Live Takes: How to Tackle the Tax Man by Buying More Real Estate - Transcripts
This is the bigger podcast podcast show 625 I think that's um, what's really clarifying for me is to pull up a little bit from the numbers. When do we pivot, how do we do this and be like, what's our goal and how do we play a perfect game that balance between offense and defense? And, and that's honestly in just a few minutes, it's really helped me to see, you know, let's sit down, let's make sure we got a well balanced game and we're focused on what our goals are,
going on. Everyone. This is David Greene, your host of the bigger pockets real estate podcast, the best real estate podcast in the world. Hey, if this is your first time here and you want to learn how to build financial freedom through real estate, you want a better life and you want to get the most out of yourself. You my friend are in the right place, bigger pockets is a community of over two million members that are all on the same journey as you trying to improve their life and real estate is their chosen vehicle to do. So we've got an amazing forum where you can ask pretty much any question in the world related to real estate and get an answer or look at other people that have done the same thing, an incredible blog full of articles that will help you gain knowledge in real estate and a podcast, much like the one you're gonna hear today in today's show, we are bringing in different guests to have them ask my co host Henry Washington and I as many questions as they have time to fit in regarding the specific situation that they're in. Oftentimes this is people that are stuck there trying to figure out how to get past their problem or maybe they're having a hard time getting started. Occasionally we get someone that's doing so well, they're not sure how to hold it all together and Henry and I are both experienced real estate investors and we do our best to try to give them the advice that we would use if we were in their situation while making it fun interesting and thought provoking at the same time, Henry, thank you so much for joining me on the show.
Yeah, thank you for having me, I love being back on here and I love these Q and A episodes, man, they're super fun.
Yeah, they're fun and scary at the same time, I think that's what keeps them engaged because we never know what they're gonna say and we also don't know if we're gonna be able to actually have an answer and the worst thing ever is for someone to pour out their heart and be like, I don't know what to tell you man, you're in trouble.
Absolutely. It is, it is a little terrifying when questions start to roll. Hey, one of the questions today was a little terrifying for me and so I allowed that one right back over to you and you did an excellent job. Thank
you. I like to look at it more like playing volleyball and you kind of set me up for the spike, right? As opposed to I completely just disappeared and said, David, you can, you can handle that question. You're setting me
up. That's right.
So what were some of your favorite parts from today's show?
Hey man, I think this is a really relatable episode for people. And so I encourage you to stay till the end because we cover a lot of topics that are often asked by real estate investors. We talked about how to find a mentor, right? And I think that's one of the, one of the first things we cover. And I encourage you to listen to that all the way through because David gave some really good analogies to what people are really truly looking for when they're asking for a mentor. And then he gives some really great advice on how to actually go and do that because I mean, we got to have some real talk when it comes to people approaching people about mentors, I think. And I think you summed that up in a great way. We also talked about tax strategies and again, neither one you or I are our tax professionals, but I think we're able to give some really practical advice to people about how to handle depreciation and tax strategies. And we talked about some marriage counseling, right? We talked about how to approach conversations with your spouse about about um real estate tactics about when to pivot your real estate approach and how to have that conversation when you're ready to pivot or how to even know when you should pivot. So I think you know you kind of run the gamut of questions that a lot of people have either in their heads and they haven't asked out loud or that they've asked other people and hopefully they get some real practical advice from some real people out in the real world doing real real estate deals.
Well thank you Henry. You're someone who always keeps it real. I think that's why people like you so much.
I am a realist.
You are the realist. Today's quick tip is don't ask can something be done, ask how can something be done now? This will help you in your own life but it will also help you when choosing which fiduciary you want representing you. So whether you're looking for a loan officer, a real estate agent, a property manager, a
C. P. A.
If you know what your goal is you want to ask them how can I get there. The best supporting pieces that you can have aren't your order taker. You don't tell your loan officer I want this and they say yes sir I'll go get it for you because you probably don't know exactly what you want. You just know what you already know the best people are the ones that know what you don't know. They're the ones that say, hey, this would be the best way to do it. And here's what I would need from you in order to get you from A. To B. Those are the kind of people you want to pick. So this comes up often when someone's trying to decide like who do they want their agent to be, who they want to sell their house, who they want to do their loan. Who do they want to give tax advice? If your first question is, how cheap are you? I want to find the cheapest C.
P. A. That I can find. Probably not going to find the best C. P. A. That you can find and you're probably going to end up with the one that says you can't do that to everything that you say when you go for the really good ones, they're gonna say you can do that. If you do this, that means you'd have to move these things around. You have to open this entity. You'd have to claim a different thing. Your your wife or your husband have to buy their name. You'd have to buy this one in your name and then you get to make the decision if you think the juice is worth the squeeze.
But my advice to you in today's quick tip is to look for people that can paint a picture for how to get you from where you are to where you're going. Those are the ones that I like to work with and those are the ones I recommend that you work with Henry before we get into today's show. Is there anything you'd like to add?
Uh yeah man, again, listen through to the end because we're going to run the gamut of how to approach your real estate portfolio from a tax perspective, we're gonna run the gamut of how to approach your spouse when you want to approach your real estate investment. From a different perspective. We're also going to talk about how you can find or seek out the person you want to be like and then how to approach them to see if they can help you become a better investor.
That is awesome advice. Thank you as always. Okay, one last thing, before we move on, a word from today's
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All right, let's get to today's show Samantha Halpert. Welcome to the bigger pockets podcast. Thank you. Pleasure to be here. Awesome. I'm glad to hear that. So what is on your mind today? Okay, so I started some short term rentals last year and so this is our first sort of taxi or closing them out And we thought that we were exempt from the 15% self employment tax. But we're finding out now that um I don't know if it's a new rule or just one we didn't really know about before, but We're being told by our accountant that we are subject to the 15% self employment tax. So we were just wondering um my husband, I was just wondering since we do have to pay that, is there any other strategy we can use to counteract that or do something different with a different rental where we can, you know, negate that a little bit or really anything or just pay it and move on. I was really hoping we could open up today's show with a legal advice request. Those are my favorite, always leveling at that.
