February 2024

In the ongoing quest for happiness, a recent Empower poll disclosed that around 60% of Americans believe money can indeed buy happiness. 

However, the dynamics of money’s role vary from person to person. For 67% of respondents, happiness hinges on the ability to pay bills on time, while more than half prioritize living debt-free and enjoying luxury without financial worry. Another 45% see homeownership as integral to their path to happiness.

Current Financial Realities

Even with a median household income of approximately $74,000 annually, Empower’s findings suggest Americans feel the need for an income of around $284,000 per year to achieve happiness. Respondents believed they required $1.2 million in the bank to feel content ($1.7 million for millennials), surpassing the median net worth of U.S. households, currently standing at $192,900, per the Federal Reserve’s 2022 data.

Moreover, these revelations come at a time when economic stress is on the rise in America. With inflation persisting for over a year, 81% of poll participants feel burdened by rising costs, and 66% attribute their diminished sense of financial well-being to elevated interest rates.

The reality is that the financial landscape is evolving, sparking intriguing questions about the intersection of finance and happiness and reigniting the age-old debate about whether monetary wealth is a genuine gateway to contentment.

Or is there another way to change our relationship with money and its connection to our happiness while we are on our wealth-building journey?

Living Happy Now (and in the Future): The Happiness Formula

Changing your money mindset is a crucial first step to transforming your relationship with money and perceived happiness. The Happiness Formula is based on Vishen’s work, a pragmatic approach to identifying and pursuing true happiness. This exercise transcends wishful thinking, grounded in actionable steps designed to align personal aspirations with a fulfilling life. 

Here are the steps to follow.

Step 1: Name what doesn’t make you happy

Humans are way better at stating what we don’t want than naming what we do want—it’s our brain’s way of protecting us. So why not use this natural instinct to your advantage and create space—mentally or literally?  

On a sheet of paper, jot down all the commitments, people, belongings, and even investments that are weighing on your mind and aspects of your life that bring discomfort. Once you have this list crafted, you don’t actually have to act on anything—yet. By just acknowledging the things in your life that are weighing on you, your brain will start to find ways to help you out—setting the stage for the next crucial step in the pursuit of happiness.

Step 2: Identifying your happiness formula

In this step, grab another piece of paper and answer these questions to craft your unique Happiness Formula based on the experiences, growth, and contribution you want in your life. If you have a partner, spouse, or kids, consider doing this exercise with them after you have taken your initial pass.

• What do you want to experience? Think of all the experiences—new and old—that you want to bring into your life or that bring joy. Consider all the local, national, and international experiences that you dream of doing. This might range from exploring the vibrant local culture of your community and attending music or cultural events with loved ones to embarking on international adventures that broaden your horizons.
• How do you want to grow? What makes most people happy isn’t hitting a goal but the change and progress they make along the way to hitting the goal. For this question, reflect on the personal and professional growth you dream of making. Identify the skills, mindset, and knowledge needed to propel yourself forward. Recognize that growth extends beyond the workplace, encompassing personal aspirations that enhance overall life quality.
• How do you want to give back? When most people consider how they give back, they think they have to donate a sizeable chunk of money or time to a specific cause or charity. However, I challenge you to think of all the ways you can give back—whether through time, money, or yourself.

I’ll also give you a big hint—giving back doesn’t have to be some grandiose gesture. Sure, for most busy people, regularly donating (ideally monthly) to a cause important to you is probably the simplest place to start. However, also think of the impact you can create by sharing your time and expertise with your community—be it writing a blog, attending a meetup, creating a podcast, or if you are a parent, investing more time with your kids. Most importantly, ensure how you contribute aligns with your life vision.

Putting the Happiness Formula Into Action

Now that you have the gist of the Happiness Formula, schedule time on your calendar to regularly check off items, cross off items that no longer align, and add new ones. If you have a partner, spouse, or kids, have each individual complete their own Happiness Formula exercise and come together as a group to see how you can support each other.

Final Thoughts

The Empower poll sheds light on how people think happiness comes with a price, making everyone take a closer look at what really matters to them—thus wrestling with the delicate dance between pursuing financial freedom and living a fulfilling life. 

In the constantly shifting money scene, the Happiness Formula is a down-to-earth approach to steer through personal dreams and cook up some real contentment. In the end, happiness might have a price tag, but figuring out your own special formula could be the secret sauce to unlocking a truly satisfying and happy life.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Marc Lipschultz, Blue Owl co-founder and co-CEO, joins ‘Money Movers’ to discuss the current environment for private credit, what banks reentering the lending space means for Blue Owl, and more.

“You’re making too much money.”

That’s what echoed in Missouri native Ryan Haywood’s ears after his boss decided to slash his commissions—a “sales haircut,” as it’s bitterly known in the industry. 

This notion of being penalized for success was perplexing for Ryan. Out of all the downsides of his job—the after-hours calls from his boss that he was expected to answer, dealing with poor management, and working up to 80 hours a week—this pay cut was the last straw. He didn’t realize it at the time, but this setback was about to unveil a path that would lead his family toward the future that Ryan and his wife Megan had dreamt about.

Ryan’s story that I’m about to share is not just a testament to his determination to build his wealth on his own terms. This story is about his strategic, practical approach to building a truly successful real estate company in the face of uncertainty, full of solid insights that every investor should hear.

Ryan’s Journey From Sales to Real Estate

It was the end of 2019. Ryan and Megan were in a period that should have been filled with anticipation and joy for their family as they awaited the arrival of their third child. 

Instead, uncertainty loomed. Despite the lucrative nature of his job in the budding field of fiber optics, the instability and lack of appreciation left Ryan yearning for change. He was caught in a dilemma: a high-paying position that offered little in terms of job satisfaction and stability. And to make matters worse, the company he worked for just decided to cut a large chunk of his pay because he was making too many sales.

Ryan knew something had to change; he just hadn’t yet realized what that change would be. Shortly after receiving this news, Megan and Ryan had their third child. This meant Ryan was on paternity leave and suddenly had extra time on his hands. He wasn’t sure what his next steps would be—all he knew was that he couldn’t go back to the toxic workplace at his current 9 to 5 job.

It was during this time that Ryan’s wife Megan stumbled across a 30-day wholesaling challenge on Instagram and brought it up to Ryan. They had dabbled in real estate investing years prior with a couple of rentals but had been paying them very little attention. Ryan wasn’t initially interested in the idea of wholesaling, and the idea of a “30-day challenge on social media” seemed a bit like a gimmick at the moment, so he declined.

But after some thought and some persistence from Megan, he decided to give it a go. As it turns out, this challenge not only introduced him to the fundamentals of wholesaling but also ignited a passion for real estate that was previously untapped.

Initial Steps and Challenges

After pushing past his initial reluctance, Ryan went full steam ahead on trying to win the challenge—this meant landing your first wholesale deal within 30 days. This entailed driving for dollars to find distressed properties, reaching out to the homeowners (in Ryan’s case, via direct mail), and securing a purchase contract from the seller that Ryan would then assign to an end buyer.

Contrary to his later experiences, Ryan’s first deal came from word of mouth (in this case, that meant telling people around him at dinner what he was doing) and did not involve intricate negotiations directly with a seller. Instead, it was the process of learning on the fly—figuring out how to assess the value of properties and the cost of needed repairs with limited prior knowledge in this area. 

