Rich Habits Podcast Summary: Episode "Q&A: Delaware Statutory Trusts, Stop-Loss Orders, & VOOG"

Release Date: December 26, 2024
Hosts: Austin Hankwitz and Robert Croak

Introduction

In this special Q&A edition of the Rich Habits Podcast, hosts Austin Hankwitz and Robert Croak delve into a variety of listener questions ranging from real estate investment strategies to stock market tactics. This episode, released just after the holiday season, offers valuable insights into financial literacy, tailored to help listeners take control of their financial futures by implementing effective habits.

1. Understanding Delaware Statutory Trusts (DSTs) and 1031 Exchanges

Listener Question by Jeff C.:
Jeff is contemplating selling his rental property and utilizing a 1031 exchange to invest in a Delaware Statutory Trust (DST) to generate passive income. He’s concerned about his current low cap rate and seeks advice on whether to proceed with the DST or take a tax hit for greater liquidity.

Hosts' Discussion:

• Austin Hankwitz starts by explaining DSTs as legal entities under Delaware law that hold title to properties, primarily used for 1031 exchanges to defer capital gains taxes. He emphasizes the complexity and illiquidity associated with DSTs.

  "DSTs are super illiquid and involve high fees, making them a less favorable option compared to finding your next deal or paying taxes and investing accordingly." ([00:38])

• Robert Croak expands on the drawbacks, highlighting the significant fees ranging from 7% to 15% and the lack of control over investments within the DST. He advises against using DSTs due to these high costs and restricted liquidity.

  "High fees, illiquid, and no control over your investment—it's just not worth it." ([04:14])

• Conclusion: Both hosts recommend considering traditional investment avenues over DSTs, especially given the high costs and inflexible nature of DSTs.

2. Buying vs. Renting During a Temporary Stay

Listener Question by Chris:
Chris and his fiancée are considering whether to buy a home near her medical school program or continue renting, given that they plan to move to another state afterward. He also inquires about using funds from a taxable brokerage account for the down payment.

Hosts' Discussion:

• Robert Croak advises renting due to the short-term nature of their stay, current high home prices, and substantial mortgage rates. He questions the financial sense of buying a property they won't hold long enough to appreciate significantly.

  "I think you should rent because buying a home right now is extremely expensive and may not make sense for just a few years of ownership." ([07:38])

• Austin Hankwitz concurs, pointing out the benefits of maintaining liquidity and avoiding the unpredictable costs associated with homeownership, such as maintenance and repairs. He emphasizes that renting allows for continued investment and financial growth.

  "Renting is not throwing money away. It allows you to have more cash flow and continue investing, setting yourselves up for multimillionaire status." ([08:55])

• Conclusion: The hosts collectively recommend renting in Chris’s situation to preserve financial flexibility and avoid the hefty costs associated with short-term homeownership.

3. The Role of Stop-Loss Orders in Investing

Listener Question by Josh W.:
Josh inquires about the use of stop-loss orders in their investing strategy, seeking the hosts' personal rules and opinions on their effectiveness in managing investments.

Hosts' Discussion:

• Austin Hankwitz explains stop-loss orders as tools primarily for traders rather than long-term investors. He stresses a long-term investment mentality, suggesting that holding stocks based on conviction is generally more beneficial.

  "I encourage having a long-term investment mentality. Stop-loss orders can prematurely exit your position, potentially missing out on future gains." ([11:05])

• Robert Croak echoes this sentiment, sharing his personal shift from active trading with stop-loss orders to a more long-term investment approach. He warns about the downside of stop-loss orders triggering during short-term volatility, which can lead to missing out on rebounds.

  "Stop-loss orders can make you sell during a downturn, and then you have to re-enter the position, potentially missing out on the recovery." ([14:22])

• Conclusion: Both hosts advocate for a long-term investment strategy over using stop-loss orders, emphasizing that conviction in your investments outweighs the short-term protection that stop-loss orders might offer.

4. Portfolio Diversification and Reducing Individual Stock Holdings at Age 50

Listener Question by Jason L.:
At 50 years old, Jason and his wife hold a significant portion of their retirement accounts in individual stocks. They seek advice on whether to diversify into index funds and ETFs to mitigate risk.