But at the same time, I know what it's like to be in your position, Samantha and you're like everybody keeps telling me they're not a lawyer, but like somebody in the world has to solve a problem without having to be a lawyer. So I totally understand your position, Henry did you want to take a swing at first before
I see what
am gonna gladly lob this
away right out of that charging bull of a lawsuit coming right down the pipe.
so neither Henry and I are legal experts, were not cps, we're not lawyers. So anything that you hear me say please go run this by your legal crew before you take action. But here's a couple of things I'm thinking are you a full time real estate professional? No we looked into that but I guess we're not really entirely sure that um like how that would help us. Like I would listen to some podcasts about it and so I was thinking that it would help us but my husband listened to and he interpreted differently so I guess we're not really sure if that was something that we should do. And here's my here's my understanding of it and if somebody would like to hear more, please reach out. I'm happy to connect you with my C. P. A. And I can have them run you through the same thing that we ran me through. Okay when you're a full time real estate professional, you are allowed to use the depreciation that comes from your real estate asset against income that you make in other real estate ways. So what that means to the layperson would be Normally when you buy a house, you are able to write off as a loss, a portion of the income that that I should I said house I should say property makes because it's falling apart so I won't get into a really long explanation of how that works or why.
But if you buy a rental, the rental is theoretically deteriorating every year. So you get to take the income and have a loss that we call it depreciation. That doesn't mean the house is becoming worth less every year. It's a confusing term, but in accounting depreciation refers to a property becoming worth less so many times if you make $10,000 a year in rental, you only get taxed on one or 2000 of those dollars because the depreciation covers rest. Sometimes it covers all of it as a full time real estate professional, you would be eligible to take the commissions or the income that you earn from managing properties, selling properties, doing loans, flipping houses, whatever it was and any unused appreciation that you had from that property will cover income from other places. And the I. R. S. Understands well if you're a full time real estate professional, you're taking a lot of risk. You're an entrepreneur, You don't have a safety net. So because we want to encourage people to get out there, buy more properties, take more risks, make the economy go better create jobs for people, we're going to give them a tax break. If on the other income that they make, because being a real estate agent is risky.
Being a loan officer is risky. Anything where, you know, you're not being spoon fed income, there's some risk. So how this works in my world is that I make income from the David Green team selling properties. I make income from the loan brokerage with the commissions that come from the brokers that compensate us when we bring them someone who wants to do their house, I make income from flipping houses. I make income from rental income of some some property, some do better than others. Now, if the problem is that your property that does really well, if you don't have a ton of depreciation, you pay a lot of taxes on that income. But if you have another property that sucks. But there's a lot of depreciation, you don't even get to use it. That's unused appreciation is like what we're trying to solve here is when there isn't any purpose for it to be well, when you're a full time real estate professional, you can take the property that didn't perform well and has the appreciation, you haven't used yet and apply it to a different area Where you did. So that would be the benefit to you and your husband being full time real estate professionals is if you're in a situation like this where you're showing that you made money and they want to tax you for 15% of that income as the self employment tax. I'm not a C. P.
A. But my understanding would be if you showed you made no income because appreciation watched it all out there would be nothing to tax. That's the first thing that pops into my head now if you want to. This is I made that sound. It's simple. The concept is very simple. The execution is not okay. Like You have to buy a lot of real estate. It has to be very expensive real estate right? Like in order for me to do this, I bought a place in Minnesota that was $16 million dollars and that covered my income. So I had to buy a really expensive property. Um It's not like you just this just accidentally happened.
So you have to be willing to really commit to buying a lot of property and leveraging that quite a bit right? Because it doesn't make sense If you save 200,000 in taxes but you had to put $800,000 down to buy the property. You still ran out of money right? So you have to be willing to leverage these properties where you're putting down less of a down payment To where the taxes you're saving are close to what your down payment was on the real estate. But what ends up happening is it kind of ends up in a sense free real estate right? So if you save if you don't have to pay $300,000 in taxes and you put a down payment on a house of 400,000, you really only put down 100,000. So your R. R. O. I would be four times higher than someone that had to put down 400,000. That makes sense so far. Yeah.
Okay so that's one strategy to say right off
Okay. Um so we were thinking that we wanted to get a more expensive house, like you said um a lake house, that probably would make that much money because we'd be using it as a short season. So that would be that same idea where the Lake House might help offset the properties that are making the bigger amount of money that one would not make as much money. So that would help offset the ones that are making money. If I was a real estate professional to make sure it's correct, correct. Okay, so your question was if I if I buy another house that does not make money, would we be able to use that? The depreciation that was unused against the property? That does, yes. Is that correct? Samantha. Yes, that's correct, theoretically what you're describing would work, but I want to caution to make sure you understand it's not necessarily that you lost money on a property Or didn't make money? It's that the depreciation of that property was big.
So is this a commercial property or are we talking about a residential property? Alright. So what they're going to do is they're going to take the value of that residential property and they're going to divide it by 27.5 And that's the amount of depreciation you can take. So if this property loses money but it only costs $200,000 per se. If you divide 200,000 by 27.5, that would be 7200 and $72 that you could have depreciation, That's how much income that would shelter. That's not very much, right? So if you go buy a million dollar property for what we're talking about, you divide that by 27.5 Every year, you're gonna get $36,000 worth of depreciation, right? So you're gonna have to figure out what what I do is I literally go to the C. P. A. And I say, ok, here's how much money I think I'm gonna make, how much expensive, how much real estate do I need to buy in order to cover that much money. And then he goes, and he figures out well based on the value of the land, we have to subtract that because you only get to depreciate the actual structure, right?
And then the cost segregation study depending on the type of property we think you're gonna save around this much, like there's a little bit of detail that goes into that? I don't want people to just hear this and think oh I don't have to talk to a C. P. A. Because there's quite a bit of pieces that make it not simple like the execution of it is a bit complicated right won't be for your CPA because they do this but he'll come back and say hey roughly you need to buy something in this price range and then I will typically go a little bit higher than that just to cover myself in case I made more money than I thought I was going to make. And now the question is how can I buy this much real estate and then you have all of the freaking avalanche of questions that come like can I afford that? Can I handle the cash flow from that many properties? How much money do I have to keep in reserves? What do I have to change? Can I make enough income to cover that? But that's the gist of how you you do what the donald trump's and the robert Kiyosaki is of the world are doing when they say we don't pay taxes is it's they're still paying taxes or they're still earning income. They're just having their taxes sheltered by depreciation.