Despite these initial uncertainties and the steep learning curve, Ryan’s persistence paid off when he secured his first real estate deal. This pivotal moment was not only a testament to the validity of his new career focus; it also resulted in a significant payoff, earning him an $8,500 finder’s fee. 

Like many investors who came before him say, this deal was massively important. And not just because of the $8,500 check—that was just the icing on the cake. This deal was a proof of concept that wholesaling as a strategy works. In other words, the business model was proven right in front of his eyes.

Ryan admits he was still “terrified” of wholesaling at this point since he still had very little knowledge and understanding of the industry. Nevertheless, with the check in hand, he knew that this was the path forward for him and his family.

When the challenge was all said and done, Ryan ended up landing two deals in 30 days, totaling $28,500. This number was the base salary at his last job. He had successfully escaped the rat race and, as it turns out, would never set foot in his old office again.

Scaling Up and Embracing Technology

Ryan and Megan’s focus at that point then became getting more deals and repeating the process. From the very beginning, they knew that they wanted it to be a family venture, even packing up the kids and bringing them on business trips to ensure that everyone was benefiting from experiencing the lifestyle that was bringing them so much success.

They needed reliable, efficient tech to manage processes and allow them to actually find success while traveling to new markets and cities to explore investment opportunities. Thanks to DealMachine, the tech platform at the center of the 30-day challenge, they were able to travel while still building and working on their business.

Because of their adoption of technology, scaling came naturally for them. Wholesaling is a numbers game—to grow your business; you need more leads, more marketing, and people in key positions to help ensure a smooth pipeline. DealMachine helped them with all of this and then some, allowing the leads to keep flowing and marketing to continue on autopilot while Ryan and Megan focused on the most important parts of the business and spending time together as a family.

To get a deeper insight into how they scaled from getting their first few deals, here’s a breakdown of the numbers in the first couple years of their business:

• First full year (2020): Achieved 73 wholesale transactions with no standard operating procedures (SOPs) or employees—just Ryan and Megan working together.
• Following year (2021): Completed 113 wholesale transactions, indicating significant growth. This year also saw the introduction of a transaction coordinator (TC) and a salesperson, though they quickly quit. A new TC was hired, who eventually took on sales as well due to competence in this area.
• Year after (2022): Conducted 45 wholesale transactions, which might seem like a decrease but was part of a strategic shift to focus on quality and integrate construction into their business model. The team grew to eight people, and the average assignment fee increased to $10,500.
• Portfolio growth: From seven rentals in 2020 to 12 by the end of 2021, and then expanding their portfolio to 30 properties.
• Financial highlights: In 2021, they grossed $575,000, and in 2022 broke over the million-dollar mark in revenue.
• Operational shift: Started their own construction crew in 2022 to better control the renovation quality and timeline of their investment properties.

Networking and Community Building

In their pursuit of growing their business, Ryan and Megan Haywood not only built relationships with city officials but also mended fences with local real estate agents who were initially wary of wholesalers. Their efforts in renovating distressed properties across St. Joseph, Missouri, garnered Ryan the nickname “golden child” from the mayor, underscoring the impact of their work on the community’s fabric. 

This special recognition from city leadership demonstrated the benefits of their strategic relationships, highlighting how working closely with city officials was instrumental in smoothing the path for their projects and fostering an environment of mutual benefit.

These partnerships proved to be highly important in navigating the complexities of real estate development, from regulatory compliance to accessing new opportunities that aligned with their mission to uplift the community. Because the city officials (people who are often the gateway to successfully securing permits and zoning for building projects around a city) could physically see that Ryan was creating positive change, they were happy to help him. 

Some of these officials, with deep knowledge of the city’s housing, even became a source of leads for their business and guided them to properties and areas around St. Joseph that needed change. Alongside this, their engagement with agents eventually shifted from skepticism to collaboration as they demonstrated the value and professionalism they brought to the table with these relationships as well.

For Ryan and Megan, the lesson was clear: Building a network that includes both city officials and real estate professionals can significantly amplify an investor’s ability to effect positive change while scaling their business effectively.

Lessons Learned

Looking at Ryan Haywood’s journey through the real estate landscape, there are several lessons we can learn from them. By achieving over 400 deals so far, Ryan has not only showcased what’s possible with dedication and strategic planning but also exemplified the significance of adopting certain practices for long-term success. 

Here are some key takeaways from his experience, each providing a blueprint for how to navigate the complexities of real estate investing effectively:

Embrace community engagement

Ryan’s success was significantly bolstered by building strong ties with community leaders and real estate professionals. This highlights the value of networking, not just for deal flow but for fostering a supportive ecosystem that can propel your business forward.

Leverage technology for efficiency

Utilizing a real estate tech platform allowed Ryan to scale his operations by streamlining the process of identifying and managing potential deals. For investors, embracing such technologies can enhance productivity, allowing more time to focus on strategic decision-making.

Adopt a mission-driven approach

Having a clear mission, such as improving the community, can differentiate you in a crowded market. Ryan’s focus on revitalization projects earned him the “golden child” nickname, underscoring the impact of aligning business goals with community values.

Final Thoughts

Ryan Haywood’s path in real estate is a compelling story of strategic growth, innovation, and impactful community engagement. His progression from executing individual deals to achieving over 400 transactions is not merely a story of personal success but a blueprint for investors aiming to elevate their business practices. 

Haywood’s story highlights the critical role of embracing technology to streamline business operations, the power of networking in your local community and beyond to unlock new opportunities, and the impact that can come from fostering both business growth and community development.

For investors looking to replicate Ryan’s success, the key takeaway is the value of strategic adaptability—integrating new tools/methods and pushing forward while also remaining rooted in the community’s welfare and having a bigger “why.” This story shows that achievements in real estate require not just good financial judgment but a vision that extends beyond personal gain.

This article is presented by DealMachine

DealMachine empowers real estate professionals to discover and invest in off-market properties with ease, offering a comprehensive app that guides you every step of the way. From identifying potential investments to instantly accessing high-quality homeowner data for informed decision-making, we make investing simple and effective. Click to start expanding your portfolio today!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Dave:
Hey everyone. Welcome to On The Market. I’m your host, Dave Meyer. Today we’re going to be talking about the big news everyone’s thinking about, which is of course, the Super Bowl. I don’t know, is everyone thinking about it? Do you guys think about this? Well, Kathy, you clearly do because you’re wearing some sort of football uniform today. What jersey is this?

Kathy:
This is actually the Cardinals, and it is Devon Kennard, who is coming out with a BiggerPockets book very soon.

Dave:
That makes a lot of sense.

Kathy:
And his first interview on real estate was on my show, The Real Wealth Show, so I got this.

Dave:
Awesome.

Kathy:
I don’t think he gave you one Dave when he was on this show though.

Dave:
I don’t have one and I’m glad though because I would not look as cool as you do in your Devon Kennard professional jersey right now. If you guys don’t know Devon, he’s an awesome real estate investor, former NFL player. He is been on this show. He’s written a book for BiggerPockets and apparently, friend of Kathy.

Henry:
I don’t follow football too much. I like football, I understand it, but I have beef with grown men in kids’ uniforms. It’s just weird to me. I’ve never been a jersey guy. Just me walking around with some young kid’s last name on my back just always seemed like a weird thing. I just can’t get with the jerseys. It’s weird for me. I don’t know.

Dave:
Is that all sports or just football?

Henry:
All sports. All sports. It’s like I would get a jersey that you customize and put your own name on the back, but I don’t know.

