Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. This week we start with a question on private oil well investments, then how US Australian family should think about an Australian superfund when their long term plans are in the US.
And in our from the field segment, we’re joined by Paul from All In Aviation to talk about what pilot licensing actually looks like for busy professionals, including the time commitment, training realities and how aviation fits into different stages of life. So let’s go ahead and get started with our first question.
Question 1 – Oil Well Investing
Listener: Can you please help me assess an opportunity? I sold a portion of my business last year, now have about $12 million invested with around 1.5 million set aside to deploy to private investments. I’m considering adding a $750,000 oil well investment that would represent half of my alternatives bucket. The sponsor projects a 15 and 20% IRR, but the capital will be illiquid for seven to 10 years.
Stephan Shipe: So congratulations on the business sale. And the $1.5 million on the $12 million is not crazy. So I don’t think that’s too far out there. You’re looking at somewhere in the 10 to 15% mark for alternative investments. So I don’t think that’s the issue. The issue that I would have is you’re going to take half of that and drop it into one investment. And it doesn’t have to be oil wells. It could be anything, any investment that you were telling me you wanted to drop it into. Dropping half of your alternative allocation all in one particular asset ends up having a significant amount of concentration risk that we’d want to try to avoid.
One way would be to look at your alternatives bucket and say, out of this $1.5 million that I’ve allocated to alternatives, what assets do I want to invest in? Do I want some to go to oil wells? Do I want some to go to real estate? Do I want some to go to private equity? Break that up first and then plan to deploy that over the next couple of years. That way you have a little bit of diversification from a time perspective and type of alternative investments as well. In your case, you’re throwing $750,000 in right now, all in one investment at the exact same time. So that’s the way I would look at the split.
Now, let’s get into the specifics of this investment. Whenever you’re dealing with any type of private investments, I know this is something we’ve talked about a lot in the show in the past, alternative investments, private investments, they can play a little fast and loose when it comes to the IRR projections. So when they start saying 15 to 20% projected, that is just projected. That doesn’t actually mean that that’s what you should anchor your decision on.
And what’s risky about that is 15 to 20% sounds really good if it shows up. But if it doesn’t show up, you just dropped half of your alternative investments into one oil well. That’s also where it starts to get interesting when it comes to oil well investments. Unless you’re a fourth generation wildcatter who knows everything about oil wells, this is one of the most opaque areas when it comes to alternative investments. And you get shown a map.
And somebody says, we’re thinking about well number one, six, seven right here. And that’s the one that you can invest in today for $750,000. Give you X percent of the stake and we’re looking at this having a 15 to 20%. Who knows what that actually means. Unless you have any background in the oil industry to know whether or not that well will produce, this is truly a crap shoot on those scenarios. And if you did one, you said, Stephan, I really want to get into the oil investment area and want to get in. That’s fine, but don’t put it all in one well.
Anyone who does well in oil wells will tell you that you need to diversify this out, not only from a geographic perspective, but the types of wells. If I showed you two maps, one of Oklahoma and one of Texas and told you to tell me where the best place for an oil well is, if you can’t answer that, then it’s probably not a good idea for you to take three quarters of a million dollars and go buy an oil well for yourself. We want to be careful on that type of investment.
The illiquidity is kind of an interesting one to point out. They’re showing the capital be illiquid for seven to 10 years. Be a little worried there of what that actually means. Generally, these oil well investments are long term. So my guess is that’s a projection based on IRR of if you have 20% return every year, you’re going to get all your money back in that seven to 10 year time horizon. But those are definitely some red flags sticking out there. I think the first thing you should do before writing a check for $750,000 into a single oil well is to look at that overall asset allocation, finding out what your ideal alternative investments portfolio looks like, and then start to piecemeal that out and invest in a variety of different asset classes.
Question 2 – Australian Superannuation Funds
Listener: My wife and I are dual US Australian citizens with roughly 1.5 million combined in Australian super funds. We plan to remain in the U S permanently for retirement. How should we think about consolidation reporting requirements and if we should still keep the money in super.
Stephan Shipe: So the Australian super funds, for those who are not aware, run a lot like a US 401k system, except it’s actually really neat. They’re required to be contributed to by the employer. So I want to say the Australian requirement is 12%. So you’re required as an employer to put 12% of wages into the superannuation fund.