What we're looking for there. What what what what to be looking for there is that your your amount of depreciation is greater than the money it makes and then that is your unused appreciation that could then be applied to another property. If you were a real estate professional,
yep. And my understanding is it can even be applied to next year's income. So I think being a full time real estate professional is something I would encourage you to look at. I would like to introduce you to my C. P. A. And the question you ask is how do I become one not? Am I one? That's that's just, that's what you're looking for. In fact, I would say the litmus test for every professional I work with is can you answer the question of, how do I do it if someone comes to me and they're like David, I want to sell my house and it's in bad shape and I say no, you can't sell it. Well what worth am I? But they want to hear is how can I sell it?
What are my options? And so that's the professional that you want to work with. Um as far as any other means of avoiding that tax. Have you been given any other kind of advice or possible strategies from other people? I know a lot of people I asked other Airbnb or short term rental owners just pretty much told me I'm wrong and that you shouldn't pay the tax. But when we breed the rules, it looks pretty clear that you do. Yeah, here's a wild suggestion. What would it look like if you just found a different cp and got a second opinion because I don't this is a hot button topic and cps that are listening to this are probably losing their mind. Half of them that are like, no, you never have to do that. Why would they tell you this? There? Just a coward.
And you have the other half that are like, you're gonna go to jail if you don't pay. This is so black and white, black and white stuff still is gray within that community, right? So, I would go to a new C. P. A. And say, do I have to pay this? And if they say yes, say explain to me why and then say all right, if I would have done it differently or how would I have had to do it differently to not pay it. And you might find a CP that says no. They think you have to pay it because of this. But actually, if we if we change the way your income is reported or we put it into a different LSC, I don't want to make it sound like I'm encouraging you to do something illegal, okay? But often times I will restructure the way that I take money. So like, let's say for example this, I don't know if this would be the same for you, but this is an example of what I'm describing.
So people don't think this is illegal or this is unethical. If I'm taking money in the name of a C. Corp and I have a lower corporate tax rate because of that. But it's still tax that I'm going to have to pay and that c corporation has not bought any real estate. Okay? But me personally I bought a bunch of real estate so I have an appreciation that depreciation that I have doesn't just magically get inserted into my corporation, corporations are looked at as a different entity than me. But if that corporation pays another corporation or I pull money out of it as a salary right now that salary is covered by the depreciation of the property that I bought. Alright. It's completely legal. It actually makes logical sense. Now there's ways you do that you probably can't pay yourself like a ridiculously high salary. There's there's that's where you gotta ask the C.
P. How do I do this? But I would get a 2nd, 3rd and 4th opinion. And if every one of them tells you the same thing, you have to pay this tax, well then you look at, well next year how do I avoid it? But there's there might be one that has that creative understanding of Well if we if we change the money from this corporation to that or we change the way you thought yes. I just can't tell you what the actual answer would be because I'm not a C. P. And myself. But please reach out to me if you like and I'll introduce you to mine, okay will do thank you so much, thank you Samantha thank you Henry. What do you think? Do you think we dodged that raging bull of a lawsuit charging right down? I
think you did a wonderful job of providing valuable advice and not putting bigger pockets in a tough situation. Thank
you and Samantha thank you for asking that question that doesn't get brought up. Nobody ever wants to admit when they have to pay money in taxes or they look like they made a mistake so I appreciate your candidness there Cody, welcome to the bigger podcast podcast. What's on your mind today?
High so my question is pertains to mentorship um and kind of applies to partnership as well um but Quick Little background I guess I'm 31 years old, I have a wife and kids um I am an aircraft mechanic so I I have no experience in real estate um and I have about $10,000 saved up in the bank so I'm not like big spender can't go buy a house for cash or anything like that. So my understanding with mentorships and partnerships is that
relationship like you you want to bring something to the table or be able to provide something and in turn they give you the knowledge you need to succeed. Um So my question is what are some things I can do to make myself more marketable to a mentor or partner awesome. Uh super cool. So are you the guy they call like when they say the plane has maintenance issues and then like you come fix it or do you like work at a place and they take the plane to you and you fix it? Work at a place and they bring the plane to me. Got it cool. Hey. Um, so yeah, I like this question right? So mentorship is helpful for sure because you get to leverage someone else's experience and learn from the things they did right as well as the things they did wrong. And the whole concept is that like you can move a little quicker, um, with mentorship and ways to bring value. So look, it's, it's from a value perspective, you can bring the deal, you can bring the money or you can bring the experience right? Those are kind of like the three buckets that, that, that people look for and so you have to look at what is it that I feel like I can provide and if you're a person, like you have a day job, but finding deals right now is challenging for people, there tends to be more money out there than there is deals, it seems like for people.
And so I always tell new investors, if you're looking to add value, find a partner, find a way to get a deal done. If you can get out there and find deals and then bring those deals. And so one thing to think about is, hey, you get in real estate investment groups, right? Go to meetings, find people in your area or in the area that you're looking to invest, who are successful, strike up a conversation, right? Ask them what they're buying, right? What they paid for it, what what they're doing on the exit strategy? Are they flipping, are they selling? Are the Airbnb, right? You're starting to gain information and investors will talk about their deals. If you ask David what his last deal does he tell you? Right? Like we'll tell you that information and then you can use that information to go out and source deals and there's, there's tons of different ways to find deals, You can find deals on the market, you can find deals off the market.
But uh, if you're, if you're willing to put in the effort to source a deal, right, When you have a deal that's, that's hugely valuable to people, especially investors who are actively doing deals. If you can bring them something that makes money and then Asked to be, to take on some equity, you know, you can take on 50%. It doesn't you know, it said differently. The percentage, you know, in my opinion, it doesn't matter because the experience is huge. But if you bring, if, if somebody brought me a deal in my buy box and said, Hey, I found this, will you help me get this deal done? And you can have 50% of
There's a strong likelihood that I'm gonna say yes, right? And so, right, putting in the work to find the deals and then bringing a deal to somebody is a great way to provide value. You can also provide value, um, um, in the form of paying attention to what people are needing, right? Like right now, for example, I need someone to help me manage my social media. Right? And if you're networking with active investors, you'll start to see what some of their needs are. And sometimes you can provide value with something that you currently have as a skill set that maybe doesn't relate directly to real estate, but relates directly to what they need. And so being able to just be around investors to understand, hey, I saw you were looking for someone that can do this. I'd be glad to do that for you on the side. If you take me under your wing and show me kind of how you're taking down your next deal or how you're finding your next deal or how you find it right. Whatever that may be. And so, but you've got to be around the people to understand what their needs are.