Dave:
You’re just rooting for yourself. You just want to root for Henry.

Henry:
And then it’s just like everybody’s running around talking about, “We got a game. Who do we play tonight?” Sir, you don’t have a game.

Kathy:
When’s the last time you ran around the block?

Henry:
You’re not on the team. They don’t even know you exist. You got to pick your kids up from daycare and you got a chiropractor’s appointment. You don’t have a game.

Dave:
James, you got to jump in here because I know you disagree.

James:
Oh, I’ve invested some serious money into my jersey game. The Super Bowl is my favorite holiday, so it is the number one holiday. Make sure my calendar’s blocked out and I will be always watching, but unfortunately the Seahawks aren’t in there, but I’m heavily invested in Seahawk swag.

Dave:
Well, that’s perfect for you, James, because today we are going to be talking about different markets that have hosted the Super Bowl. So we aren’t going to dive into the teams that are in the game. This show should be coming out I think two or three days before the Super Bowl. We have 49ers and the Chiefs matching up. But today we’re going to talk about a couple of markets that have hosted them recently and we’re going to evaluate each and every one of them about how good they are for investment or what particular strategies might work in one of those markets.
So each of us is going to take one of the last four hosts of the Super Bowl and we’re going to break them down. So James, hopefully this is an appropriate celebration for you. Henry, you could just sit there mad for the whole time, but you do have to participate because we got a game today Henry, you do have to play it. And before we do it, we also have Super Bowl trivia to talk about to see how well you do. And Henry, I’m going to make you go first.
Do you guys know what year the first Super Bowl was, Henry?

Henry:
1941.

Dave:
Kathy?

Kathy:
I think we should toss this to James. I think he’s going to know the answer, but it’s been some decades.

Dave:
That is true. Very vague but true. James?

James:
I don’t know the exact year, but I know it was somewhere in the ’60s because there was two leagues and they merged them back when there was two leagues. I think Henry was close when there was two, but when the NFL came together, I think ’60s, somewhere in there.

Dave:
All right, James, you’re correct. It was 1967, so it was Chiefs versus Packers in 1967.

Kathy:
Guys.

Dave:
That was the first Super Bowl.

Kathy:
I’m older than the Super Bowl.

Dave:
Well, you’ve been around for some decades also, Kathy.

Kathy:
Thank you. Yes.

Dave:
That’s how old you are, some decades. Could be 20.

Kathy:
Thank you.

Dave:
All right, I’ll ask you one more trivia question and spare you. Maybe I’ll just ask James, see if he knows. Which two starting quarterbacks won the Super Bowl with two different teams?

Henry:
Are they currently playing?

James:
No, they’re not. This is easy though because it’s fairly recent.

Henry:
Okay. Okay. Okay.

Kathy:
This is easy. This seems easy. Yep. I even know this one.

Dave:
Okay.

James:
Two of the greatest. You got Tom Brady-

Dave:
And?

James:
-And Peyton Manning, because Peyton Manning won it with the Colts and the Broncos.

Dave:
Bravo. Well done James. That was a good one.

James:
Can we get Tom Brady on the On The Market podcast? I would love to interview Tom Brady.

Dave:
I don’t think we have that kind of pull, man. Kaylin just slacked us and said that she’s going to work on it.

Kathy:
Oh, he’s probably listening right now. Yeah.

Dave:
Yeah, he definitely listens. So we’ll get him on here any day now.

James:
There’s two man crushes I have, Tom Brady and Mark Wahlberg. Those are the two. Mark Wahlberg, if we could get him on too, that would be a great show.

Dave:
Mark Walberg? Okay. Who knew? All right, well we should probably move on from football, even though I’m excited about the Super Bowl. And what’s cool about the Super Bowl is we’re all going to be together for the Super Bowl this year. We’re going to be together in Denver at a Super Bowl party, which will be very fun. And if any of you by the way are in the Denver area the day after, so the 12th, we’re hosting a BiggerPockets meetup in Denver. So if you’re in the Colorado area, James, Henry, Kathy, myself and the other podcast hosts will all be there. So go check that out.
But we’ve talked enough about football, let’s get into real estate after this break.
All right, Kathy, you are the best dressed for this event today by far.

Kathy:
Thank you so much.

Dave:
For those of you who aren’t watching on YouTube, it’s like full shoulder pads. It is a really good outfit right now.

Henry:
Yeah, it’s a legitimate game jersey. It’s not one you go and buy from the store.

Dave:
It’s like a professional game jersey and-

Kathy:
It shows my guns. Look at that.

Dave:
It does. It does show your guns. And because you’re doing so great today, we’re going to have you go first. Tell us about the market you’ve been researching as a recent host of the Super Bowl.

Kathy:
Well, this city had the Super Bowl five times. The population is 3.2 million and the population growth is 1.9%. Unemployment is at a very low 3.1%. Median income is $60,000 approximately, and the median rent is about $2,000. Rent growth has been 2.7%, which seems low, but maybe high considering this past year. And the median home prices, $372,000 with price growth at a whopping 1%. Who knows what city this is?

Dave:
I do because reading it.

Kathy:
In your notes.

Dave:
Yeah, I’m reading it. Yeah, I could see it. It’s Tampa, Florida. I’ll help you out.

Kathy:
Thank you.

Dave:
Tom. Brady’s most recent Super Bowl winning team.

Kathy:
Yeah, so Tampa, Florida, would I invest there? Not only would I. I do, but not specifically in the city. And I think this is something that people should really pay attention to is they’ll see these big city names as a great place to invest, but oftentimes it’s not actually in the city, it’s in the surrounding suburbs where it just gotten too expensive in the city and people move out and jobs move out because they can get cheaper land and so forth. So we do invest, but not in Tampa, just right outside, mainly St. Petersburg, but in and around Tampa.

Dave:
Kathy, actually tell us a little bit about that because a lot of what we talk about here on the show is sort of at the metro level, like the whole metropolitan area, but you’re talking about differentiating it. So when you first started investing in that area, how did you decide that St. Pete was a better option for investing than the downtown area of Tampa?

Kathy:
Well, when I first, first started investing in Tampa, it was in 2009 when the housing market had completely crashed and I was in a different city pretty much every day just trying to pick up the pieces of that mess. There were whole neighborhoods boarded up, Tampa, most of Florida in fact, was one of the areas that got hit the hardest because it was one of the areas where investors went a little nutty and it was pre-demographic growth there. So they had the right idea, they were just too early basically into Florida. So that area went up the highest and then came crashing down the hardest.
So when I went to Tampa, we were finding properties for 20 to $30,000 if you can believe that downtown. But the issue was crime. So in a lot of these areas where if you have a lot of boarded homes, you’d have vagrants, you’d have drug dealers, it completely transformed what had been a middle class neighborhood into a D class neighborhood. So for me, Tampa was, it was just too scary to invest there in those neighborhoods. So we just needed to look out. Part of what I do is finding property managers and teams, people who can help me at the time find those foreclosures, help me, I live in California, I didn’t want to oversee it myself, so find teams. And one of those teams was showing the growth that was happening in St. Petersburg.
The suburban areas tend to have less crime in general, not always, but it was really just the property manager and local team that I found there that gave me the insight on where they’re investing. And again, that’s how I do it When you’re investigating a city, I think going, walking it, talking to people, going to the Starbucks, learning where do people like to live, but most importantly really getting to know the property managers and where they invest because they know all the secrets. They know where who’s calling and who’s wanting to rent.