Hosts' Discussion:

• Robert Croak recommends reducing the number of individual stocks to enhance diversification. He suggests maintaining a portfolio of 10-15 well-chosen stocks and reallocating funds into diversified index funds to cover all bases without being overly exposed to too many individual equities.

  "You probably should sell off some of those underperforming stocks and diversify into index funds to reduce risk." ([16:36])

• Austin Hankwitz supports this approach, advising a 75% allocation to ETFs and 25% to individual stocks in retirement accounts. He highlights the benefits of broad market exposure to protect against volatility and reduce the impact of any single stock's performance.

  "A 75 to 25 split into ETFs and single stocks ensures diversification and protects against downside risk." ([17:36])

• Conclusion: The hosts strongly advocate for diversifying retirement portfolios by reducing the concentration in individual stocks and increasing allocations to index funds and ETFs to balance growth potential with risk management.

5. Inspiring Financial Wisdom from a 13-Year-Old Investor

Listener Story by Danielle M.:
Danielle, a 13-year-old from Maui, shares her experience with investing through a custodial brokerage account funded by her grandparents. She discusses her strategy of investing in companies she understands and believes in, such as Tesla and Apple.

Hosts' Discussion:

• Robert Croak praises Danielle’s approach of investing in companies she knows and understands, emphasizing the importance of conviction and knowledge in stock selection.

  "Buying what you know and understanding your investments is crucial for long-term success." ([28:33])

• Austin Hankwitz encourages Danielle to further educate herself by exploring the investor relations websites of her chosen companies to gain deeper insights into their operations and financials.

  "Explore each company's investor relations website to understand their financials and growth strategies." ([29:19])

• Conclusion: The hosts commend Danielle’s proactive investment strategy and encourage her to continue building her financial literacy by researching her investments thoroughly.

6. Exploring Tax Lien Investing for Portfolio Diversification

Listener Question by Sasha V.:
Sasha is interested in incorporating tax lien investing into his diversified portfolio and seeks the hosts' opinions on its pros and cons.

Hosts' Discussion:

• Robert Croak explains tax lien investing as purchasing the tax lien on a property, thereby earning interest or potentially acquiring the property if the owner defaults. He highlights the risks, including prolonged legal processes and the possibility of the property not being reclaimed.

  "Tax lien investing is risky and requires thorough understanding of local laws. It’s not as straightforward as it seems." ([30:51])

• Austin Hankwitz outlines the process and cautions against its complexity and the effort required to manage such investments. He suggests alternative investments like REITs for those seeking real estate exposure without the associated risks.

  "I wouldn’t personally invest in tax liens. Alternatives like REITs offer real estate exposure with less risk and complexity." ([34:01])

• Conclusion: The hosts advise caution when considering tax lien investing, recommending thorough research and understanding of the associated risks. They suggest more straightforward real estate investment options like foreclosure and land bank sales as preferable alternatives.

Conclusion

As the hosts wrap up the episode, Austin and Robert reflect on the holiday season and express their excitement for the upcoming year. They emphasize their commitment to providing valuable financial insights and encouraging their listeners to continue cultivating rich financial habits.

"We're excited for the new year and bringing you guys just a ton of value. Stay tuned and we'll see you then." ([35:55])

Key Takeaways

• Delaware Statutory Trusts (DSTs): Often come with high fees and illiquidity, making them less favorable for certain investors.

• Renting vs. Buying: For short-term stays, especially under a few years, renting is typically more financially sound than purchasing property.

• Stop-Loss Orders: Better suited for traders rather than long-term investors who believe in the sustained growth of their investments.

• Portfolio Diversification: Reducing concentration in individual stocks and increasing exposure to index funds and ETFs can mitigate risks, especially as one approaches retirement age.

• Youth Investing: Encouraging young investors to buy stocks they understand and to deepen their financial literacy through company research.

• Tax Lien Investing: While it can offer high returns, it is complex and risky. Alternatives like foreclosure and land bank sales may be more manageable and less risky.

This summary captures the essence of the Rich Habits Podcast episode, providing listeners and non-listeners alike with comprehensive insights into the discussions and advice shared by hosts Austin Hankwitz and Robert Croak.