And for you to understand how your, your, your specific skill sets can, uh, can line up with their needs. So I would, um, but all that involves you having to be around those investors to understand to understand what their needs are. And so that's, that's one way, I'm sure David has some ideas for you.
What do you think so far? Cody?
Uh, yeah, sounds like I just need to go out and search, I guess find,
of people or find the investors and then kind of find deals.
So was that the first kind of light bulb moment you had where you realize like you're gonna have to go look for someone if you want them to be a mentor, they're not, it's not like the job you have now where someone brings a broken airplane to,
you know, I, I do know, I have to get out there and you know, find, find the people are, find them mentor who's kind of doing what I wanna do. But okay,
um, Henry gave you some very good micro level advice, some actual practical tips. I'm gonna give you more of a macro big picture thing. The older I get, the more I recognize that when you work against human nature, you make things very difficult for yourself strife and conflict as a result of it. It's like going against the grain. When you work with human nature, it's like shaving in the direction you're supposed to be going. You don't get those little skin tags. Like everyone just likes it when you go with human nature. So there's a few things that I've learned as I've gotten older, that I think helped me in business, that will probably help you. The first is the law of reciprocity. Okay, like a lot of human beings I notice like when they're dating, they want to find someone that will love them unconditionally, but I've yet to meet the human being when you say, what do you want in a relationship and they say, I just want to find someone that I can love unconditionally. I want to find someone where I can accept all their flaws and never have them change anything and just give, give, give and never get anything back. Like that's never happened.
But almost 100% of people are looking for someone to give that to them, right? So can you see how that could create some strife in some conflict and what happens in most relationships? Right? So recently I was thinking about this and I came up with this theory that humans that have that idea of I want to be loved unconditionally are trying to find a love that only comes from your mom and dad, your mother and your father. If you had if they were in your life, you're blessed and if they weren't or you didn't have a great mom and dad, it probably left you with this whole and then you go looking for a human being to fill that hole who never signed up for unconditional love. They're looking for more of like an agreement. I'll handle this part. you handle that part, right? Like that's how relationships end up ending up. That just isn't when anyone starts with well, business isn't much different. Like that's what I'm getting at is this is human nature. Everybody needs to be getting something out of it.
And if they are they're usually willing to give. But if if it's a one way relationship, it doesn't work unless it's your mom or your dad. Even grandparents are not a one way relationship there. They're going to give to you because your mere presence is giving something to them. But they're still getting something out of it, right? Your parents are the only people that don't expect anything because by loving you, they're loving themselves. Like you're kind of a part of them and that's how that that's why there's an exception there. So so many people ask this question of how do I find the mentor and they're looking at it? Like how do I find the parent, I never had to help me with these problems that don't expect anything from me and then they're just always frustrated that that doesn't work. And when I'm positing here is that works against human nature. There's nobody who's really successful with a lot of the problems that like can you imagine the problems Elon musk is dealing with on a daily basis. He doesn't have a whole lot of peace.
It's just when you run the company, you're the person that deals with every problem that no one else knows how to solve, right? It's like being the best doctor in the hospital. They're only calling you when all the other doctors could not figure out what to do about this. And so you're freaking challenged all the time. That's what the people at the top of the heap look like that. We're all looking up to and we're saying we want you to be my mentor. And those are the people that tend to have the least amount of resources and mental energy to spend helping the new person. Right? And so it's like that system inherently is designed to be really screwed up. Um, if you, if I wanted to be like an airplane mechanic, I wouldn't, if I went to the best mechanic that existed and said, can you teach me how to do this? The answer is probably no because I have to fix all the airplane stuff that the other mechanics don't know how to fix. I'm, I'm really busy with it.
Right? So a better question would be, how can I find a way to be useful to the mentor that I want? Okay, so you got to go look for the person that you think I'd like to be that person's mentee, I like their integrity. I like their style. I could see myself becoming like them. I like their approach. Like whoever you pick as your mentor, you're gonna move in the direction of them and many times this isn't even someone you meet someone you listen to on Youtube, right? So someone's listening to me versus Grant Cardone versus robert, Kiyosaki versus some other real estate guru, person, like you're gonna move in the direction of that person who's telling you all the time, how to think and how to act and what values to have, So you want to make sure that someone that you want to turn out, like first off and then the next question should be, what do they need? Right? So if you wanted Grant Cardone to be your mentor, this is me speculating if you, you would have to find a way to help him raise money because that's what it's on. Grant's mind constantly never stops thinking about how do I raise money? So if you went to him and said that Grant's brain immediately goes to like, well how would this help me?
And if you had a plan in place that could help him raise money that he bought boom, you probably got a shot at him being your mentor. If you just show up with nothing that only works with mom and dad, okay, now this isn't directed to you Cody because you're just sort of the person who brought this up, this is to every human being that asked this question, how do I find a mentor that doesn't realize that what they're actually asking for is how do I find the parent I never had, how do I find the person that cares about my career, cares about my well being, wants to see me succeed, is willing to be patient with me, will answer all my questions, will hold me by the hand, all things that parents do for their
kids, but I
don't have to bring anything to them, right? So you're a smart guy, if you fix problems with airplanes, your brain's already thinking the right way, right? Like something's not working the way it's supposed to be working. The first step is you got to diagnose why it's not working and what the possible system malfunctions could be right, like from the end working backwards and then eventually isolate whatever that problem is and then your brain switches into how do I actually fix it is a part? I need to order, did something break that I need to put back into place? How do I take something else apart to get to whatever that piece is, It's very structural right? We'll learn how business works. What are the pieces that someone needs to make a business work? Like Henry said, do they need deals? Yes, they do you find a way to bring somebody a deal? You are inherently valuable? They're gonna want to mentor you, but they're not gonna want to mentor you because they're your the child, they never had, they're gonna want to mentor you because you bring them more deals, that's what makes it mutually beneficial, right?