Dave:
I mean that’s a great situation. I’m sure people who are listening to this now want to invest in Tampa are a little bit jealous. Are there still good options to invest in either Tampa or St. Pete or in that metro area?

James:
I think Tampa is on the upswing for numerous reasons. A, I still believe there’s a lot of relocation coming out of California, coming out of New York, and Tampa is a very hot place for people to move to. The beaches are awesome, the quality of living’s good, and they’re also improving the city. They announced actually in 2023 that the violent crime rate actually went down. And so they’re really working and I know the whole state of Florida is working on getting the crime down, especially the violent crime, but they’re making progress with their policies. And that’s also why it was ranked number eight is one of the best places to live in America as quality of living.
And so I think with these strides and then still that the attractiveness of Florida from a lot of some of these states with very high income tax, I think there’s still a lot of runway there. I personally would move to Tampa if it wasn’t such a long commute flight to Seattle. And so I still think there’s going to be a migration in. Lower taxes, crime decreasing versus if you look at some parts of California it’s increasing, and so quality of living’s going. It’s just coming around. It’s attractive. I would move there for sure.

Dave:
So what would you recommend Kathy to people who are interested in this area? What kind of tactics work right now?

Kathy:
I think in Tampa city, in the city area, I imagine there’s still lots of opportunity to renovate. If you’ve got the skills of James Daynard or Henry Washington and you have teams set up there and can find older properties, fix them up. It’s a growing city for sure. And James wasn’t kidding, those beaches are gorgeous, but prices have been high. I mean prices have gone up quite a lot since 2009, so it is going to be a little bit more expensive versus again, the suburbs.

Dave:
Tampa, I totally agree. I actually remember, I think it was our second show ever, we all picked markets that we really liked and I think Tampa was the one I picked. There’s a lot to like there on the fundamentals level, but you have to adjust tactics and sort of make sure that you’re using the right ones for an expensive type of market. With that, after we’ve talked about Tampa, let’s move on to our second city. And for that, let’s go to James.

James:
All right, the market I’m covering is Los Angeles, one of the biggest cities in our country. It has hosted the Super Bowl eight times. Their new stadium, SoFi Stadium, is absolutely amazing. I’ve been there a few different times. I do know that they did what Los Angeles likes to do and overspend and overbuild. I think they spent what, $4 billion building the stadium, which was four times what they spent in Atlanta. But anyways, population is 12,872,000, and the concern is the population growth has dropped by 0.77% this year. People are starting to leave California. Expensive life, a little bit more crime, and they’re looking elsewhere to make their dollar stretch. Unemployment is at 4.9% and the median home price, and like Kathy mentioned, it depends if you’re in city or out of city because if you’re in LA proper, it’s going to be substantially more. And then the median rent is at $2,858, with rent growth of 2%.
And now typically, and I’ve seen too with LA, it gets steady, rent growth, because of the regulation to where you can only increase it at a certain points. So there’s very steady, but it’s never really jumping that high. LA is just one of those big cities that you can make a lot of money in, invest in, especially I think if you’re a developer or flipper, it’s kind of the best avenues to look at doing there because there’s still a lot of money pouring in, inventory’s still low. And even with I think some of the issues that LA’s having right now, people are still attracted to it. It’s still that, “Hey, we want to move to LA,” that LA dream. And I think it’s good for the short term.
Personally, I would never invest there long term. There is way too much rent control going on. There’s a ton of regulation. And if I was looking at any So Cal market, I would actually pick Orange County over LA because we are seeing some massive growth in Orange County because the crime that’s going on in LA, people are reloading out, they don’t want to move off that coast of California because they can’t find a better spot, but they are going to places that are a little bit more stable. I know in Newport Beach, we’re seeing prices just climb year over year and it’s all that LA money selling and bringing the cash down south.

Dave:
So long story short James, and thank you for sharing all that information, that’s really helpful, would you invest there?

James:
I would not invest there. For me, I want to invest in climates that welcome development and growth. And there are so many regulations just pumping through California on the regular. In addition to the biggest concern is what is happening in the back end is causing massive problems. You can’t even get home insurance. It is near impossible to get home insurance in California. That is a basic need of investors and homeowners. And when you have a basic need that’s being taken off the table, that can cause issues in the market in general. It is crazy what you have to do to get just even that simplest thing, home insurance. If you want to buy a property, there’s so much regulation between what you can do. So if I was forced to invest there, I would flip and do development. I want to be in and out. I don’t want their hands on me for longer than 12 months and get out. But I would definitely pick elsewhere.
And also tying into the football, I have a fundamental problem investing in LA, the LA Rams, or investing in San Francisco, San Francisco 49ers. I just won’t support them.

Kathy:
Hey now.

Henry:
See, this is the problem with sports fanatics is you’ll make financial decisions about your money and wealth based on absolutely nothing that has to do with finances. The fanaticism is insane to me.

Dave:
I grew up in New York and I’m a big Yankees fan and I for work for a while had to move to Boston. And it wasn’t just financial decisions, I was just a miserable person for six months. I just hated every single thing I saw or did for six months. It really does impact your whole life, Henry. You just start committing yourself to this.

Kathy:
And James, those were fighting words about the 49ers. I’m third generation San Franciscan. Not anymore. I did move to LA County, but I mean what a story though. Come on you guys. You have to admit that the 49er Brock Purdy story is amazing. He was third string, he was considered Mr. Irrelevant. Let Brock Purdy completely inspire you to never give up, never give up.

James:
Very relevant, love the guy’s story, but I hope he gets smashed by the Chiefs in the Super Bowl. There’s a lot of players I like individually on the 49ers, but as a whole they get crushed and I’m happy.

Dave:
Well, I don’t think anyone here is standing up for LA as an investing market. There’s a lot, like James said. Personally, I’ve never spent a lot of time in LA but it does seem like the stats don’t seem overly encouraging.
All right, we are going to take a quick break. Just to remind everyone, we talked about Tampa, which everyone did seem to think had strong fundamentals. Talked about LA next, which probably overpriced. James talked about regulations that probably weren’t good for investing. And after this, I will share the market that I’m going to be sharing, and so will Henry.
Welcome back everyone. Now for our third market, I’ll be sharing, so happy I get this city, it is one of my favorite cities in the country, the world. I love visiting this city so much. It has maybe the best sandwich I’ve ever had in my whole life, and that is not an exaggeration. It is New Orleans, Louisiana, and I know I don’t know how to say it correctly. I’m from the Northeast, I’m proud, I’m sorry. But New Orleans, Louisiana has hosted the Super Bowl a whopping 10 times. It has a large population but it is declining. So that is something that I personally think of as a red flag when I invest anywhere is a population that’s declining. It’s not necessarily something that you can’t invest in, but it’s something that I worry about. Would any of you invest somewhere where the population is declining?

Kathy:
I have. I wouldn’t do it again. What about you Henry?

Henry:
It depends on how long. If it’s a decline, I’m seeing a decline over five years history, then probably not. But if it’s a blip on the radar, then I probably wouldn’t have a problem with it.

