Journey to Multifamily Millions

How 831(b) Plans May Be the Solution to Your Insurance Woes with Van Carlson, Ep 90

• Tim

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Today's guest is Van Carlson, Van is the Founder & CEO at SRA 831(b) Admin and has over twenty-five years of experience in the risk management industry. 

Van’s primary goal is to continue the upward growth of SRA and continue to develop new products to bring to market.

He explains how 831B plans provide a tax-advantaged means of self-insurance for business owners that cover risks that are either too costly to transfer to standard insurance policies or not generally insured.

He also talks about how these plans can act as a financial cushion, possibly converting cost centers into profit centers through the investment and growth of plan funds in a tax-deferred manner. 

Van also addresses common misconceptions and emphasizes the significance of adopting 831B plans with the right intent to prevent unnecessary IRS attention, as well as the flexibility of these plans in managing certain risks such as damage waivers and rent protection.


Episode Topics

[01:17]  Meet our guest, Van Carlson
[02:53]  The Power of Self-Insuring: Transforming Risk into Opportunity
[06:27]  Maximizing Returns: The Strategic Advantage of 831B Plans
[17:48] The Future of Multifamily Investments: Adapting to New Challenges
[24:53] The Impact of Market Conditions on Insurance for Multifamily Properties
[31:47] The IRS's View on Innovative Insurance Plans
[38:32] What is one red flag every investor should look out for?
[39:11] What is a myth about the real estate business?
[41:31] Connecting to Van


Notable Quotes

  • "There's got to be a smarter way. Small to middle market business owners need to be aware of self-insuring risk." -Van Carlson 
  • "Every business owner should have their own PPP plan. This code allows you to self-fund it and has been around for 38 years." -Van Carlson 
  • "The biggest benefit is having that tax-deferred reserve... If you can make that money work, that's even better." - Tim Little
  • "Having that flexibility to tenants can really make a difference... It's big!" - Tim Little
  • "Your approach is very custom, every person or business is different. And so you have to look at the risk scale, et cetera, associated with that." - Tim Little
  • "I like the accidental damage waiver because I do think it's an additional revenue maker for the building owners right now." - Van Carlson


👉Connect with  Van Carlson

👉 Connect with Tim

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[00:00:00] Van Carlson: I was introduced to the idea of self-insuring risk, for business owners, didn't see any value at the time and leading up to Oh eight. And then here comes the great recession. And unfortunately, when you first start out any business, you wear all the hats and eventually you start giving hats off, but one of the hats I always kept was working with business owner and, I remember one of my top clients own some of the, own multifamily housing and, they did okay, but there was a lot of subcontractors and general contractors and those guys, I just saw the financial risk business owners took. And unfortunately, sometimes it was too late. they find themselves going out of business.

[00:01:08] Tim Little: Hello, everyone, and welcome to the journey to multifamily millions. I'm your host, founder and CEO of ZANA Investments, Tim Little. And on today's show, we have with us Van Carlson. Van is the founder and CEO at SRA 831B Admin and has over 25 years of experience in the risk management industry. Van's primary goal is to continue the upward growth of SRA and continue to develop new products to bring to market.  Van, welcome to the show. 

[00:01:34] Van Carlson: Appreciate it. I look forward to talking with you guys today and the opportunity to get out to your listeners on exactly what we're doing, especially when it revolves around multifamily business owners. So thank you

[00:01:44] Tim Little: Yeah. And I think it's going to be a really interesting conversation. and we're definitely going to talk about eight, three, one B plans. I want to dive into that. But first, please tell us how you got started, in this field and how you got to where you are today. Oh,

[00:02:02] Van Carlson: insurance, property casualty agent. I worked with a lot of clients, and rose to a pretty high success rate as far as the industry standards, 1 percent performer in the industry. and I live here in Idaho, Boise, Idaho. So we're a very fast, rapidly growing area. and I thought life was going to be on the easy street. I'm going to build up my agency and take up golf. And then here comes away. And I was introduced to the idea of self insuring risk, for business owners, didn't see any value at the time and leading up to Oh eight. And then here comes the great recession. And unfortunately, when you first start out in any business, you wear all the hats and eventually you start giving hats off, but one of the hats I always kept was working with. business owner and, I remember one of my top clients own some of the, own multifamily housing and, they did okay, but there were a lot of subcontractors and general contractors and those guys, I just saw the financial risk business owners took. And unfortunately, sometimes it was too late. they find themselves going out of business. And that's really when I said, there's got to be a smarter and better way of doing a business. And, the idea of owning an 831B plan, I said, you were going to dive into those, but, I saw a business owner that had seven or eight of these in place already.  It was a manufacturer for RVs and what he did with it, how he was able to parlay it in a way that made it very,He took an idea of what big industries are already doing this. Big businesses, what we're going to be talking about, when it comes to self insuring risk, big insurance companies are, excuse me, big publicly traded companies, all that they all want to own their own insurance companies. there's a lot of advantages to it. And we'll again, get into that, but I just saw it in a way, man, it's just, this is this idea for the small to middle market business owners. needs to be brought to their attention. And so again, appreciate being on your platform and getting the word out. And I definitely like the multifamily sector because I think there's a lot of risk that we can talk about. And how do you position that risk more effectively? Not only just be, change it from a risk standpoint from a cost center, maybe to a profit center. And I'd love to get into that with you because to me, I think there's a lot of things that multifamily owners could be doing, and also protect themselves against the covid issues that came up to in the last several years because of What transpired there with rent income, coming, having to deal with a lot of different issues, political issues, all the other things that, you find yourself being an owner that you're like,this wasn't in the performer. And again, it's about hedging against downturns and not only the economy, but also the unforeseen risks that you're retaining on your books. And that's what we call about. And a lot of business owners retain risk. Traditionally, you transfer that risk for fire, for example, in the multifamily, right? You're going to cover for fire, wind damage, hail damage, all those fun things. Smoke damage, water damage, sudden and accidental. and of course that's getting really weirdly, oddly defined in those policies today. What's covered and what's not. Mold remediation is not covered anywhere on policies anymore. Unless you go by pollution policy, it's very difficult to get those things. And so these are to retain on your risk. The owners like to listen and he B does. I guess I should. I always forget to t I get going on the risk a