Like I mentor everybody that's in my companies. If you work on the David Green team or you work on the one brokerage, I'm your mentor because I want you helping my clients better. It makes me look better and it makes us all money. Right. I'm not going to mentor someone I don't know in another place that I've never met and I have no idea what kind of human being that is. Does that make sense? Right. So if if I had people reaching out to me and saying David, I want you to mentor me, how do I join the one brokerage? That would be a good way to start that conversation versus, hey, you don't know me. I live in a state that you don't live in and I know nothing. Would you be my mentor? Like does that make sense?
Okay. Yeah. Henry, you have something you wanna add there?
Yeah, absolutely. I love how you took what I was trying to say and made it sound so much better. So I appreciate that. Um to uh so absolutely, I want to give you like practical. Like, so I'll talk to you about the last two people that I've mentored that came to me out of the blue, right? So to put some practical around what they would just said, one was, one was a contractor. So instead of just approaching me and saying, hey, so when he found me, he liked what I brought to the table as a person and said, you are somebody like as an investor, I want to model my investing career after. And instead of just saying, hey, mentor me, he said, Hey, I see that you're doing projects, looks like you need some help from a contractor perspective. I'd be willing to do a bid on the next job that you have and all you, all I would want from you is that you pay the labor for my guys right? In exchange for you being able to help guide me answer some questions point me in the right direction.
for me that was huge. He 100% was right. I did need some help with some contractors. He noticed that by following me on social media by networking with me at certain at real estate investor meetups. And then he came to me with a solution, right? And so I absolutely took him up on that. I asked to see some of the work that he currently has going on and then I asked him to give me a bid on a project, a labor bid and he did and he did that project. He did a good job. And so now if this guy calls me, I'm answering his phone, answering the phone, I'm answering his questions. I'm helping to guide him right because he brought, he solved a problem for me, but he had to get around me to understand what it is that I needed and see how he could help in that arena, right? The other person was somebody who did exactly what I told you to do, right? They came to me and they said, hey I found this deal, I don't know how to take it down, but if you help me take it down and guide me, We can be 5050, I wouldn't, I took a look at the deal, I knew the person a little bit from, from playing sports with him previously and I said let's do it and so now we can we talk all the time, we own this property together and she's getting a firsthand look at like how I approach real estate and how I, you know, approach getting a renovation done and how I'm gonna approach picking tenants and how I'm gonna approach managing that property, you know, a front row seat to all that because she brought the value Yeah,
it's in a, it's a form of a partnership, it's not free, right? You're, you're providing something also now you're not providing the same thing as the mentor and that's something just to keep in mind. But that's the approach you gotta take is Henry likes this person, he trusts this person, he thinks that they have some value there, probably helping with managing the rehab, they're taking some stuff off his plate, they're helping him be more successful in some way, which makes it mutually beneficial, which now makes sense for him to invest into this human being, right? Just don't find yourself in a position where you're trying to learn from someone that you have no way to help them because you're now dis incentivizing them from investing in you, none of us invest in the rental property that isn't making money, we don't put more money into money pits, Right? So if you can take that philosophy moving forward and say, how do I make sure that I'm bringing value? What is my value? It should lead to all these really good questions. You're a smart brain, you diagnose problems. That's a great way to start with. Like when you're talking, real estate investors say, what are the hardest parts of your job? What makes this, which makes this suck for you? And if they start talking and realized I could help with that, just go help come back and say, hey, I found the person that you think you need to fix the H Vac and they'll do it at a lower price, something like that.
Boom, you're in the inner
circle phenomenal advice. Just fix the problem. Don't ask if they need help and bring them the solution on a silver platter, they'll give you the world, man.
All right, there you go. Alright, thank you Cody, Good luck to you. All right, before we move on to the next portion of our show, let's take a quick break to hear from today's show sponsors.
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F S. T. O. C. K. Dot com forward slash B. P. Stacy. Hi, what's on your mind today, Stacey? I am thrilled to be here. David love this format and Henry. Your I.
G. Post caused me to push that submit button. So thrilled to be here. Um I live in paradise which means right now I'm sitting in Tucson Arizona and sometimes I live in the beautiful pacific northwest and in Honolulu hawaii
know right, We are unorthodox investors in that. We've picked these places we want to live. And then we have our plan B. And then we've started getting more involved in real estate investing and we've chosen to do it within our home state of Washington which can be an expensive market and doesn't always pencil out great from a cash flow perspective. Um But we've always kind of, you know toyed around with this idea of what's our plan B if this doesn't work, give you a recent example we took, we acquired our first short term rental property, it's not in a vacation destination. So we weren't sure how it was going to go. Um But it's uh it's a home that zoned residential office and used to be a counseling office. So our plan B. Was you know if they change the short term rags on us or something else comes up maybe we can turn it back into some sort of office rental. Um So we're that's how we kind of mitigate this idea of not having this perfect cash flow and and and handling all that. So here here's my question one. How do you know when to pivot?
I gotta tell you my first guest, I was on a trip to New York and they're blowing up my phone and I was like that's it, we're not doing this, let's get out of this. So one is how do you know when to pivot from you know to your plan b. Um And obviously if it's a change in rags that's an immediate but when it's just not working out, how do you know when to double down versus switch. And then second is how do you you know how are you smart about it? I'll give you an example. We have another one that's a long term flip and hold that we were gonna you know fix up and turn into a long term rental which means we were choosing certain finishes and and whatnot. But then we were all of a sudden seeing this market appreciation. We're like maybe we should, you know flip and sell. So how do you make the wise decisions when you do plan for a plan B. So you find that middle ground? I hope that question for those questions makes sense.
you think? Henry?
Yeah. Yeah, they make sense. And so um, so for me I am paying attention to or what I try to stick to is so I set goals on both. What I want my business to look like and what I want my my life to look like. And um I know it's time to pivot when the results that I'm getting from that asset are not meeting the goals that I had in mind. And also I would look at look through the lens of these assets, is it truly that you are needing to pivot or is it just that you know that that it's that it's bothering you right like that something's not going perfectly according to plan and it's bothering you. And so your brain is now looking for like a different direction to take that asset in And when when when I get in that situation then I just have to go back and look at the numbers. Is this asset what I wanted to buy to meet my goals if the answer is yes. Okay now is it producing the results that I wanted to produce if the answer is yes then okay then it seems like I just have a process problem. Like I need to fix the process that's causing me the headache so that I can keep the asset because it's doing the things that I wanted to do. It fit my buy box, it fit my results that I want from that product. It's just giving me some sort of a headache in between there.
