong, right? So let's keep the train on the tracks and let's move over to the final five. Sure, all right. So let's talk about what gets you out of bed on Monday morning. Typically successful people like you the mortgages paid, the car payments if you even have them are taken care of, kids' college is all set, but nevertheless you get up and you go to work on Monday, right? So that, to me, is purpose. So I'm curious what is your purpose? What gets you out of bed?

Ben Carmona:

Yeah, Helping people, frankly Awesome. That's short and sweet, just good A little bit Okay.

Ed Mathews:

I'm a simple guy. Simple's good. I'm a simple guy. All right, let's also talk about your mentors along the way. Obviously, you've been in this business a long time. I'm sure you've had bosses and colleagues and other folks who have helped you along the way, so I'm curious about the best advice you ever got, and who gave it to you Best advice I ever got, and who gave it to me.

Ben Carmona:

I've been blessed to have many people give me advice throughout, one From an investment standpoint. One thing Mr Short, a college professor and I remember this clear as day and I don't remember a lot of things he said it's not hard to make money. All you need to do is follow demographic trends. At the time I was I don't know, 2004, 2005 in college he said look, today, in 10 years, the need or demand for healthcare is going to go through the roof. And it's all in the spirit of short and simple, because I can go on a tangent. That's something for the audience, maybe the younger audience, to keep in mind Align yourself based on demographic trends, understand that community and whether you're in tech or real estate or whatever, that was a powerful state.

Ed Mathews:

Yeah, right now we're experiencing probably the largest transfer of wealth over the next 20 years. Some people have called it the silver tsunami. Right, it's all the baby boomers my parents and maybe not yours because you're younger than I am, but they're getting to or have already retired. For instance, one of the big trends all my venture capital buddies have gotten into the private equity world and are now buying up baby boomer businesses, services businesses, and it's a massive opportunity, right? The only way you detect if that's coming is that 76 million people over the next 30 years are going to be retiring and ultimately passing away, and that presents them, the baby boomers, with an opportunity to sell and, for the younger generations, an opportunity to buy and continue to grow those businesses and maybe even roll them up. It's a dynamic that has become a really big opportunity just because of the size of that generation. When the Gen Xers people like me get to that point in the next what 10, 15, 20 years? There'll be other opportunities.

Ed Mathews:

And I always talk about pattern recognition. Right, and very similar to your professor, you want to pay attention to demographics and other patterns and as they start to present themselves, the really smart people are figuring out how they can solve problems for that next generation and they're making a lot of money on it and other things, right. They're also contributing to the greater good and a whole bunch of other things, but it presents opportunities for sure. All right. So let's talk about mistakes. I fully believe in the way we run things here at Clark Street. No one gets in trouble for making mistakes once right. Where you get to have a conversation with me is the third, fourth time, second, third, fourth time that same mistake right, which really doesn't happen that often. I think you learn a lot from those mistakes because and I think, you learn a lot more from mistakes than you do from successes. So let's talk about a decision or a mistake, something that you'd love to have that back. What was it professionally and how did you recover, if you were able to?

Ben Carmona:

Yeah, and, like you said, mistakes, as long as you learn from your mistakes, you make adjustments, they're valuable. I will say, right out of school, when I got into this business, it was 2006, 2007, and I was on the sales side of spring chicken. I didn't know what I was doing, but I was having fun. So much business. Our biggest problem was keeping paper in the fax machine because it was coming through something. But 2008, 2009 hits right. Everything crumbled. And in our business they weren't DSTs at that time, but there were real estate syndications and people got crushed.

Ben Carmona:

And here, yes, I was a spring chicken. I didn't know what I was doing. I can hide behind that, but that changed my life, frankly, because here you go again, serving baby boomers and seniors. These folks have worked all their lives to run what they've had and they're losing. It was a wake up call for me I need to know what I am selling, and so I transitioned from being a salesman to an analyst at heart and so I guess it would be. You need to understand, really understand, what you're offering in investors. And that was a mistake. Yes, it was early on, and I've made many other mistakes beyond that, but that was a pivotal moment in my time and I'm blessed and thankful that it happened so early.