[00:04:51] Tim Little: I was going to ask you, don't worry.

[00:04:53] Van Carlson: So the 831B is just a part of the tax code and the tax code, no different than the 401k, right? So all that is just, if you wanted to go, if you couldn't sleep one night and really had insomnia, if you wanted to go read the tax manuals, you would go to 831B and you read, okay, what does this code mean? What can I do? What that code means is really instead of for business owners, if they're going to retain risk on their books is do it on tax preferential treatment. No different than 401k. So basically if you're self insuring risk, you have an administrator like us, which is what we are as an 831B administrator, no different than a 401k administrator is, we're going to administer your plan. Make sure you can elect an 831B tax return because you're going to expense. Premium out of your company. No different than you would do it for work comp or for coverage of your multifamily buildings. You're that's a line item expense under the one 62. This is an additional expense as well. So now you're able to create an expense, dumping into an eight 31 B qualified plan, and that money is staying deferred. It can grow. It can be invested, it can be managed, it can be managed by a financial planner, it can be just simply sitting in a bank, but you expense it out of your operating company level and now you dumped it into a plan that's deferring it. and the idea there is you want to build up those reserves, right? Those surpluses and everything else that comes in there with an insurance company. The box has to look and feel like an insurance company. That's where we come in as administrator and make sure that happens. So you can stay elected under the 831B. but what you can do inside that thing is significant. specifically what we saw in COVID 19 situations where rent income for right. So we have things for rent income protection. So if you want to set a certain dollar away where, you just can't collect rents because the government says you can't, you would have that bucket of money sitting there that you would have just actually just sent off to uncle Sam anyway. So one of the things that we're telling people, business owners today is we feel like every business owner should have their own PPP plan. But they should be in a position to self fund it. And this code literally allows you to do that. This code's been in existence for 38 years. It came out in 1986. Very similar to the environment we're in today. I have a Time magazine. In fact, you might be able to see it right here. You can see it on the back wall here. It's that Time magazine cover that says, America, your insurance has been canceled. And that was written in March of 1986 on the cover of Time Magazine. And it's very similar to what's going on today. it continues to go on. and so it took about three years. It started in 83, and it ramped up. This, the market we're in today with, especially with property owners, having a hard time finding markets or a lot of exclusions, or they can't get capacity. their building's worth 30 million, but they can only find 20 million in coverage. We're seeing that a lot. we're seeing hell damage being excluded or to the point where it's not coverable because it's so darn expensive it's hurting them, they're locked into long term leases or rents and they can't adjust fast enough on the rent income because of what they're experiencing on substantial increases in premiums. And so those are things that we're trying to work with business owners on, multifamily especially. And then the other one I really love for multifamily is a thing called accidental damage waiver. Where, we're simply waiving, we have clients that are waiving deposit security deposits. I think if you're in a highly competitive, environment, Where, you're trying to do the first and second on a security deposit, working with the property managers, we can show them how to do an accidental damage waiver where you're just charging a monthly premium fee for that accidental damage waiver, but there's no refund in the process of that. and it's not a security deposit, so you're not going to get refunded. Also that was a bit of the new tenant coming in to pay a monthly fee versus a first and last. And we've seen really good traction in that, especially in some marketplaces.

[00:08:07] Tim Little: yeah,  I think that is a real benefit for property owners because, giving that flexibility to tenants can really make a difference in terms of them being able to do small monthly payments in addition to whatever the rent is, vice coming to the table with these huge chunks of cash, first month, last month's rent. so that's big. But I want to dive more into what an 831 B is, and talk about, like, how is this different from your regular insurance? Is it, and is it really just a supplemental?