And that just means I need to go fix that problem. So is it that I need to hire a property manager or Airbnb property manager? A short term rental property manager or is it that I need to bring somebody in Aviva or someone that can handle taking those phone calls for me. So I don't have to do that portion of the management. Right? And so just remember your goals and then look at the results and if they're meeting those things then I would look at solving a different problem. But if they're not meeting those things then that's when I know yet it's probably time to pivot. Does that make sense?
That makes perfect sense. You know, we wrote our goals at the beginning of the year and I know exactly where they are and they've been there ever since. So I think your point is so solid. It's time to pull them back down right? And just once a quarter check in. Is this you know, are we on track? I hadn't even thought about linking it back to gold. Super smart. Okay, so after hearing that what questions remain, I think you know the other problem that I started thinking about this is you, I thought it was gonna be the second part of what you were talking about is how to not get caught in that shiny new penny syndrome. Right? Because everybody gets excited about short term rentals. So everybody wants to go out and try it and get those blockbuster numbers.
So and and and that's that's the other issue that you know that I have and you know, I invest with my husband who's more like stay the course steady Eddie and I'm like let's go, let's go change up the world and do it all different. Right? So trying to find that balance between us is a tough one too. So I don't know if you have you know, kind of any guidance on how to do that with partners, especially once you're married to.
can't I can't yeah, I can't offer you help because I'm not married.
forget that. That's a struggle other people have to be honest with you. Like every once in a while, Brandon or Henry will be like how do you get your wife to whatever. Oh, I forgot you have to do
Right. My my struggles are with my own schizophrenia of all the different aspects of David that want to do all these different things and I argue with myself, I forget that there's actually other human beings that you have to. So I can't help you there. But I can possibly help you. Or maybe muddy the waters worse when it comes to the shiny object syndrome when you're saying shiny object syndrome. But what I think it's not that as much as I know I am talented, I see the vision of how to make this work. I want to use all of my skills and I'm willing to take some risk. And your husband's like know that the tortoise won the race. Just keep doing with what's working. You are an offensive mindset Stacey. You see what's possible and you want to go out there and make things happen and your husband is a defensive mindset. His his vision is geared around not making mistakes and not losing capital.
Okay, both need to happen. So what we're really talking about is how you marry the two together. Um This could be an entire show. In fact, maybe we'll have you back on and we'll get into like I'm having so many thoughts that run through my head about how to do this the right way. Um The first thing I want to address is, I don't think, I mean it's shiny object syndrome is a thing. You see people that jump from exciting opportunity to exciting opportunity. But I think that's more of a problem when it's in a completely different asset class or opportunity. So if you quit your job working at a C. P. A firm and you go try to be a multilevel marketer and then you quit doing that and you go try to be a personal trainer. Like that's clearly you looking for something to fix a part of your life through your job that isn't gonna work okay if you're, if you're in real estate and you're like this strategy was working but it's getting harder and harder and harder to make it work. I gotta move somewhere else to me.
That's more like this. Well isn't producing water, I want to go look for another. Well, so I don't deter people from that and that's why I'm using, I'm kind of clarifying, I don't consider this to be shiny object syndrome because it's not motivated by just something fun or I have a hole in my life I'm trying to fill. I feel like that's what shiny objects, this is almost motivated by God, it's getting harder and harder to make it work this way. There's got to be another and I think that can be smart, right? Like that's one of the things that I haven't figured out what jiu jitsu is, someone will have something to stop me and I will just try to overpower that thing and wear myself out. And my instructor will say why don't you just move your hips to this side and there's and I didn't even think about that, I just kept pounding away at what I was doing okay. And I am like you in the sense that I am adjusting strategies and when it comes to real estate, luckily I'm the black belt. I'm not the white belt so I can see, man, it's too hard to make it work this way. We got to change something and a lot of people will not adapt. That's where your husband's strategy can actually get you in trouble. So I keep going back to this analogy of the NFL and they changed the rules for how the game is played to where you're not allowed to touch wide receivers, you're not allowed to touch the quarterback.
It made offense much easier. Well the teams that didn't adapt that just said no, we're just going to keep running the ball over and over and over. They just started to lose because the rules don't benefit them. They're at a huge disadvantage. So short term rentals became popular in large part not just because the returns are higher, but because you could not get cash flow any other way. This is more like why are the mountain lions coming into town while we're chopping down all of their freaking where they live, We're chopping down all the forests. They gotta go somewhere right. Like we've pushed people into short term rentals with the lack of inventory and the lack of cash flow and now you're finding that now that the mountain lions are in town. There's a lot of municipalities that are like, we need to shut down short term rentals. We don't like these mountain lions walking around. And so a lot of people are gonna get stuck like the mountain lion that thought it was safe going into town. That's when animal control is gonna get called.
So to me, that's the conversation we're having is how do I safely bounce from asset class to asset class within real estate without getting caught buying a short term rental? And then they say that they're outlawed or not understanding how to underwrite a short term rental and then finding out it's actually costing a lot of money that being said, if we've kind of clarified it, what thoughts are going through your head when it comes to how to do this with you and your husband. I think what you hit on is exactly right. It's offense and defense, right? And I think at the end of the day, a game that's well balanced is what causes you to win. And so I think it's us coming together and, and to Henry's point going back to our goals and saying, okay, is it time to pivot? Because we're too far off course from this school. Um, you know, the, the idea of the short term rental came because we wanted to stay in Washington, we wanted to self manage and you couldn't, you couldn't do that anymore with long term rental for where we were at. And so I think that what's really clarifying for me, uh, is to pull up a little bit from the numbers. When do we pivot? How do we do this and be like, what's our goal and how do we play a perfect game that balance between offense and defense And, and that's honestly in just a few minutes. It's really helped me to see, you know, let's sit down, let's make sure we got a well balanced game and we're focused on what our goals are.