And it continues to grow. It works almost like a, this is kind of the, for some people would be like the dream scenario for a social security system where there’s a forced retirement, a forced contribution, and then actual investments that are there and continues to grow. What’s nice is it works kind of like a backwards Roth a little bit or a better Roth in that the withdrawals from it are usually tax free, but the money going into it is only taxed at 15%, which is less than a traditional income tax rate in Australia. So you get a little bit of a tax break and you can pull the money out tax free. So that’s what I mean by being a better Roth. So these are great funds. They’re great accounts to have. They work really well. The issue is that the US is not Australia. So when you start pulling that money now in the US, it’s going to be taxed and it gets much worse than that. These become quick nightmares for people in the US who have these super funds.
And the reason for that is each of your holdings in those superannuation funds are going to be treated as its own investment and will have to have a tax form filled out for it. So it’s not just this superfund is going to have a tax form. Any holding within that fund is going to have a tax form that a CPA in the US will need to fill out and you’ll be taxed on it. In addition to that, any type of distributions that are being made from those funds in Australia will be taxed by the US. So this quickly becomes a mess of complexity and taxes. And then you have to find somebody in the US from a CPA perspective who’s comfortable filling out those types of foreign income forms and with experience on the superannuation rules. So really risky to jump in this. Now, if you have the money there, the one piece of this puzzle that we’re missing is whether or not this 1.5 is everything for you, or if this 1.5 is only a small portion of the total investments. If it’s a small portion of the total investments, not as concerned. You can still pull the money out and just have it taxed as you repatriate it back into the United States. If this is a large portion for you, I’d get a little bit more worried because those taxes are going to really eat into that value.
In either scenario, when you’re talking about consolidation reporting requirements, reporting requirements can be a mess. As I said, you’re going to have to report on this. How can we try to mitigate some of that risk or some of that complexity? Consolidation, absolutely. So if you can consolidate multiple of these funds together, that’s going to be great. And if you consolidate the types of holdings in your investments, so let’s say you have the 1.5 million over in Australia, but you have another 5 million here in the US, you may go and take that 1.5 million in Australia and invest it all in one holding there. So that way you’re only filling out tax forms for one holding as opposed to an entire portfolio of holdings and then using your US accounts to help balance out the entire mix. So I like that idea from a consolidation perspective. And then you also want to be focused on investments that don’t have a high level of distribution. Because you’re going to be taxed on that distribution in Australia, it would be tax deferred, but it doesn’t matter. If you’re going to be in the US, you’re going to have to pay taxes on that regardless of what Australia says. So you would want to look at certain types of funds, certain types of investments that don’t have a heavy amount of distribution, that aren’t doing a lot of rebalancing because every time they rebalance, they’re selling things and buying things. And those are all taxable events for you that you’re going to have to report on and pay taxes on. So I would completely avoid any type of these like target date funds where you have this glide path toward retirement and you’ll gradually have more bond exposure and less stock exposure. Because those are constantly in a state of rebalancing where they’re selling some of the equities and buying some of the bonds. You want to avoid that. So I would stick with a fund that has a straight investment path, pays minimal distributions.
And then if you’re going to be in the US forever here, which sounds like that’s the plan, you’re going to have to pay the taxes. Eventually, the question is whether or not you should do so slowly over time, or if you should just take the hit and start writing a check for $1.5 million over to the United States. And that’s a little bit hard without knowing your tax rates. But I think the likely scenario is consolidation of the accounts, create a bunch of simplicity here, try to have as much flexibility in the types of investments as possible, and then plan to slowly divest this with a CPA in the US who’s comfortable and familiar with an Australian superfund.
From the Field – Paul Salach, All In Aviation
Stephan Shipe: Next in our from the field segment, we shift from portfolio decisions to how busy professionals should think about time, training and lifestyle fit when pursuing aviation. So today we’re joined by Paul Sallach, founder and president of All In Aviation, a platinum Cirrus training center. Paul has logged over 7,500 incident-free flight hours, including extensive experience as a flight instructor in high-performance Cirrus aircraft. He works closely with busy professionals who pursue flying for both enjoyment and lifestyle flexibility. So Paul, welcome to the Scholar Wealth podcast. Why don’t you give us a little background on how you got into this world?