[00:08:41] Van Carlson: it can be supplemental and we can actually replace traditional insurances too, based on the amount of premium you're having. So what we're seeing right now is a substantial rate increase, right? So if you have enough, big enough premiums, we can actually go to the reinsurance markets. Especially if we have a client that's willing to take on a larger first dollar risk. I would tell you right now with a multi family, the challenge is submitting any claims. not if it's a very large we have a lot of business owners saying, hey, you k and if they're in a position to do that, if they feel comfortable with that, but what we're, what we'll do then is we'll set up an 831B and start the fund for that 250, 000. again on a tax deferred basis, because if it happened, all you can do is pull cash flow out of the company anyway and pay for that deductible. But wouldn't you, wouldn't it be smarter, and I tell clients this all the time. Do you want to use pre tax dollars or after tax dollars? If you're going to take on a larger portion of your risk, wouldn't it be better to use pre tax dollars? That's why the tax code exists. for you to be able to pay your claims. Or if you're going to retain this yourself, you want to use pre tax dollars to pay it with because you just got a lot more money to pay it with, right? you look at, Coastal, with coinsurance deductibles, we're seeing a big swing up on that, right? Where not only, you might only have a 5, 000 fire deductible for your properties, but you're going to have a coinsurance of 30%, which if your building's worth, you Call it 10 million dollars. You're going to come up with and it's complete You're going to come up with first three million dollars to get that building rebuilt There's parts of california or excuse me florida right now around naples There's a lot of places that aren't rebuilt because the cohen churches are having a hard time People are having a hard time coming with money for their responsibility. So you've got all this stuff going on. And again, if you're a profitable company, just to take a little bit off top, park it off to the side. It's just good. Not only is it good, just good risk management. It's just good business. And so we're able to use these situations where they. Allow you to take on the affordability of more risk and some business some of these guys with multi family They said no choice if they want, they're gonna have a hard time getting a renewal policy sometimes they're gonna take your their site They're seeing sizable rate increases right now across the board all 50 states And exclusions are going up one of the things that we saw a lot going on right now If you have an older commercial, older multi family building more than 20 years, you haven't replaced the roof.  They're actually actual cash value minus depreciation on the roof. So they're not even going to replace your roof in the event of it being blown off by a hurricane or tornado or just a flat wind storm, an actual cash value minus depreciation on a roof. You're basically self insuring the roof. and so these are just things that come up all the time with these business owners that says, okay, and here it is, Tim, the 831B this allows you it's a code that was passed in 1986 tax reform by Congress. Been revisited again in the path act because they got rid of some things there because Unfortunately, the code was being abused for things for what it wasn't designed to be which was a state tax planning essentially the iris doesn't like these things. They don't think that they feel like you know At times are too much of a benefit to the taxpayer. I get all that but at the same time it's real law And this is real risk. We're talking about that. A lot of business owners Entrepreneurs, and risk takers are taking on all the time. And again, how do you make it more efficient for them is by literally taking advantage of all the tools that are out there for them. And this is just one tool. This allows you again to take things that you would have been paying taxes on anyway, under the profit model and taking a portion of those and setting them off to the side. And on a tax deferred basis, you just have more money to weather the storm. That's the tagline of our company.   We want clients to weather the storms are coming. How you handle those will be the difference between surviving it or not.

[00:12:09] Tim Little: Yeah. And I think,one, I live in Florida and and I've owned properties in Florida and sometimes I think it's, we have it worse than anybody else. But then I look around and I see we're not the only ones, whose rates are doubling, tripling, finding it hard to find an insurer in the first place. because so many are just. For example, but it sounds to me that the biggest benefit is having that tax deferred reserve is what I'll call a capital reserve. And so help me understand with this capital reserve that I have and how exactly can I use it? And am I the one who? Who is allowed to decide what it's used on and what are the parameters associated with this plan because I'm assuming if you use it the wrong way you run afoul and you know you're no longer covered. So why don't you dive into that a little bit?

[00:13:01] Van Carlson: Yeah, absolutely. Great question. you do sign an investment agreement, which you can and cannot do. So a lot of times we just have clients have their financial planner manage the reserves. there's, these are one month, excuse me, one year policies, no different than you're buying your today through, whoever you can find a carrier through, it's a 12 month policy, you're going to set premium side for those 12 months, those 12, that policy expires, the company has underwriting profit in it, assuming you didn't have a claim, now you're able to build up those reserves and surpluses in a way that, again, allows you to take on more risk or handle the risk you're having. as far as management goes, though, you control it. You're the, I should tell you the box is a C Corp. So the owners would be a shareholder of that C Corp. there's a president secretary. it's a fully operational company within a company, but it, the box looks and feels like an insurance company. We administer that we don't complicate the business owners lives by no means. So that's one thing but we will get a hold of them from throughout the year and all that stuff Of course when they have a claim We have our own adjudicators We either hire an independent adjuster to adjudicate the claim Assess the damages sets the value sets the business interruption occurred loss of rents all that other stuff That goes on and then we can submit a claim back to their insurance company pull money out of their 831 b Push it back into their operating company and then made whole the biggest reason for that push is not to pull money out of cash flow on unexpected expenses. you get a couple of those back to back in a year. It puts you at risk. it's just, it's operating capital. you gotta protect your operating capital. And this allows you to do that. a lot of business owners retain, have retained earnings left in their companies. Okay. That's great. That's to create that cashflow. But at some point that was retained earnings, they become pretty tax burdensome. Where you can expense it out of your company and then still drop it into these things. And again, the biggest advantage of that is you have to have more money to work with.  More options are available to you. and of course, down the road, if you decide to sell your multifamily or you no longer have the risk, You just shut these things down and you pay long, long term capital gains anyway. and that's really where the advantages longterm come into play. but during the time you own these properties and you're assessing the risks that you're retaining, this makes it more efficient. So, money makes money, Tim. So we would expect this to be invested. Our symbol right now, we just have a lot of clients sitting in money market accounts, to be quite honest with you. they're happy to get four or five a fee. 5 percent right now with the interest the way they are. but yeah, absolutely. That money's working for you. Why is it sitting there near 401k.