That's awesome. Here's the advice I'll give you when you have that conversation to keep it productive. You each make up a half of a whole, you need offense and you need defense. Okay? Imagine a football team where the offensive coordinator is saying we want to throw more long passes, we want to throw the long bomb. We think we can air it out that may be good for the offense, the defensive coach might be hearing, we're going to take some big risks and if we, if it works, we're gonna score really quick and if it doesn't work, we're gonna turn the ball over. But either way the defense has to come back on the field really quickly and he's like, I gotta get my guys a break. This does this strategy does not work for us because by the fourth quarter they're gonna be so exhausted. We're not able to stop a team, okay. And you may have the same thing happening from like the defensive side where he's like, I wanna blitz, I wanna blitz, I wanna blitz blitz blitz constantly and the offensive person thinking well like if that works, uh, if that doesn't work, we're going to get the ball back in a really bad position or something, right? So what I'm trying to say here is there are ways that will work for defense that don't hurt the offense and there are ways that hurt the offense and vice versa. So when you guys are having this discussion, when you're coming up with the, with the possible, hey, we could do this to make money.
Your brain should be thinking, how do I make money without hurting the defense, right? How do we limit the risk or limit the downside? And he needs to be thinking the same thing, how do I protect us? But still give us the opportunity to have an upside. And if each of you can approach it from that perspective of my solution cannot hurt the other side, at least not significantly. You'll probably come up with things that you guys are both gonna be excited about.
Who says you're not good at marriage counseling?
I love the football analogy. I oh, did you guys hear that a sports analogy that people didn't complain about thank you Stacy, I need more of
This has been, this has been gold. Thanks to you both. Thank you Stacy, we really appreciate you being here. Please come back on and let us know in the future what you thought. And if you're listening to this on youtube, please consider right now going and leaving us a comment to let us know what you thought about Stacey's situation. If there's an angle you can see that maybe we miss what advice you could offer her as well as what type of question you'd like to see in the future. All right, Colin what's on your mind today? Yeah. So um obviously we just filed their taxes. Um
We were looking
at reviewing them with our accountant and I noticed our depreciation for a property that we had. We've owned the property for about five years. Um You know obviously Northwest Arkansas, like all markets have appreciated a lot. So I'm looking at the cost basis of that property and what we're depreciating and wondering if there's a way to raise that so we can increase our depreciation amount each year without having to sell the property. Okay, so this isn't legal advice run this by your C. P. First, but here's my understanding when you make improvements to the, Okay, actually let me back up and explain what you just asked. Can you share what you paid for the property? Yeah. 1 40. Okay so you paid 140,000. You're dividing that by 27.5.
That's how much depreciation you can take off every year and your cash flows are higher than what the depreciation shelters. Right? Alright. And let me tell you why that's happening. You already know. But let me explain it probably the lower that you get in price point, your price to rent ratio typically gets stronger. So when you get into lower priced homes, that's when you get the 1% rule, the 2% rule, they cash flow stronger theoretically, when you get when you get a good one, okay, the higher of a price you go into real estate, the harder it is to make it cashless. So here's just like a principle that you can apply to in general, like when I was playing basketball, there's a role. The closer you get to a guy, the harder it is for him to shoot, the easier it is for him to get past you, the more you back off, the more space you have to react, the harder it is to get past you. But the better he can shoot you're trying to find this balance right, When you buy more expensive real estate, the cash flow is less so that your your depreciation covers it and then you can usually have leftover depreciation to cover something else where you have the opposite problem, you got all this cash flow, but your depreciation isn't sheltering. So that's what Exactly. That was one of the the ah ha's when I went to our taxes, I was like, I thought depreciate.
Just general rule of thumb depreciation would cover our kind of income, but it did not this year. So trying to figure out how to
So thank you for highlighting one of the ways I give people advice when I say cheaper, properties don't actually equal safer all the time and you should buy more expensive markets. I've been getting heat about this like David sinks cash flow isn't the only reason to invest. It is it just gets there's more nuance to it as you're finding out right now Colin where this isn't working as well. So on the next house you buy you probably want to consider going into a nicer neighborhood that might appreciate more rents will go up more over time and you'll have more appreciation now for the problem you're in. I can now kind of comment on that when I thought when I first started buying properties that if I bought a house and I spent a lot of money to fix it up, I could, that would be like a write off against my income. So I'm like oh I spent $30,000 to fix up this $140,000 house. So All my rents will be covered because I didn't make more than $30,000. I thought it was a loss but that isn't what they do, they take that That that you spent to fix it up, they added to what they call the basis of the property. So for your case that would be like $140,000, what you paid minus whatever the land value was. And they say okay so in this case it's kind of like you get the depreciation of $170,000. House, not 100 and 40 if you spent 30 to fix it up. So that is one way to bump it up.
If you spend a significant amount of money to improve the property, the same is true if you're furnishing it. So like with the Airbnb stuff that we're doing when I spend money to buy furniture or amenities for the property, they're gonna take what I spent on the house and they're going to add it to the basis. I'm not gonna get subtract all of that in year one. Are you with me so far? Yes, yep. Okay so my mind as I was just talking, started thinking about how small is the house, what's the square footage of it? uh 1600
So it's not tiny but there's definitely room to go, I would probably talk to an engineer and see can I pop the top? Can I make it add more square footage to it? Now I'd make sure that you're in an area where the demand for rentals would support that. But the pop top, put something above the garage or even convert the garage, something like that is a pretty good bang for your buck, you're going to add square footage to the house which makes it worth more. I bet you're gonna improve your basis. Okay then you can refinance when you're done you've improved your basis but you spent money. Well now you can get that money back out on a refinance. So you go ahead. You have thought there. I was just gonna say so that comment right there. I have a kind of a a second part of the question was when you refinance obviously it's been talked a lot about the past few years about refinancing because of the low rates. Does that increase your cost basis when you refinance?
You know I would email my C. P. A. And I would ask right now and they can answer that question for me pretty quick. So I'm not positive because I haven't had to do that yet. I don't think that it automatically does. Just I don't think that you get to take the new value on a refinance and say my basis has increased to this much. I do think you get to take the money that was spent on the refinance like your closing costs that might be able to be added to it. But I think the money that you spend to fix it up would absolutely be added. So if you spend $40 or $50,000 even if you borrow that money the government doesn't care Right now you've bumped your basis up from 140 up to maybe 200 if you spend 60, but you just lost 60,000 because you spent it or you borrowed it. Well, you can refinance it to get that cash back, pay off the money that you borrowed or pay yourself back. Now.