Dave:
That’s a good point, Henry, because I wonder how much of it is COVID and migration patterns changed so much, and some of them are proving and looking like they’re permanent, or at least not permanent, but the trends are enduring past just the pandemic. But some of them are starting to reverse. So I do think you probably do want to follow Henry’s advice and look a little bit broader there.
But the one thing that does tend to happen with lower population, lower growth cities is oftentimes you find that there is better cashflow potential. And that stood out to me when I looked at some of the stats here about New Orleans is that the rent to price ratio is about 0.7. That is more than double what it was in LA and significantly higher than it was in Tampa. And so it does allow for interesting cashflow opportunities, but on the other hand it’s experiencing one of the biggest corrections in the entire country with prices dropping over 8% last year. So to me, this is a little bit risky, especially it’s a market I’ve visited and enjoy visiting but don’t know much about the fundamentals. I would probably stay away from this until we saw some sort of bottoming of the market because an 8% drop, that is significant. That’s not a one-year correction. That is something that could really hurt if you were on the wrong end of that decline. Any of you have any thoughts on New Orleans?

Henry:
Well, I think New Orleans as a city is amazing. It’s probably my second favorite city in the country. I think what I want to say about all of these markets is yes, we’re giving our opinion on whether we would invest there or not, but there are investment strategies that would work in all of these markets. In terms of New Orleans, I think you’re 100% right. If you’re looking for a market where you can get cash flow, maybe you live there, it’s in your backyard, you’ve got some sort of advantage and understanding the neighborhoods and having boots on the ground and a team you can build, it’s a decent market for cashflow. New Orleans isn’t going away tomorrow because it’s had population decline, right? It’s around. It’s going to be around. And if you understand the market and you understand how to find deals, I think you can make great cash flow.
Are you getting appreciation right now? No. It’s got negative price growth, but I don’t know that that’s going to last forever as the interest rates come down. But when you look at something like Tampa, what we talked about earlier, you can almost get the best of both worlds in Tampa because of the growth that that market is seeing and because you have positive population growth and you have affordable home pricing, right? You’re at 372 there for median home price, which means you can probably go in there, find an off market deal and get it to cash flow because the median rents are $2,000. Now is going to cash flow a ton? No, probably not. So you can probably get cash flow and appreciation in Tampa if you look hard enough, where Los Angeles, you can’t hold anything there, right? You’re not going to get cash flow, but the margins on flips are amazing.
You can flip one house in California and make what it would take me like five flips to make because of the margins are so large because the home prices are so much more there. But you’ve got an inventory problem, you’ve got 12 to 13 million people, you’re going to be able to sell those homes so you can get great margins if you’re turning money. So there’s strategies that work everywhere. If you’re going to turn money, like I said, you can do a flip. I get jealous every time I see Tareq flip a house out there and make like $250,000 and I’m like that’s six flips for me. So there is a strategy that works in all of these.
In terms of New Orleans, yeah, I think you got to go for cash flow and I think you have to understand the market because another thing that’s going to play in New Orleans is crime, and so you got to understand where am I buying these homes? What’s the crime going to be like? And factor that into your strategy, your purchase price. And I’m not saying you shouldn’t invest in an area where there’s crime. I’m saying A, you got to be built for that, and B, you got to plan it into your numbers. It’s like Walmart. You think Walmart doesn’t plan for stuff to get stolen from stores? They plan it into their numbers when they’re building out stores and figuring out where they’re going to go. So you just have to understand those markets.

Kathy:
Henry, I’m just curious because you said you’d have to do five or six flips to make that same kind of money. Do you think it takes the same kind of money and time and you’re just doing one big flip five different ways and maybe that’s better diversification?

Henry:
I’d say the timeframe is no different really. A big renovation is a big renovation. It takes the same amount of time if you’ve got your teams and your contractors in place. I think the difference is the risk involved when you’re flipping in LA because of the holding costs. So if I’m doing two flips in LA and I paid $600,000 for each one of those houses and I have a 12% interest only loan from James Daynard because he charges me a whole lot of money to do that, then I’m going to have to get them things turned fast or else I’m paying James a lot of my profits.

Dave:
Then James is making the money, not you.

James:
But it may be expenses Henry, but think of your overall cash on cash return. It’s infinite.

Henry:
I keep coming back to you, so it must be good.

James:
And we are dependable. I want to touch on New Orleans real quick because it is an awesome city. I love it. It’s food, the culture, the people. An amazing, amazing city. I think it has just infrastructure problems. I think like what Henry said is really important. You can invest in any market, whether it’s LA, New Orleans, you just want to adjust your strategy. The good thing about New Orleans on flipping is you can get real high cash on cash returns. Entry level price is small. You can get construction loans. They’re usually cheaper, bigger fixture properties. And so you can lever more when you get construction loans so that the amount you’re putting down on a cheaper property at the big rehab, your cash on cash return is going to hit like 50, 60%. And it might not be the same amount of profit, but the velocity in your money is always going to keep moving and growing. And so it’s good for that.
My concern with New Orleans is they have police force problems. It’s a little bit of a lawless city when you go there. Again, I love the city, but they got some infrastructure problems and for me, I’m already an active investor in a market that has crime problems. I don’t want to go into another one. It does cause issues, cause infrastructure, and pick and choose. I’d rather balance into a safer market at that point.

Dave:
Makes sense. All right, well thank you all for sharing your input. I’m going to share one last piece of advice. If you’re in New Orleans, go to a restaurant called Cochon Butcher and get the sandwich called Le Pig Mac. It’s like a high end pig mac with really good pork patties. It is truly one of the best sandwiches I’ve ever had in my whole heart. Go check that out. This is more important to me than real estate. Henry, let’s round it out with our last market. What do you have for us?

Henry:
All right, last market of the show is Miami. Miami, Florida hosted the Super Bowl 11 times. So what about Miami? What I like about Miami here is average home price $473,000, but they’ve seen a 5.9% increase in pricing over the past year. So we’re going up in Miami in terms of values. The sale to list price ratio in Miami is 97.3%, which means things are getting listed and selling for just a little under what they’re getting listed for, which means people are buying the homes there, they’re in demand. And that is because Miami has a very rapidly growing international base that is moving there. You’ve got lots of people moving there from other countries. You’ve got a lot of people moving there, especially from Canada right now. And so you’ve got people who are always migrating into and landing in Miami and they’re buying homes. I think I read here that the demand for homes around that $1 million price point is pretty high, so people with a lot of money tend to move here and they’re wanting to buy these nicer homes.
So in terms of median rent, you’ve got median grant and about $2,700, so just under $3,000 a month for median rent. You got median income at $77,000 and your median home price is around $472,000. So Miami, I think it has some decent fundamentals. You’ve got $472,000 for the average home price, you got about $2,700 for the median rent. So to me that tells me if I can find a decent enough deal, I can probably cash flow a property, maybe break even more likely to break even than cashflow. So not a super great cash flow market, but you’ve got demand there. And I think what you really have here is a market where short-term rentals and midterm rentals would probably do well as long as the rules would allow for you to be able to do that in the different areas around Miami because it is such a tourist destination. You’ve got people always traveling there to go and have a good time.
And so I think we’ve kind of seen markets where each one of the popular real estate strategies would work. I think this is a short-term rental market where you can probably get something to pretty well as a short-term and midterm rental. It’s a flip market. You can make good profits flipping deals here because you’ve got people who want those million dollar homes. And so you could go buy a distressed property for four or five, 600,000, put a couple hundred into it and sell it for over a million because you got demand there. And if you want cash flow, you’re probably going to have to work really, really hard to find a good deal.