[00:15:14] Tim Little: Yeah. And you already answered one of the questions I was going to ask, which is, what's the exit plan for it? And it sounds like you said, you collect those funds and get taxed on it, long term capital gains, which all that makes sense. But the biggest benefit to your point that you were just raising is that while that money is sitting in reserves, for any emergency that you might have, you're able to make money on that money. Which is the true benefit that you know, I think we need to highlight, mitigating the risk and having that money available is great. But if you can make that money work, that's even better.

[00:15:46] Van Carlson: Oh, heck yeah. Think of it. Think of this as a health savings account for your multifamily, built business because you are taking on a first hire, no matter what you're doing in today's environment, you are taking on a higher first dollar risk right now. There's no way around that. everybody's renewing either at a higher rate. And what I mean by that is we're starting to see sublimits come in for hail damage, sublimits come in for wind damage, sublimits come in. And then of course you're completely on your own with mold. all of those things we can wrap policies around and work with business owners, assess their risk, look at the buildings, and then, think of it as like a sinking fund or capitalization fund. That's, but it's been on a tax deferred basis. Those are the big challenges about building up capital sinking funds, right? All that stuff is income that allows you to build it up to where it's an advantage to the, there's so many different options you can have on the table. And I really liked the idea of where they have the ability to, Make different decisions. and I always tell business owners all the time, the more options you have, the better decision making you can do for your business. And that's really the bottom line.

[00:16:46] Tim Little: Yeah. And I guess, I'm thinking about it from a syndicator's perspective, right? We do a lot of these multifamily properties under syndications. Are there special considerations Associated, with a syndication where, it's not just those general partners that you have involved, but you have, multiple limited partners, passive investors as we usually refer to them. and what are the special considerations associated with having this type of plan on one of those types of deals? 

[00:17:12] Van Carlson: I think the biggest thing there is, depending on the ownership structure. but I see, I've seen it used in a lot of different ways in that situation. Because some people want to re-buy out, you have the entity own the C corp. And then you can declare dividends if you want out of that C Corp. And that actually goes towards helping buying a partner out if they want to buy out without having, and he can redistribute it back out to all the other partners. You're probably doing that already right now. if I forget what they call it. when they, when somebody, just wants to buy out remorse, whatever it goes on in the world of their lives, right? life issues, where somebody says, Hey, I don't want to be part of this anymore. Can I be bought out? And there's certain provisions you guys put in the agreements and all that stuff. But to be able to have those funds to be able to do that is pretty nice too, by the way. the other one is I think business interruption is huge.meaning that some of these folks start to live off the income. These things are kicking off. And all of a sudden they got a contraction of rent, due to one reason or another, like economic, it's not necessarily economic downturns because it's more of a business risk, but I think COVID 19, I keep directing back to COVID 19 was, and here's the thing, the government stepped in and did a lot of things, right?they came out with ERC, they came out with PPP and all these other things, but the reality is I don't know if we can, I don't know if we should be relying on that, nor I don't know if that's going to be there the next time. And let's hope to God it doesn't happen next time. But, I think that's another income protection thing that you can put in place. And hey, we're going to put these profits away for the time being, build them up in a tax deferred bucket of money. And if it happens, we're going to, we're going to at least be able to keep our nose, minimize the capital calls coming in when there's an unexpected Disturbance in the cash flow of the rental incomes. The bigger thing, too, I think it goes towards when something happens, there's a good chance you could have a capital call, right? And if I'm misspeaking on that, Tim, please tell me because, if all of a sudden the business owners had to come up with an extra 250, 000 of a deductible or a coinsurance deductible 20 percent on a 5 million building, they get a couple with a million bucks. if that many bucks isn't sitting around somewhere, they're going to be called in for a capital call. So again, any of those things that you can soften those blows on by utilizing a program like this, just to me, it makes the investment stronger truthfully. To the way I see it.

