Investing In Mineral Rights – Episode 301

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[00:01] Welcome to the Prosperity Podcast. Welcome to another episode of the Prosperity Podcast. Today we’re gonna be speaking about mineral rights and for some reason I wanted to start out with a Texas oil boy twang and try and lead the episode that way but I figured this wasn’t a comedy podcast. We wanted to get some education in. And I could not match you with said Texas twang. People figured out a long time ago I’m not from Texas even though I live here and love it and am certainly right in the middle of the subject that we’re gonna talk about today. Yeah, and it’s one of those subjects where I think it lends a couple different ways. One, many people understand that a lot of wealth is created around mineral rights

[00:53] and there’s a lot of mystery because you can actually be involved with not getting your hands dirty or being involved in the typical way or a traditional way. So we’d love to learn more about what this world of mineral rights is. Fabulous. Well, mineral rights for us fall under the category of bridge loans. And it’s funny, sometimes people push me back on this bridge loan moniker that we use so often and it is purely a function of just coming up with a word that is, it’s not like I invented it, it’s out there in the marketplace that I think so perfectly describes the investment category that does one particular job and that is create income. And creating income from assets is one of the hardest things to do.

[01:50] And a bridge loan by my definition anyway is where you as an investor with regular money or IRA money, lend money to an entity that secures or collateralizes that money with something, pays you an interest rate on a monthly basis and then after a fairly short period of time gives you that money back. So that for us in our conversation is the definition of a bridge loan. And many of our listeners of course are aware that we do that with real estate. Makes sense so far? It does, yes. Adding to the real estate environment for bridge loans is this concept of a mineral rights environment. And mineral rights are essentially enabling that loan. So remember you’ve lent money, you now want an interest income

[02:43] to be collateralized by the business of an oil well, the equipment of an oil well and the mineral rights that go with that business. So the easiest way to think about this is it’s everything that’s above the ground of an oil and or gas well. So clearly the oil and gas well is below the ground and there’s drilling and there’s all kinds of things that go on with that. That’s not what we’re talking about. What we’re talking about is the equipment and the business and the rights, the legal rights that go with the energy arena of the oil and gas productivity and the wells that go on below the ground. But what we’re talking about is above the ground. Okay, now there’s a reason why this vehicle was created

[03:40] and we would love to hear what the benefits are for people that are interested in this. So the benefits are, first of all, it’s important to state that they are available only for accredited investors in most cases. So the accredited investor definition is million dollar net worth, not including the equity in your home or 200,000 of income if you’re single and 300,000 of income if you’re married. So for accredited investors with either IRA money or regular money, this is a space where you can lend money and get a monthly payment that is at a fairly sizable interest rate compared to what you might see in an annuity or a bond or a CD. So the mineral rights space is typically in that six, seven, eight, maybe 9% interest rate

[04:38] and it’s paid monthly. And the timeframe is generally only one to maybe three or four years. So it’s a fairly short-term environment where you’re lending money. It is collateralized by that business and that equipment using what are known as UCC filings. So it stands for universal commercial code and it’s what banks use when they lend money to businesses that’s collateralized by equipment. It’s what other entities use when they use any kind of physical equipment to secure monies or dollars. Now, of course, this is still involved in the oil and gas space. And this is why here in East Texas, we are right in the middle of it. We’re involved in it literally as we drive down the road, we see this equipment that we’re talking about

[05:35] and we can literally drive about an hour and a half from where our home and office are and see some massive amount of activity around this area because new technology has enabled these oil and gas companies to get more oil and gas out of existing wells. And the equipment and the technology that is used is what is securing these mineral rights environments. Okay, so if I, to summarize and to understand, it sounds like one, this is creating cashflow on a monthly basis and the percentages will vary it upon whatever you’re doing. And then on top of that, it’s also collateralized. And so for people that may often be working things that are more speculative or on the other end, people that happen to be a lot more conservative,

[06:37] they can understand where the money is actually going and what’s going to happen to it. And one of the big things to me is that your money’s not tied up for decades and decades. That’s a great piece to read. And I really encourage people in this space to just be open-minded and dig in and learn and then go slow and start small. And that’s been our mantra for years. When you learn about an investment like this that you may not be familiar with, go slow and start small. And so a lot of the opportunities that we have in this space have fairly reasonable small minimums, 50, 100,000, something like that. For an accredited investor, that should be a small step and it can be done again with IRA money or regular money.