Ed Mathews:

And the list of mistakes I've made are longer than both my legs right. It's crazy. Not without mistakes here either. I'm always fascinated by how leaders like yourself take in information. Some people read books, other people listen to podcasts. I'm curious about how do you keep up with the market and who are you paying attention to these days?

Ben Carmona:

Sure, I told you on the front end. Sometimes I'm almost embarrassed to sit. I'm not a big book reader, not because I'm not. I love learning daily. There's different ways to emerge in real estate and investments and odd business. Whether I'm talking to Cantor Fitzgerald, the executives there, or investors myself, or brokers across the country or qualified intermediaries about what their flow is like, I am emerged with, I would say, the ground level, so I couldn't give you data points on every market, but I have a pretty darn good sense on what is going on at any given time based on the plethora of professionals in various capacities that I speak to. So that's where I digest most of my information. I don't have time with two young kids and a wife.

Ed Mathews:

One of my favorite books I'm going back probably about 20 years was a book written by Pete Ferrazzi. It's called Never Eat Alone, and it was one of the things that I learned from that it was. The one thing I learned from that book is that you should never listen to the title. You shouldn't be eating alone. You should be networking and using that half an hour to learn about your industry. Create new relationships. As they say, dig the well before you're thirsty.

Ed Mathews:

I meet with realtors and brokers all the time, not because I'm necessarily buying In fact, we haven't bought a property in seven or eight months now but I always want to hear about what's going on in the market. I want to understand what they see, and the reason being is I see my little world, but I don't. The beauty of being in a sales-oriented position is you don't see one deal, you see all the deals, and so Ben's over here doing this kind of stuff, ed's over here doing this kind of stuff, tim's over there doing that kind of stuff, and it's amazing what you can learn over a cup of coffee or a hand sandwich. Right, absolutely, yeah, all right, man, I'm interested in how you define success in your own life.

Ben Carmona:

Yeah, it used to be different. Today is a healthy and happy family and peace within, knowing that I'm serving a purpose and helping people. That is what success is to me.

Ed Mathews:

Yeah, man, it's amazing what the arrival of a significant other, and, more specifically, children, does to your perspective, isn't it? 100%? As I tell people, having kids is literally the best thing you'll ever do. So, speaking of that, when you are not saving the world from making huge tax mistakes in their real estate portfolios, what do you like to do for fun? How do you spend your time? Pickleball, okay.

Ben Carmona:

You're one of those guys, all right, you can already see it in your eyes that you're thinking well, I'm a pickleball, you lose. I play tennis. Yeah, oh, you do. Okay, I love pickleball. It's how I try to maintain my health and secure from stress. It's a great game, it's fast paced and I love it.

Ed Mathews:

Pickleball is what I love. Excellent, and so, Ben, I've really enjoyed this conversation. If people want to learn more, get to know you, or learn more about Perch Wealth or any of the other things you're doing, what's the best way to get in touch?

Ben Carmona:

Absolutely, and I didn't even talk about my team, but perchwealthcom, right. perchwealth. com, p-e-r-c-h. Wealthcom. I always give out my cell phone number and you feel please call me. I'm all about education Now. I will definitely call you back, but I have 10 advisors on my team as well, throughout the country, so we're nationwide. So you can find them on the website. You can call me. My cell phone is 818-269-4972. Again, 818-269-4972. Love to talk to you. I don't care where. If you're thinking about selling, curious about 1031 exchanges, curious about DSTs, we're happy to speak to you.

Ed Mathews:

Excellent, Ben Carmona, thank you very much. It's a pleasure to meet you and congratulations on the success of your business, and I look forward to hearing more in the future.

Ed Mathews:

Thank you, Ed.

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