[00:19:14] Tim Little: Yeah. and that's a great example that, hopefully we can dive into a little bit more, you mentioned capital calls, which unfortunately is something that's, ever more common right now, within the multifamily industry, just because of the, unprecedented rate cuts, et cetera, et cetera. and so I guess I'm wondering how we'd be able to use that. Use this for that problem, you know seeing as how hey rents like you said rent's going down That's more of a business risk But how would you be able to get access to those funds, because I can't really put an insurance claim in When, rents go down or occupancy goes down. could I, yeah,

 

[00:20:29] Van Carlson: depending on the structure of the ownership, but a C Corp doesn't pay other C Corps as dividends. So if you don't have to, if the company owns that C Corp and they declare a dividend, those monies flow back into that C Corp, and they're using it for expenditures. obviously you're offsetting expenses anyway. there's a lot of, you can't necessarily use it. And again, if it's an insurance claim, obviously it's a pretty black and white insurance claim, Hey, we got to come up with certain first dollar losses. That's pretty, but it's when you have to have the roof replaced because of the wear and tear on it or something like that. Where it's just time for it to get replaced. you can use a portion of those funds for a dividend situation. Obviously, again, based on the structure, there's a lot of creative, in fact, I meet more creative people out of Florida when it comes to the way they structure ownership than anything I've seen in the recent years, But so there's just a lot of those things that play into it, Tim. and those are one offs that we would probably have to sit down with the client, trying to figure out what they're trying to solve for. but to your point, a lot of his businesses, I like the accidental damage waiver, because I do think it's an additional revenue maker for the building owners right now. They don't get any of that money because typically the higher property manager. They get all the security deposits. if you offer an accidental damage waiver and waive the security deposit, you're charging, we caught, we had clients charging 80 a month. Now after 12 months, they might go down to 60 after three years, or excuse me. And then after the second year, they might go down to 40, but those are premium dollars that are being collected every month off those rents. over and above their rent income. Now you can scrape that out, scrape it out, dump it into your 831B plan. Your operating company is not picking it up. And when they do have claims, meaning when the person moves out and there's damage done to the apartment, holes in the walls, carpets got to get replaced, they submit a claim against those dollars. But the cool thing about that is ease of operation, no refunds. when you talk about property managers and owners of multifamily, they're given 50, 60, 50 to 60 50 to 60% of those deposits back. it's an administrative nightmare in a way. I, from what you know, talking with somebody that owns several thousand doors, it's a full-time job for many people. And then two, the other one is making sure they have insurance. That alone to upkeep on that can be very tiresome for a lot of business owners, especially a lot of property managers because people go in and out of force all the time. And again, this is busy work. it's just part of owning the multifamily business, but if you can just put an accidental damage waiver in, do you are charged tenant liability to this? And bake it into the rent. You're not, you're getting rid of that administrative costs because you're already covering it through your own channels. You don't have to worry whether or not they have renter's insurance or not. It's being handled, through the policies and stuff at work that we can put away. And again, most business owners would never do this because they don't wanna take on the risk. But if they can charge the premium to the tenant and then scrape it outta their operating company, not as additional income. They could take somebody out for administrative costs, but let's say the income and they can scrape it out, expense it, and now dump it into an 830B and have it build up tax deferred. It's just more appealing to them, to them to want to do. Does that make sense? What am I saying?

[00:23:15] Tim Little: I think it's just another creative use of the fund, if that's the right word plan, sorry, plan. I guess that, that makes me curious too, about how the traditional insurance market looks at a plan like this. And is it something that's favorable, right? do they look at this and say, okay. Your risk is reduced because you have a plan like this in place. Do they not care or what is the thought process from the perspective of traditional insurance? 