Paul Sallach: My gosh, that’s a loaded question to start with. But first, let me thank you for going all in and wanting to talk airplanes with us. I had the upbringing as a preacher’s kid. My dad, my whole family wanted me to be a preacher and I wanted to be a traveling guy is really what I wanted to do. And my parents never could afford it. So I thought, why not go be a pilot and then I can see the world. So that was how I got the spark lit and have been doing it ever since.
Stephan Shipe: So why don’t you dig into that a little bit more for us on what is entailed. So if somebody else hears that and says, I want to be like Paul and I want to go get a plane to travel the world. What is entailed in actually getting that private pilot’s license, going through that process?
Paul Sallach: The way that I did it, I went to college to be an airline pilot is what I wanted to do. And then when I was there, September 11th happened. So there was really no airline jobs to pursue at the time. So I shifted gears and went to work for this aircraft manufacturer in Duluth, Minnesota, Cirrus aircraft, and sort of got a glimpse into the other side of aviation where people were buying their own airplanes and people were flying around for business and they were taking their loved ones, their business associates and doing whatever they wanted wherever they, whenever, and take whoever you want with you. So it sparked an interest in me where I was like, why would I want to fly a school bus, right? With 150 random people versus like just sitting shoulder to shoulder with the guy that grew a business, typically they’re pretty successful people. And then I’m there to be their mentor and teach them how to safely operate their aircraft. Ever since then, I’ve never looked back. Never have I flown a plane that’s any bigger than a six passenger airplane. So it’s kind of funny to think how the world comes full circle.
Stephan Shipe: Yeah, that’s pretty unique. From what I’ve seen, you can correct me if I’m wrong. But normally, when people are going through flight training or flight schools, you end up with like a 1960s Cessna 152 sitting out there and that’s what they’re training on. But the hangars that you have are not filled with anything like a Cessna 152 from the 60s. Can you talk a little bit about that decision?
Paul Sallach: When I was delivering these airplanes all over the place to people, it was that they were buying them because they wanted something other than what was available at their local flight school, right? If you wanted something nice, you basically had to buy it. So being here in Las Vegas and I was selling these airplanes to people all over the country, people kept on asking, hey, can I just rent the plane and learn how to fly with the plane that’s right there in Las Vegas. And I kept saying, no, I can only sell you an airplane. So in 2016, that’s when I decided to start the flight school using Cirrus only at the time, but basically new aircraft to cater to that type of customer that was willing to pay a little bit more for a modern, you know, technologically advanced airplane. And ultimately, get them their pilot license. And my hope was that they might one day then buy another airplane. So it sort of keeps this ecosystem of upgrading and then maintaining them while they own it to have safe, you know, pilots flying these airplanes around.
Stephan Shipe: So for somebody listening who doesn’t know anything about planes, walk me through the difference. What is the difference between a Cessna 152 and a Cirrus or pick your flavor there?
Paul Sallach: Yeah, so as it stands today, we have both Cessna and Cirrus. So this is not a brand thing necessarily. It really boils down to the modern technology that’s available. So what we offer at our school anyways is the latest and greatest of technology. So that’s using an avionics platform, basically the screens that you’re looking at. They’re all from Garmin. Garmin is sort of regarded as the high end of what’s out there for flight displays. So all of our airplanes come standard with Garmin avionics. The traditional flight school has the cheapest airplane that they can possibly have to be able to make aviation flight training more accessible to the masses, right? And when you get a cheap airplane, that basically means that it’s going to be old. You know, might be a 70 year old airplane. So the normal experience that a customer has when they’re shopping for flight schools is they go look at the flight schools and most of the time the planes are older than certainly their vehicles, but oftentimes they’re older than the guy walking in the front door wanting to learn how to fly, right? And that doesn’t leave a very good first impression. So I don’t know if that answers your question, but what we…
Stephan Shipe: I think what I find interesting about that too is because you have different levels of flight ratings too, right? So you start going to instrument. Is it easier to make that transition too? Because if you already have a plane that has all of the avionics and everything that you need for it, then you’re able to stay in the same plane and move up through those different ratings. Is that a fair assumption there?
Paul Sallach: Yeah, so I would say that the people that are our customers, they’re used to technology, right? So it’s very, they might be rolling in their Tesla, right? And it’s got a big screen in the middle. Then they get in the plane. It’s very much similar versus when you get into an older plane, you’re literally looking at round dials. And it is intimidating to try to be able to interpret that as well as it’s off putting just because of the, you know, it might smell and the paint might be, you know, chipping away and stuff like that. So we find that we attract a different customer. We want somebody that wants the most technologically advanced, the safest, the most modern airplane to be able to learn in.