You've improved your basis and you've improved your cash flow and you've improved your property. Yeah. I mean that sounds like a win win. I
was just going to say
I was listening to uh, to people ago
and you're just like, make sure
they get that comment about how I just dropped some knowledge on them. So yes, that was
Now the Caveat I'm gonna give you because I always do this, I can't help myself. I always just see worst case scenarios, right. It's not what people don't like it about me. Like maybe 5% of population thinks I'm cool. The rest of them just think I'm annoying that I'm constantly talking about what could go wrong. Don't do this. If you're in a bad neighborhood, a bad area, it's a bad property. Okay. That is just throwing good money at bad. So if you're like, I never get good tenants or I can't find tenants at all. Don't assume that making your house bigger makes it better if it's in a good area that works. If it's in a bad area, you just made a bad house worse.
Yeah. No, this actually fortunately this isn't a good area,
This is, this is one of the unique opportunities where I get to give like localized advice. I live here.
I was like
yeah so it's so my advice was David nailed it, that's what my advice is going to be. As I was like, you got to improve the property. Um But but knowing what I know about where your property is, here's so pop tops are great. Um But can be difficult, depends on the layout of the house, blah blah blah. Right? So um Fayetteville is very bullish on a. D. U. S. Right? And so Fayetteville will allow you to put in a. d.
U. one attached and one detached. Hm. So you could take your one unit property, turn it into a three unit property. You can, so that's improvements which improves your cost basis. Plus you can Airbnb those units, you'll have to get an Airbnb permit through the city of Fayetteville to do that. Um So now you're increasing your cash flow substantially because as you know, that's Fayetteville, it's an Airbnb, you know, amazing place to do that. So um and David's right, you want to make sure you do that in good neighborhoods. The benefit to Fayetteville is, there's like one bad street in. Uh So yeah that's what I would look at is how can you improve the property and knowing what I know about what Fayetteville is willing to do with a D. U. S.
And um allowances for setbacks and variances and things. There's something you might think about awesome.
Here's what I'm gonna leave you with Colin. This is my what I'd love to see ideally you pop the top you had upstairs, you get an engineer to bless it and say yes it can support it. Then you look to see where you can build onto your existing structure at a. D. You if you can avoid having to do a stand alone, Okay then you wanna throw a little bit of razzle dazzle on this puppy. You look at converting the garage and you put a separate entrance to your upstairs from the outside and you end up with the downstairs that you got an upstairs that's a separate unit that can be rented out and 80 the 80 you that can be rented out and then a garage conversion. If you're just a little bit of icing on the top of that bad boy and you just added an extreme amount of cost bases and a lot of cash flow and you're gonna be a Fayetteville celebrity when you're like yeah look at what I just did to my thing
and if you're looking for a partner that's local, you know, I'm just saying you can, I was just gonna say somebody maybe, you know yeah
awesome. Well hey guys, I really appreciate it. Yeah, we appreciate you man, good luck with that, we'll be rooting for you All right and that was our show for today man. That was a lot of fun. And I think we might have actually given some practical advice. What do you think Henry?
I think we might have helped a person or two. I'm in for it.
Yeah, that was a lot of fun. I love these live call in shows and I wanna know is it just me or do you guys love them as well? Please leave us a comment on Youtube and tell us if you like this style or if you prefer a different style. I mean at this point we've got a whole lot of different uh buffet that you can pick from. Do you like the story, hearing someone talk about what they did. Do you like the seeing green? Do you like the new stuff where we comment on what's going on the market or do you like these kind of coaching calls? We want to know because we want to make more content geared towards what you like. So leave us a comment on Youtube and please subscribe to this podcast. Subscribe on Youtube. Subscribe on itunes wherever you're listening. It really helps.
I know that right now bigger pockets, we are the best real estate podcast in the world, but things are changing. A lot of attention is going to Tiktok a lot of it's going to instagram a lot of it's different like 32nd sound bites where you can't actually get the full level of knowledge that we're trying to bring here. So what I'm saying is we need your help to stay at the top, please subscribe and let everybody else know about this podcast, we want to grow it. Henry, what do you think about today?
Today was fun man, it was like, it was like being a member of David's tax marriage and legal advice brokerage, mind you, we're not professionals at any of those things, but it was, it was a fun episode because you know, real estate investing, I know you said you you know, you're not married and so you forget that people have to, you know, work with their spouse sometimes, but real estate investing with a partner is, is like your second form of your, of your marriage and you know, hearing how other people are kind of dealing with those struggles is it's fun for me and it's encouraging for me too because I, I too have a spouse who I'm in this business with and um we talked about it on a previous episode, becoming a real estate investor helps you build wealth, but also helps you become a better person. It can also help you become a better spouse. So super fun,
really good, I love that advice, Henry, you always drop these little nuggets that are inspirational and insightful at the same time if people want more nuggets, where can they find out more about you?
Absolutely, you can catch me on instagram is the best place I'm at the Henry Washington on instagram.
Can they pronounce it? The like the Ohio state,
you can pronounce it the, you can pronounce it the Henry Washington, you can, I've got the website too, you can go to the Henry Washington dot com or the Henry Washington dot com. Alright,
You can follow me online at David Green 24. Check me out and tell me how my new social media company that is helping running my page is doing. I would love to have that. And then if you'd like to be introduced to my C. P. A. To one of the loan officers on my team to a real estate agent. My team, please reach out to me as well. I'm beginning a lot of people that went with someone else and then came to me after the fact and like what do we do? We're in trouble. And my answer is always, you should have come to me before you did it. So in general, no matter who it is, you're going to don't work with the first person you talk to unless they're a rock star that was referred to you by people and you know, they're really, really good like ask ask around to make sure you pick the right fiduciary that you want representing you before you get into this Henry, I just want to thank you again.
It's always fun doing these with you. They're always a little bit scary because we never know what the guest is gonna throw at us and we have to kind of think on our feet, so it sets our podcast apart from other podcasts or people don't do this time of thing nearly as much, but it also makes your butt pucker a little bit like, oh man, I really hope I can give some
advice. I have no problem lobbying grenades right back at you when they come through, so I'm good with it.
Alright, my friend will have to do it again sometime. This is David Greene for Henry, Call of duty Washington signing off.