[00:23:45] Van Carlson: I think we're a competitor against traditional insurance. That's the way they would see it because we do replace traditional insurances as well, especially when it comes to property. It's still a tough market, but there's, you still have reinsurance carriers out there based on the type of risks we're dealing with, type of building materials and all that, where you're at in the,like Intermountain West, the Rocky Mountains. Multifamily is still not getting hit that hard. any place that's subject to catastrophic losses are going to, and Florida's a good example of that. and two market constraints. We market, people are just getting outta the markets altogether. There's another big announcement out of California this past week. State Farms, non-renew and 72,000 homes, they were not taking on new business. Now they're simply non renewing. And I know you've also got the same things going on in Florida right now, even with residential homes. just trying to, even in the sales process, even trying to find affordable insurances, sometimes killing the deal to sell your house or not, and it's just becoming problematic. I can't imagine what that looks like on multifamily right now, if you're trying to sell your property and it's going, obviously it's going to hit the cap rates pretty significantly when you all of a sudden you have a higher cost and premiums. So to me, then we come in as a solution maker and say, listen, it costs 40 to 50 cents to run these insurance companies. So I will give you a dollar in premium. They're using 40, 50 cents of that just to run the company, to pay the agents to do all that and keep their names on the buildings. The other 50 percent is really designed for paying claims. And when they go and they exceed that 50 cents is when they get up is when they claim they're losing money. and they have to dump into their surplus. So we'll come in and say, listen, I got a carrier that will take on that 50 cents. You retain the 50 cents yourself. But understand you're at risk for that. So now you can be, especially you have efficiencies of scale, which we bring the table to the business owners that own multifamily units, at some point that, they're parallel and then they cross and when they cross the business owners, it's going to decide, am I willing to take on more risk and enjoy the profits that the Insurance company was making off my dollar anyway, and I retain that risk. I'm willing to bet on myself and we for the right client Tim I would tell you and for the right investment group that just says hey,this is painful can we just go self insured risk think of it as a level funded health care plan or a self funded health care plan or? we're seeing that more and more around the country with general liability, property, commercial auto, all of those things, when they're going up in rates, no different than healthcare was going up in rates, more and more business owners were looking at ways to self fund. and I would tell you self funded healthcare plans are happening all over the country. If you have a hundred more employees, you should be looking at it because the dollar, it just, the numbers do what the numbers do. And same thing for this situation. As property costs go up for the premiums. and the limitations you're getting, is it better to take on a bigger risk yourself? Because you already are doing that. Because think if you had a claim, what would happen to you next year anyway? Do you really want to submit the claim? So again, if you have any issues going on and I can't iterate enough, would I rather use pre tax dollars or after tax dollars to fight the fight? And I'm just telling you, mathematically speaking, you have a lot more dollars to work with. On the pre tax basis, especially if it's working for you, you're putting in investment and you can, now you're really getting what insurance companies live and breathe to do. And that's investment income off the reserves and surpluses that you would have just given away to uncle Sam anyway, in the form of a tax, again, efficiencies of business models. And this is why big companies have adopted this. I can tell you if you're in a, if you're in a, big REITs, all those guys, these guys are doing all this stuff. big business. This is a big business tool. We're trying to price it in a way where your mom and pop, your vet, your normal investor on the street that's participating in your type of investment pools can participate as well. and I think we've done a good job with that. I think the fact that we have 800 participants right now in our plans, 800 active plans, and we're on track to double a, the next three to four years. And we're excited about the space we're in. Obviously you can, hopefully you can, we're geeked out risk managers, but we understand the tax code and we understand what needs to happen to make sure our clients are protected. But we're going to sit down and visit with the business owners, find their pain points and see if we have a solution to their problem when it comes to their overall insurance program. And then we also look for things that they're not covering. How do you want to cover that more effectively and efficiently?

[00:27:43] Tim Little: Yeah. And it sounds like your approach is very custom, every person or business is different. And so you have to look at the risk scale, et cetera, associated with that. But is there a general threshold at which it makes sense more than others,in terms of, scale, whether that be value of the assets or number of employees or whatever the case may be, is there some determinant that people can use in their own mind? to think

[00:28:09] Van Carlson: Yeah, I

[00:28:09] Tim Little: when they should start thinking about this as an option.

[00:28:13] Van Carlson: would say when, it comes down to their deductible,what their deductible exposures are, and then two, what they're already paying in premiums. So if you're paying north of a hundred,our sweet spots are over 250, 000 in premiums, when we can really start to, we can show a client saving 125, 000 of that. Now again, they're going to be taking on more risk, again, are you willing to bet on yourself? Are you going to pay for the tenant that you're going to pay for the property manager down the road? That may not be. taking care of their properties as well as you are. you're a much better risk to the insurance carrier than your competitor down the road is. the way you manage, the way you handle,the prevent, the prevention you put in place, the type of shrubbery you use. all the things that you do, to make yourself a better risk, not only from an insurance company standpoint, but from just simply a business management standpoint. why wouldn't you, why wouldn't you want to at least look at Does this make sense to go self insured? The other thing is that we're getting into the thing called a name peril, single name peril. So let's say, he's killing me on the wind. I'm going to, I don't want wind coverage on my traditional insurance. I don't want hail damage covered on my traditional insurance. I will help clients set up a single name peril policy. They call it and they can self insure for that. And I can actually find reinsurance markets for that. That will just reinsure that piece of it, but we'll still keep the fire in place. We'll still keep the sudden accident and water damage in place. We'll still keep the general liability for their tenants, slip and fall. And in business interruption on that. But when you're looking at single peril policies, what I mean by that single peril loss, potential loss, it's either hell. Good examples, flood insurance is a standalone coverage now, but right. based on FEMA, no, nobody's selling you flood insurance. along with your habitational policy that just doesn't exist. then, you have to go buy that by itself. we got clients now buying that with, earthquake was another good example, but now we're seeing the health coverage and also the wind coverage now where it's a single name peril policies. That's all they're going to buy. And that's all they're going to self insure for, but they're able to lower the premiums down on their traditional insurance significantly because they don't, then that traditional insurance company is not on the hook for those coverages. That's a great way to manage the risk overall, especially, I think we're on a 10 year cycle right now based on historical facts from the 80s, that business owners that own property are probably gonna be looking at this kind of a thing for the next 10 years. Until the market recorrects and does its thing. But, yeah, you, it's, we're just in the beginning of this. Unfortunately,

[00:30:24] Tim Little: Yeah. And so this definitely gives people something to think about because there isn't a multifamily operator that I know of that, doesn't think about insurance. Cause it's become one of the biggest challenges with making a, like you said, a deal work, just based on the numbers. when it comes time to renew, how is that gonna impact profits, et cetera. so definitely something to think about. One thing you mentioned that piqued my curiosity was you said that the IRS doesn't like this type of plan. I wonder sometimes when we get these new or more innovative types of plans,it garners a little more interest and oversight from regulators. Oh, what does this do in terms of bringing undue attention from the IRS? Is there a higher rate of audit, for example, when we have a plan like this? Yep.