Kathy:
Here’s what confused me about Miami. I love Miami. I love to visit. I love Miami Beach and ride my bike there along the beach whenever I get to go there for conferences. So great city. What’s confusing to me is that I think President Biden said that the biggest crisis we have today is climate change, which is there’s a lot of crises, but you hear this and that yet companies are flocking to Miami. I would think that Miami would be number one in climate change crisis potentially, but that city has grown like crazy. So apparently people aren’t paying attention to that or they don’t agree with Biden in that. But that concerns me because it seems like Miami would be right in direct line of hurricanes and then they’ve been saying for years that city’s sinking into the ocean. So I don’t know, maybe it’s not as bad as they say, but that to me is the biggest concern and that probably reflects in the insurance.

James:
And Miami’s insurance has increased dramatically and that’s what makes it hard to be a buy and hold investor there. It’s 31% higher than the national average and is climbing every year, and it’s also another tough state to get insurance in. And so the cash flow is a little bit tight in that market. And then when you start stacking on these insurance costs and the property taxes that are increasing because the market is moving up, it does make it hard to be a buy and hold investor. I do like the fundamentals of quality living, the lower taxes, the attractiveness of the investor, but these costs are a real issue for investors.

Henry:
I just did a quick search and what I’m seeing here is the average cost for a policy with a $300,000 dwelling coverage is approximately $3,500 per year, which is 56% higher than the Florida average and 104% higher than the national average. That’s crazy.

Dave:
104% higher.

Henry:
That’s insane.

Dave:
Okay. I’ve heard from a couple of real estate investors who I know who are trying to get out of Florida buy and hold just because the costs just aren’t worth the taxes and the expenses. It’s really interesting because people tend to want to go to Florida because there’s no state income tax, but states need to raise money somehow. And so they often do that through property taxes and that, especially if you’re an out-of-state investor, disproportionately impacts you negatively, right? Because you don’t get the benefit of no income tax as much as you would if you live there, but you have to pay higher property taxes. Happens in Texas too. So it’s just something that you have to think about if you’re going to consider investing in one of these markets.

Kathy:
Dave, I’m so glad you brought that up because people do give California a hard time. And one thing that we actually do have in our favor is really low property taxes and they stay there. They only go up very small amounts every year. So I do have two short-term rentals in the Los Angeles County area and they’ve performed really well. But there are regulations that people need to be aware of when it comes to short-term rentals and make sure you follow them. But property, I mean our property taxes are 0.07% in Los Angeles County. That’s really low.

Henry:
That’s super low.

Dave:
Yeah. The national average for property tax is about 1% just for record, so 0.7 in California would be below. Just as a benchmark, in Texas it’s 2%. So it’s double that. And that might not sound like a lot, but it can really add up.

Henry:
Oh boy.

Kathy:
And some areas are 3% or 4%, but our insurance in California definitely trumps everyone, even Florida. It’s worse here in California.

Dave:
All right, before we get out of here, I need to know your picks. James, since you’re the only qualified person here, who do you think?

James:
You got to go Chiefs. I fundamentally cannot root for the Niners.

Kathy:
Hey, hey, hey now.

James:
Go Mahomes.

Dave:
All right. Kathy’s a homer, so we already know this one.

Kathy:
Listen, Brock Purdy, he’s the age of my daughter. How can you not love him? You just got to love him. He’s got to … Come on.

Dave:
I’m not really following that logic.

Henry:
Yeah, I don’t know if I’m following either logic.

Kathy:
I mean, okay, so Taylor Swift, I do want to see Taylor Swift in the audience too. So you know what? All good. Both teams, they should both win either way. Let’s make it a tie.

Dave:
One of my buddies is a big Chiefs fan, so I’ll just say Chiefs. What about you, Henry?

Henry:
Well, unlike these two people, I’m actually going to make a prediction based on the football skill that’s involved in playing this game. James won’t pick the 49ers because he can’t, emotionally can’t, and Kathy thinks Brock Purdy is pretty. So I just think Kansas City is the better team. I think Patrick Mahomes is playing phenomenally.

Dave:
So good.

Henry:
He’s one of the best quarterbacks we’ve seen play the game of football in a long time. Yes, you look at some of the greats and I think when it’s all said and done, he’ll be up there with some of the greats. It’s just incredible to watch what he can do with a football. And I think that because he’s dating Taylor Swift, his football skill has been downplayed. So Travis-

Dave:
He’s not dating Taylor Swift. Travis Kelce is dating Taylor Swift.

Henry:
No, I’m talking about … No, that’s where I was going. I transitioned. Because he’s dating Taylor Swift, his football skills have been downplayed, but Travis Kelce is incredible and has been playing phenomenal. I mean look, I grew up a Raiders fan, so I shouldn’t even be allowed to say this, but Kansas City is going to win and it’s pretty cool watching how well they’ve been playing.

Dave:
All right, great. Well, thank you for your predictions, your insights, your real estate discussion, and all the nonsense that went on in the show. It was a lot of fun. Thank you all so much for listening and we appreciate it. I hope you all enjoy your Super Bowl festivities if you’re watching. I know not everyone even likes watching it. To be honest, this will be my first time watching it in like three or four years, but I’m excited to do it with all of you. Again, if anyone’s in the Denver area on the 12th, we’re having a meetup, make sure to just Google that. You can find that on BiggerPockets. Thanks for listening and we’ll see you for the next episode of On The Market.
On The Market was created by me, Dave Meyer, and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Michael Pettis of Carnegie China says we are beginning to see the impact of China’s high debt-to-GDP levels and the country will need another source of real growth if the “rapid expansion” of infrastructure comes to an end.

Dave:
Hey. What’s up, everyone? Welcome to the BiggerPockets Podcast Network. My name’s Dave Meyer. I’ll be your host today for this crossover event. This show will be airing both on the BiggerPockets real estate feed as well as On The Market feed because we have a breaking news that’s super exciting and interesting for real estate investors. And to help me discuss this, my good friend Henry Washington is here with me today. Henry, how’s it going, man?

Henry:
Hey, man. So good to be here. This is the ultimate asking for a friend episode.

Dave:
I know where Henry’s going with this because we obviously know what the show is about, and it’s about taxes. And sometimes I admit I don’t always know what’s going on with taxes, even as it relates to real estate investing. Henry, if you were to rate yourself 1 to 10, how well you understand taxes as it pertains to real estate, what would you rate yourself?

Henry:
I think I’m a solid 2.

Dave:
Okay. I was doing this exercise myself and I was like, “I think I’m a 3,” and my goal for this year is to become a 5. And I think if you could get to be a 5, you’re probably in pretty good shape, and that’s what we’re hopefully going to be doing with this episode. I think by the end, you and I, that’s our goal here today, and everyone listening, to get ourselves to a 5 out of 10 with real estate taxes. Because as you probably know, if you’re listening to this show, real estate, obviously, offers cashflow, appreciation, loan, paid out, all these great things, but tax benefits are one of the most important pieces of the return puzzle for real estate investors. And there’s been some really interesting news about the tax law as it pertains to real estate over the last couple of weeks.
So today, we are bringing on Brandon Hall. He is a CPA, certified professional accountant, and he focuses entirely on working with real estate investors and he’s going to be joining us today to break down the proposed new law. So without any further ado, all of you listening, me and Henry, we’re going to collectively improve our tax knowledge today with Brandon Hall. Brandon Hall, welcome back to the podcast. Thanks for being here.

Brandon:
Thanks, Dave. Appreciate you having me on.