Stephan Shipe: How many hours does that take? So if somebody wanted to get their, I guess their base private pilot’s license, how many hours do they have to log in a plane?
Paul Sallach: Yeah, so the minimum that the FAA says is 40 hours of flight time. That is the minimum and hardly anybody gets it done in the bare minimum. I would say that the average is probably 75 hours, so almost twice that. You might get somebody that’s super ambitious that can do it like in a college environment where they’re literally going to school and trying to study every day and fly every day. And that might be the person that gets it done at 40. But the reality is that the people that are in these airplanes that we’re talking about, they have busy lives, right? They have families, they typically have business. So they might only be able to give two days a week, maybe three days a week. And it just takes a little bit longer to get that done.
If you’re doing it two to three times a week, I would say that you can accomplish a private pilot license in about three or four months. And then you would set yourself up to then go into an instrument rating next. And that allows you to be able to fly in the clouds. And that would be another three or four months. So I’d say to be safe and fly these airplanes to their full capability, you want to have that private pilot license with an instrument rating. You should plan to give yourself that six to, let’s call it nine months on the high end, if you can do it two or three days a week.
Stephan Shipe: And then post licensing, right? So you’re good to go and you start looking at how you’re going to fly afterwards. You have the options of obviously renting a plane, you have different arrangements there. What does the cost structure look like? When does that make sense for someone to go and say, I’m just going to buy my own or how do they even make that decision?
Paul Sallach: Yeah, if we’re talking specific to the Cirrus, which is my bread and butter, so I’ll just talk with what I know. If you own your own Cirrus airplane, it’s a million dollar airplane and it’s going to cost you about $100,000 a year to operate. If you’re renting the plane from us, let’s just say in round numbers, we’re talking 500, 600 bucks an hour. So you could say to yourself, well, geez, I gotta fly almost 200 hours to break even, right? I would argue for most people, like if you’re going to fly 100 hours or less, you should be renting because just the cost of aircraft ownership is too much. And then the more you get over 100, the more it makes sense for ownership.
Stephan Shipe: That’s gotta be tough because like you said, depending on where you’re at, if you’re looking for a certain style of plane or certain performance, that just might not even be there, right? Your options may not even exist.
Paul Sallach: Yeah, it’s typically the major metropolitan areas that have, you know, operations like ours, where you can rent a high performance, you know, recent airplane. So that’s why I started by saying I was delivering airplanes all over the place to these small little remote places and the accessibility just isn’t there. So in that particular circumstance, you pretty much have to buy or own, right, if you want to fly in a modern airplane.
Stephan Shipe: You’re talking about the annual cost. How do planes compare to like a car or a boat when it comes to depreciation? Because you see these planes last decades and decades and they still hold some value. What goes into maintaining that value?
Paul Sallach: Yeah, I tell people you should plan on two to 5% per year of depreciation. So I’d say that they hold their value pretty well. But they’re not going to appreciate like real estate. But if you’re going into it with a realistic expectation that every year you’re going to lose on that million dollar plane 20 to 50 grand of value, well, you were able to travel, right? Like you were able to do it on your schedule. And that translates into what people would call value. What was their dollar getting them? And it’s getting them the ability to be home every night if they’re in these remote areas and avoid some of the other expenses that there might be of overnighting.
Stephan Shipe: And what are those when you talk the $100,000, break that down a little bit for us on where do those costs come from?
Paul Sallach: Sure. So I’d say that the biggest one is probably the maintenance. Aircraft are required to be maintained every year. Basically, they get disassembled. They look for any, you know, weaknesses or things that need to be addressed. I’d say you should plan on about $15,000 a year for maintenance. If you’re going to be insuring a million dollar airplane, the insurance is probably another, it’s based on the pilot, it’s tough to say a set rate, but anywhere between, let’s say, $15,000 to $25,000 for insurance. You’re going to hangar that plane most likely, so somewhere to store it. So here in Vegas, we’re charging $1,300 a month to store an airplane. And then those are the big ones. Then there’s a whole bunch of little ones like you want your database is up to date. You want to keep it washed. You have some probably property taxes depending on what state you’re in or what county you’re in. Here in Vegas, we’re at like 1.3% is what we pay in property taxes.