[00:31:21] Van Carlson: but that doesn't mean that's not the case. I think we do a pretty good job. We, my competitors, are typically CPAs and attorneys. And they're out promoting the tax code for they put the tax code in front of the risk management. We don't do that. we're not that sophisticated. We recognize the fact that there's tax advantages to it, but we talked about risk. and so that's one thing I always tell clients, Hey,I don't know that crystal ball, but here's what I will tell you. If you're doing this for the sole purpose of lowering your tax liability, then worry about an audit. If you're doing this for true risk management strategies that you know you have on the books, we know you have on the book, and you're trying to make it more efficient for the stability of your business, then I would tell you to sleep easy at night. They may come. Who knows? But I will just tell you that if your motivation, your intent is sincerely, hey, everybody's motivated about saving taxes. That's why Congress passed the code back in 1986. Actually, farmers were self insuring crop insurance and business owners that own properties and buildings were having the same issues we're having today. That's why the code came into existence. Congress recognized that we as Americans have a lot of incentive to save money and they're the ones that create those incentives in front of us. I tell people all the time. if you're, if you as a business owner, would you offer a 401k if you couldn't expense it at your operating company level? They go, no, I wouldn't expect, no, I wouldn't do that. Of course you wouldn't. guess what? Congress says, hey, we'll create an incentive for you to do that. Now you have an incentive to save money. taxes, defer it and handle your risk more effectively because you can't buy or transfer that risk to a traditional insurance carrier. Already if you could, it's so darn expensive, it kills me anyway. there's no risk reward there for me, right? somebody told me a long time ago that our tax code has probably created more wealth than anything we've ever done. And the best example I give is that look at the 1031 space. Think if their 1031 didn't exist in our country, what would our real estate be worth today? Relatively speaking because there'd be no people there would be just the risk reward wouldn't be there but meanwhile if i'm going to sell my property and I can take a Take on more risk get a bigger building get a bigger rent income and all the things and all that Into another 1031. i'll take that risk. there's some people that oh my god, they're risk adverse god bless them be a cpa, right? God bless you Go become a CPA, but if you want to be a risk taker and own properties, you're going to do 1031s because, hey, I don't want to pay this damn tax bill. I took a lot of risk to get where I'm at. I can go to another one. I'll do that. But I think that code wasn't there. It would make it very difficult to sell properties. But meanwhile, what did that do? That created a lot of wealth in our country based on that tax code alone. I'm a firm believer in that. I've experienced that myself. I've done well in the past with commercial real estate and I'm like, dang, if I don't do something with this, I'm going to get killed. And meanwhile, I could have gone the other way and nobody would have cared. But now thatI won on this one, I'm going to get hit on taxes to the point where, you know, again, you lose your value or you want to. Do I really want the hassle of doing this? I think the 1031, so not to beat that up too badly, but I don't, every code will bring attention from the IRS. Why? Because they're tasked with collecting as much tax revenue as possible. Again, if your intent was correct, if the other thing is don't call, Try to bite the apple twice. I've seen a lot of our competitors get really cute with the reserves and surpluses in the back room. God bless them, but we're, we stay in our lane. We're risk managers. We're going to help you. We're going to make sure that money can stay deferred under the 30% tax code. With the motivation of risk management. and we'll work with your financial planner. We'll work with your state attorney. We're working with your CPA in the back room and how that money can be used and operating and everything else. And of course, we think money should make money, right? all that stuff. But, we're gonna have those conversations with those trust advisors and they will manage it. We're not gonna manage it for them.it's the client's money, whoever owns the C Corp. the one of the things that was, this thing was being abused for, Tim, was estate tax planning. And really what was going on, there's three or four, now there's probably five cases, the IRS has won in the last several years, and it was all motivated from estate tax planning. These C corps are going to make it so every book will trust their kids to own them. they're going to get around gift taxing, estate taxing, because they're going to draw down their estate. And of course, when grandma and grandpa die, the grandkids get the shares of the C corp and great planning. Fantastic planning. Too good to be a true kind of planning, right? In 2015, in the PATH Act, the code came back up. They got rid of the lineal descendants. So if you don't own an operating company, like in this case, if the kids are lineal descendants, don't own some kind of form of the multifamily, then they can't own the re, they cannot own the 831B plan that is part of the ensuring the risk of that operating company. So they got rid of that. But then what they did at the same time, though, when it first started out, it was only 1. 2 million. You can put a year into this thing. On a tax deferred basis. They moved it to 2. 2 in 2017. became permanent law under the path act, the 2. 2 million and then with a cpi rider So I guess there's one good thing about inflation But today you can put 2. 8 million dollars away in this thing every year now that's the top level There's rules you have to apply for there has to be a methodology to the premiums or again There's a four part test owning these things staying elected under the 31b tax code We as administrator make sure our clients adhere to all that. So as long as you're doing those things for the right reasons, I think you can sleep pretty easy at night that you're, it may trigger an audit, what's funny about audits and I've probably had 50 operating company gets audited just because the amount of clients we have, and they've made the phone call and say, Hey, my company's being operated. no 831B that we manage has triggered an audit.to our knowledge. but operating companies get all out of time. and we get a call up and, but what's crazy is I bet you 50 percent of the time our business owners have gotten refunds. So I always wonder, it's I don't know if an honest, I don't know, if you're doing something shady, then, Whatever, but if you're just being an honest taxpayer and trying to play by their rules and play the game the best you can and you have real good tax folks around you, I think you can sleep pretty easily at night knowing that you're taking advantage of all the tools that's available to you.