Dave:
You are always so reliable whenever some news comes out about taxes and I just don’t understand them, you are always there to help us make sense of what’s going on and what it means for us real estate investors. So let’s just dig into the biggest headline of recent tax news, which is about bonus depreciation. Now, before we jump into the news element of it, can you just explain to everyone what depreciation is and what bonus depreciation is, and maybe just for a little bonus, why real estate investors care so much about it?

Brandon:
Yeah, sure. So depreciation is a, and actually I’m going to back up before I explain this. I appreciate that compliment. Thank you very much, that I’m very reliable, but I have to give credit to my team because these guys are like… I’ve been able to build my firm to a point where I’ve got really smart people working at my firm now and these guys are all over this bill. So thank you, but credit goes out to them. All right.
Depreciation. Depreciation’s a non-cash expense. So when I buy a property, I have to allocate some of the purchase price to land and some in the remainder to the building value. I can’t depreciate land because land does not deteriorate over time. Does not fall apart, but my building literally falls apart. And when investors are first learning about depreciation, they get confused because they’re like, “Well, real estate should appreciate?” The value of the property does appreciate, but it is also true that the roof is falling apart, the windows are falling apart, everything inside that property is falling apart over time, just wear and tear.
So depreciation is an expense that you get to claim on your tax returns every single year in effort to track that wear and tear. It’s an expense that I don’t have to pay for every single year. The calculation is purchase price allocated to building whatever that number is divided by 27 and a half years. That’s my annual expense that I get to claim on my tax returns. Whether I paid cash for the property, financed it 100% or somewhere in between. So depreciation is just this nice shelter. It’s a cashflow shelter because I could have positive cashflow, but then after my depreciation expense comes into play, which again, I didn’t pay for because I paid for it all upfront, I could tell the IRS that I lost money. My depreciation expense could cover my net operating income from the property. So it’s nice from that perspective because I get essentially tax deferred cashflow from my rental real estate investing.
Bonus depreciation is like depreciation on steroids. So bonus depreciation enables me to write off a lot more in the year that I acquire a property and place it into service. And when we’re talking about residential real estate, like a single family home, what you would do is something called a cost segregation study, which is the practice of going into a single family home or a multifamily home or any piece of real estate and saying, “Okay. The building has all of these things that make up the building. It’s not just if I buy a property for 500K and the building values 400K and land is 100 K, if I don’t do a cost segregation study, it’s 400K divided by 27 and a half years.”
But a cost segregation study is going to say, “But there’s things in that 400K that are not going to last 27 and a half years. So let’s identify those components. Let’s assign a better, more accurate, useful life to those components. And if the useful life is less than 20 years after we do that assignment, then I can immediately expense them with bonus depreciation.” So when you’re buying single family homes, when you’re buying multifamily homes, you can run cost segregation studies and you can write off a large portion anywhere between like 15 to 30% of the purchase price in the first year of ownership.
So bonus depreciation enables you to claw back a lot of that purchase price in the first year as a tax deduction. And bonus depreciation has been phasing out 2023, it was 80%, 2024, it’s 60%, but 2022 and prior thanks to the 2017 Tax Cuts and Jobs Act, it was 100% right. So as it phases out, this whole, I can write off 15 to 30% of my purchase price starts to actually get smaller and smaller. It goes to 12 to 28% and then 10 to 25%, and then so on and so on until it’s a much smaller percentage. So that’s why everybody’s talking about bonus depreciation right now because we’ve got a bill that just passed the house that’s going to retroactively make bonus depreciation 100% in 2023.

Dave:
Got it. Thank you so much for that explanation. Really appreciate that. Before we talk about the news and whether this is going to pass, I just want to dig into this bonus depreciation because it’s super important for people. When you say 15 to 30% and there are certain things that can be written off in the first years, what are those things?

Brandon:
Yeah. So if I go into a $500,000 acquisition, let’s call it a single family home. We’re going to allocate, call it 400K to the building, 100K goes to land, and then in that $400,000, the cost segregation study is going to pull out components that can be written off over 5, 7 and 15 years. So five, seven year components are my personal property components. Think like appliances, furniture and fixtures, carpeting, things that can be easily pulled up and moved to another rental without causing damage. So it’s not going to be structural. I can’t go and rip out my plumbing and put that into the next rental. So that doesn’t get a five-year life, that’s going to get a 27 and a half year life. But the cost segregation study is going to identify all those components that we can easily pull off the walls, pull up from the floors, pull out of the house, and move to the next rental without damaging that. That’s essentially what that personal property is.
The 15 year components are going to be land improvement. So if I have parking pads or parking lots or signage or something like that, on my multi-family properties, that’s where that 15 year life is really going to come into play. So the cost segregation study is looking at those types of things and it’s saying, “Okay. Of the 400K building value that we started with, $100,000 of it is 5 year property in 15 year property. The remaining 300K is still depreciated over 27 and a half years, but now we get $100,000 first year deduction.

Henry:
So I do think that was probably the best explanation I’ve ever heard for how bonus depreciation works. Appreciate that. Thank you for that. We’ve got a lot more to cover about bonus depreciation and a proposed law that is making its way through Congress as we speak. We will be right back after this quick break.

Dave:
Welcome back to the show. We’re here with Brandon Hall discussing bonus depreciation and what that actually means for real estate investors.

Henry:
While we’re just on the topic of still discussing what it is and how it all works, I think what a lot of people tend to want to understand too is what’s the long-term implications of bonus depreciation? If I take all this bonus depreciation on the front side, is there something I need to watch out for after 27 and a half years? What happens if I sell that property before 27 and a half years? What’s the long-term picture with bonus depreciation?

Brandon:
That is a great question, and I wish more people asked that question and talked about it openly. So when you take depreciation, whether it’s bonus depreciation or just regular straight line depreciation, every time that you’d claim depreciation every single year, what you’re doing is you’re actually lowering the adjusted basis in your property. So if I have this $500,000 property and I take depreciation of expense of $5,000, now my adjusted basis is 4.95. So if I sell it for $501,000… Actually let’s play it backwards because this is what’s happening, I think with a lot of people with short-term rentals. All right. So let me just give you a more realistic example.
You buy a $500,000 property in the Smokies, you run the cost seg. It comes with a bunch of furniture and fixtures and everything. So you’re able to immediately deduct $100,000 thanks to bonus depreciation. So you bought it for 500, you’re immediately deducting 100K, your adjusted basis is now 400,000. You bought this thing peak of the market late 2020, early 2021. Now you’re realizing it’s a lot harder to run a short-term rental than I thought it was because it was super easy back then when everybody had all that cash to spend and everybody was staying home and cooped up. They wanted to go out and do something. But now you have to actually run a short-term rental in order to maximize the profit. So now you’re looking at it and you’re like, “I don’t want to put in the work and this isn’t performing at the level that I want it to, so I’m going to go ahead and sell it.” You put it on market for 520, nobody’s buying it at 520. Your best offer is 470.
All right. So you bought it for 500. Now you’ve taken this offer at 470. In your mind, you’ve lost $30,000. That’s what most people think. I lost $30,000 on this deal, which is true, you did actually lose 30K, but in the tax world because you bought it for 500 and took bonus depreciation of 100, your adjusted basis is 400, and if you sell it for 470, you have a $70,000 taxable gain. So even though you lost money, you have to tell the IRS you had a taxable gain. That is called depreciation recapture, because all of that gain comes from depreciation. It doesn’t come from market appreciation. That’s depreciation, recapture, and from bonus depreciation, if your recapture is from bonus depreciation, then you’re paying taxes at your ordinary rate, not the long-term capital gain rate. So it’s very expensive and sometimes surprises people on the back end.
So whenever you’re taking the depreciation upfront, what we try to advise people is don’t go buy toys with this. This is a loan. Every once in a while, you get somebody that goes and buys one of those Lamborghini UREs or something and it’s just like, dude. You need to invest this. This is either going into equities or you’re going to lend or it’s going to be another property because you got to grow this capital because at some point you’re going to have to give it back to the IRS.