[07:23] And yes, this is an unusual space. A lot of investors are not familiar with this at all. And I will admit that some people have moral issues with the oil and gas industry. And so for them, this is not the right investment at all. And yet for somebody seeking some income that they can be confident in, this is a really, really good space to test out. Now, there are no guarantees with this. You absolutely could use principle. There is a lot of, I think, risk. And risk is such a tricky word to define. But there’s risk in that you don’t know about this. There’s risk in that you don’t know who’s providing it. There’s risk in you might hear something that you’re not educated about and it may throw your thought process off.

[08:12] For example, the price of oil. People often think that the mineral rights space or the equipment lease space in the oil and gas industry is going to be heavily dictated by the price of oil. And that’s not accurate. The price of oil doesn’t really have anything to do with these particular deals. This is really more about contract law. And again, that UCC filing that protects the money. And yet it is still a business. And so these are the things, if you’re curious about learning a little bit more about that you can dig into. And the words are often used around the energy word. So you’ll hear it referred to as energy. You’ll hear it referred to as mineral rights. Of course you’ll hear oil and gas industry

[09:04] and you’ll hear bridge loans. Okay. Now to throw one last curve ball. What are the tax implications dealing with this? So this is 100% taxable income, just straightforward. So you do not get any benefits of owning the well. You don’t get any intangible drilling cost benefit which is something that is available if you are involved in the underneath the ground aspect of oil and gas. You do not get any of the depletion tax benefits that you get with again, the underground aspect of oil and gas. This is all above ground, completely taxable as ordinary income. And so again, it works well for IRAs. It works well for regular money. If you wanna create tax, sorry, if you wanna create income, which creates tax.

[09:57] And so that’s an important thing to just acknowledge. Paying tax is not a bad thing. Paying tax means you made a profit. And there are so many times that the tax tail is wagging the financial dog in our thoughts and in our research and in our actions. And that’s not a good thing. We should be prepared to pay tax. We should love paying tax because it does mean that we made a profit. Now that’s not to say we should do everything we can to legally reduce our taxes. And yet I think sometimes too often, especially in today’s world when the standard deduction is so large for most people, it’s gonna undo all of the other little specialized ways that we were able to reduce our tax. And so people are fighting for nothing.

[10:47] They’re fighting to try to get tax benefits. There are no tax benefits. There are real estate, there are businesses, there are oil and gas investing below the ground and of course qualified plan, but I don’t view that as a tax benefit. That’s just a tax deferral. And in my mind, that’s pretty much it. So this space, the bridge loan space is generally a income provider and it is generally taxed as income. It’s pretty rare that there are any other ways that we can reduce or defer or get out of paying taxes in this space. So the goal is to get that income as high as possible and then pay the tax. That works. Now, so when we think and as we wrap up about the mineral rights, the big thing that keeps on sitting in my head

[11:45] is cash flow and how wonderful it is as you mentioned at the beginning of this to get an asset to create additional cash flow for you. And this is one of those things that you don’t have to babysit. You don’t have to look at it and think about it on a constant basis and you don’t have to have your capital tied up for a long time. There any final thoughts that you wanna share before we part? Well, principle number four of our seven principles of prosperity is flow. And so that means that money needs to both flow away from you in the act of savings as well as flow to you in the act of creating income. And I encourage people to practice creating income or cash flow from their assets long before they actually need to do it.

[12:34] And that’s why I like this go slow, start small approach and the fact that a lot of the companies that we work with in this space do offer fairly small minimums because you wanna be well-versed and very confident in your decisions in your, say, 40s, 50s and 60s so that when you have, for example, a large 401k rollover or some type of transaction that you have to make where you have to get very serious about creating monthly income for yourself, you’re already practiced, skilled and confident in that step. What a great way to summarize that. Well, thank you, Kim. And for any of our listeners, if you’re questioning how this will work or if it may work for you, the best thing you can do is send an email to hello at partnersforprosperity.com

[13:24] or click show notes down below and you’ll see a link that will take you directly to that email address. We appreciate you taking the time to learn a little bit more today and to create this prosperous mindset and prosperous habits with your finances so that it helps you and your family. So thank you. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review. I’m Shannon Maldonado, the founder of Yowie, a souvenir shop with artisanal articles and pieces selected by artists. I chose Shopify because after trying out other platforms, this was undoubtedly one of the most intuitive.

[14:23] For me, it was important to think about where we would be in the future. All the tools to analyze sales, such as inventory management, are right there on our dashboard. Start your free evaluation at shopify.com.