[00:37:05] Tim Little: Yeah, and that all makes sense. Like you said, doing the right thing, making sure that your team is in sync. with each other. Those are the two keys right there to stay out of trouble and you shouldn't have any problems. This has been some really interesting conversation and we dove pretty deep. But now it is time to go to the turbo round. So I'm going to ask you three questions that I ask every guest that I have on the show. And I just ask for a quick, honest answer. Ben, are you ready?

[00:37:29] Van Carlson: Yep. 

[00:37:29] Tim Little: All right. First question. What is one red flag every investor should look out for? 

[00:37:34] Van Carlson: The transparency of who's in front of you. I think you go with your gun instincts a lot of times on the people you're working with. Due diligence today can be done probably easier than ever. And don't get complacent. Don't get complacent with your dollars. I think you work pretty damn hard for them.  And,I live in the world of trust and verification. I know that might be an oxymoron to some folks, but I, I give trust, but sometimes verification is just as important and you want to be able to do that. And so I think that if you can't get that verification or that warm and fuzzy feeling, there's probably a reason. it,

[00:38:03] Tim Little: Yep. Yeah. Transparency is huge, but that due diligence is necessary. All right. Second one. What is a myth about this business you would like to set straight?

[00:38:13] Van Carlson: that you br is going to, if you do pa you're going to get an au CPAs, God love them. I said earlier, they're p That's why they're in the in. and a lot of time risk tolerance to their b meanwhile, the business of that own multifamily, They're 100 percent risk takers. and meanwhile, I say very clearly a lot of times that, CPAs aren't going to, CPAs only lose sleep when you're not paying taxes. They don't lose sleep when you aren't paying taxes. and so that, to me, that's one of those things where, This isn't triggering audits. I think it's great tax planning. At the same time, more importantly, it's just straight out good business management and risk strategies that your competitors are doing and your big companies are doing. It's as natural as putting your pants on one leg at a time. and so for me, it's it, that's the myth. Unfortunately, a lot of CPAs like to portray out there that it doesn't exist. We haven't seen it.

[00:39:04] Tim Little: All right. And last question. Van, what does success look like to you?

[00:39:08] Van Carlson: success looks like to me on a personal, financial and all those things, that's great. but I would say on a professional level as a risk manager, one of the greatest things, one of the greatest joys I took that I didn't see coming, but it has happened to several clients over the years is van, I just sleep better at night knowing I've done your program. And I think from a risk management standpoint, that's true success. I sleep like crap. I think most Americans seem to not sleep that great. And anytime I can improve somebody's sleep, I'm happy to do that. And I would say from a professional level as a risk manager. Being told that is, is very, it level,you're a professional and it raises your level of professionalism. And I think that's a great place. And that feels like a lot of success to me.

[00:39:48] Tim Little: Yeah, absolutely. Helping people sleep at night. There's, it's underrated. I'll say that for sure. so knowing that you can help people do that is huge. All right, Van. And so on. I know this has been my introduction to 831B plans, so I certainly learned a lot and I know the listeners did as well. Please tell them, if there's anything else that you'd like to share with them and how they can get a hold of you.

[00:40:11] Van Carlson: Yeah. Hey guys, this is just another tool in the toolbox, as business owners, we have to look at all the tools, what's available to us. And again, for the right client, it's a fantastic tool. It's no silver bullet by no means. but it can be a great tool at the right time. 831b.com is our website. I would recommend you start there. My name is Van. So van@831b.com, happy to respond to emails. but going to our website, a lot of educational videos are there, and I really get to learn more about them. One of our taglines is weather the storm. And like I was saying earlier, think of your, the storms are coming and how do you want to weather them? And I think that's, yes, This is something that you owe it to yourself. You owe it to the risk you took to own the properties you own.and like everything else out in life, it's something you got to think about and work on and set it in. And I, again, I just think if you're too, if you're to a level of where you want to just take some risk off the table and not double down all the time, this is a great tool for you.

[00:41:10] Tim Little: Alright, Van, we'll definitely have all your contact information in the show notes. I appreciate you coming on and I look forward to seeing you do big things on your journey to multi family millions.

[00:41:21] Van Carlson: Thanks Tim. Appreciate being on your show.

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TIM LITTLE (FOUNDER/ CEO)

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