And then you’re going to fly that airplane 100 hours, you’re going to put fuel in it, right? So the fuel is probably one of the cheapest things to actually operate the plane, right? It only burns 20 gallons an hour, five bucks, six bucks a gallon. So like the joy of actually flying the plane is reasonably inexpensive when you compare all the other overhead that there might be. So that’s a broad brush, but those are the main expenses that you should be looking at.
Stephan Shipe: How much does that insurance cost fluctuate for planes like a Cirrus that have built-in safety features that are unique there?
Paul Sallach: Yeah, so it really doesn’t have too much to do with the airplane. It has to do with the whole value or the what dollar amount you’re insuring and then the experience level of the pilot. Think of it like you want to buy a Ferrari and have a 16 year old driving that Ferrari. It’s going to cost a lot more. You know, it’s the same expensive Ferrari, but if you got an experienced driver, it’s going to be much less. So that’s usually the two driving factors.
Stephan Shipe: All right, and you’ve clearly worked with pilots from a variety of life stages going through this. How does aviation fit kind of into their lifestyles differently or is there a change? It’s easy to say, I can travel wherever, but does that over time or the type of plane they’re looking at?
Paul Sallach: I mean, airplanes give you quality time back, right? So like you’re able, let’s just pretend that you didn’t have an airplane and you’re a business person here in Las Vegas, just because my geography, I know it very well. And you want to run down to Palm Springs. So Palm Springs in a Cirrus and in a plane like us, it’s a 55 minute flight, right? It’s an hour to get there. So if you are going to do a noon lunch appointment with somebody in Palm Springs in a Cirrus, it’s easy. You just take your kids to school in the morning. You go to the plane, you jump in, you fly, and you have that lunch appointment and then you come home. If you didn’t have that, you would either drive four and a half hours to get there. So then you start thinking, gosh, am I going to go the night before or am I going to wake up early? So that’s not a good option.
Or are you going to fly airlines? And there’s not a nonstop flight from Vegas to Palm Springs. You got to connect through Los Angeles in this scenario. So maybe you could get it done in two and a half hours, but then the flight doesn’t just line up with exactly when your meeting is. So it really gives you the freedom to be able to take appointments on your schedule and not an airline schedule or not anybody else’s schedule. And I’m not sure if that directly answered your question, but that’s the typical person that we find walking in our front door. They have this regional travel need. They’re spending way too many hours in a car driving around or connecting through major hubs and realizing, if I had my own license to be able to fly, I could wake up in the morning, run to Palm Springs, and then I could actually then do another visit in Los Angeles, you know, mid afternoon, and I can still make it home in time for my kid’s soccer game that’s at 5pm. You know, so that’s really the person that’s doing this later in life, you know, as an aspirational, you know, accomplishment.
Stephan Shipe: Gotcha. And as I guess as we wrap up today, is there anything that you’d like to share with any of our listeners who are curious about flying, what it really takes to make it a part of their life?
Paul Sallach: I mean, becoming a pilot is time and money to get it, right? Like it takes the time to study and to be a student again. But the reward is really hard to quantify until you can just go out and do a trip. Like you don’t have to buy a ticket in advance. You don’t have to worry about what sort of stuff you’re putting in your luggage. Like the freedom of driving your car out to the plane, preflighting it, jumping in and going whenever you want, wherever you want with whoever you want is a freedom that most people don’t realize even exists. So if you have a friend that you know is a pilot, have them just take you somewhere for what we call it a hundred dollar hamburger, right? Fly somewhere for a hundred dollar hamburger to try it. And I think it’ll open up the world of possibility of the freedom that being a pilot affords.
Stephan Shipe: Well said. Thank you so much for coming on today.
Paul Sallach: Hey, we really appreciate it. And like I said before, thanks for going all in.
Outro
Stephan Shipe: And that’s our show. Thanks for listening and we’ll see you next week!
Disclaimer: The information provided in this podcast is for general informational and educational purposes only, and is not intended to constitute financial, investment, or other professional advice. The opinions expressed are those of the hosts and guests and do not necessarily reflect the views of any affiliated organizations. Investing in financial markets involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, you should consult with a qualified financial advisor who can assess your individual financial situation, objectives, and risk tolerance.