Henry:
Brandon, you cannot be a self reputable Instagram real estate short-term rental investor who does not A, own a property in the Smokies and B, use the money to go buy a Lamborghini. This is not being… I have to do this for my business.

Dave:
Well, Henry, if you buy a G-Wagon, it’s a tax deal according to Instagram.

Henry:
It’s a free G-Wagon according to Instagram.

Dave:
Yes. Just for everyone listening, there’s this common belief that if you buy a property, I think it’s over 6,000 pounds, you can deduct it and people feel like it’s all of a sudden a good financial decision to buy an incredibly expensive car. And it’s a little bit more complicated than that, to say the least.

Brandon:
Yeah. I mean, those rules exist for the people that are… It’s construction equipment. It’s like trucks, construction trucks. And if you’re a business owner and you’re going to retain this vehicle for a long time, then go for it. But what happens is we get to December 15th and somebody calls up their account and frantically, “What do I do? Buy a vehicle. Okay, I’m going to go buy the biggest, most expensive I can G-Wagon.” And you go buy that, and then two years later, your business has shifted. You don’t really need the vehicle anymore, but you can’t offload it because you’re going to have a big taxable gain and you’ve got this depreciation hit, like actual depreciation hit, you’ve lost money. So there’s a lot more that goes into it than simply, I get a big tax refund.

Dave:
Actually, one of the things that I’ve encountered many times in my career is that a lot of the benefits to real estate investors in terms of taxes only exist for “real estate professionals.” And when I say real estate professionals, Brandon could probably give us a better definition, but I don’t just mean, I, Dave talk about real estate as a job. There is a very specific IRS definition of what a real estate professional is and what it isn’t, and I am not one. So I’m curious about the bonus depreciation. Does this benefit only people who are real estate professionals or does this also apply to people who work full-time in some other industry?

Brandon:
Yeah, both. So first, absolutely, if you are a real estate professional or if your spouse is a real estate professional, so you could be working full time in a different industry, a non-real estate industry, but if your spouse is a real estate professional and you’re filing a married filing joint tax return, then we think of it as the entire tax return as a real estate professional return. So yeah, so if that’s the case, then it’s wide open to you. You can acquire property place in service bonus, depreciate it, and you can use the tax losses to offset the W2 spouse’s income. So that’s certainly an option. Now, real estate professional status, you have to spend 750 hours working in a real property trader business and you have to spend more time working in the real property trader business or businesses than you do anywhere else.
So if you’re working a full-time, W2 job, you’re out. We get a lot of questions from physicians all the time. “Well, if I’m 10 days on and 10 days off, does that count?” Well, no, because you’re still working 2000 hours for the year and you have to spend an additional 2001 hours in real estate, more time in real estate than you do at your day job. And even if you could do that, I’m an optimist. When I was starting my firm, I was working 80 to 100 hour weeks for a really long time. So I get it, you could certainly do the work, but you’re never going to convince the IRS or the tax court that you did it. So if you’re working, you can’t qualify as a real estate professional.
But if you are working, there is a workaround. You can invest in short-term rentals. If the average period of customer use is seven days or less, then it’s technically not a rental activity. Real estate professional status only applies to rental activities. So a short-term rental is a workaround to that. I think last time I was on, we recorded a whole episode on that, so I’m not going to go into all the details there. But if you can do one of those two things, if I can be a real estate professional or if I can buy short-term rentals and qualify for that workaround, then the bonus depreciation is super helpful.
However, it doesn’t mean that it’s not helpful for other people. I bought 10 duplexes with my parents and we formed a partnership. We went and bought these 10 duplexes and we cost sagged it. So I’ve got huge passive losses sitting on my returns that are just sitting there. So it doesn’t really help me because I’m not a real estate professional, neither is my wife, but now I have this padding of suspended losses and I can go sell my three unit that I bought in 2015 that has 200K gain built into it, if I so choose to do that. So there are benefits to doing a cost sex study, even if you can’t necessarily capture all the losses today. If you have passive income from other sources or if you have a passive gain from sale from other sources, you can use losses from STIC studies to offset them.

Dave:
Okay. So I think I understand. So thank you for that explanation. And please, if you’re interested in this, look up what a real estate professional is in the eyes of the tax code. It is super helpful to you to know one way or another if you are or you’re not. So what it sounds like though, Brandon, is that you can do a cost seg, get your bonus depreciation on, let’s call it property A, and even if you go to sell property B and you have a taxable gain there, you can use the cost seg from property A, even if you’re not a tax professional because they’re both passive income. Is that right?

Brandon:
Yes. Correct. Yeah.

Dave:
Cool. Thank you for letting me know that.

Henry:
Even if you’re not a professional?

Brandon:
Even if you’re not a real estate professional. So passive income always can be offset by passive losses. And to further that too, it doesn’t even have to be a real estate passive activity. I could invest 100K into a hair salon. This is the example I always use because I really want my local hair salon to call me up and say, “We need 100K, they’re great.” But anyway, I can invest 100K into this local hair salon and they could use that capital as expansion capital and I could get a share of the profits every single year as a result of my investment. Now, I’m not doing anything. I’m not going to manage it. I’m not going to be part of voting or anything. I’m just capital guy.
So let’s say that they passed me 10,000 bucks in profits, that is passive income, even though it’s not from a real estate source, that’s still passive income. And then I could go and use my real estate, depreciate it bonus, depreciate it to offset the 10K coming from my business or from that business activity because passive losses offset passive income. And this is something that accountants mess up a lot, especially if they don’t have a large real estate book, like book of clients or if they’re new to the game. But it’s absolutely something that can be done if you really want to be a nerd and dig into Section 469.

Dave:
Okay. So now that we’ve talked about what depreciation is, we’re going to get into the logistics of this law right after this quick break.

Henry:
Hello everyone. Welcome back to the show. Okay. So that was hopefully a ton of great and helpful information for everybody. I’m sitting here learning as we’re listening and taking notes myself. So let’s get back to the proposed law. So what else is in this proposal and what is the likelihood or timeframe that this may actually pass because it’s not in play yet?

Brandon:
Yeah. So as of this recording, the bill just passed the house and it’s going to go to the Senate next for markup and debate. There are varying thoughts on when this bill will actually pass, but it is supported by the Senate and also supported by the White House. It is a very popular bill, so I think that it will ultimately get through everything. The question is just when? The Senate recesses, I believe on February 12th, and there are now reports this morning, this is February 1st of Senate aids saying that they don’t think that the bill’s going to be up for discussion until after that recess, which then puts us into early March for actually getting this thing passed and signed, which is a huge question of, “Well, what do all the real estate investors that have bonus depreciation do?” Because bonus depreciations potentially getting rolled back in 2023 to be 100% versus 80.
So right now we’re on a big wait and see. A couple of the guys in my firm think that the Senate will actually fast track this, and it might be done before the recess on February 12th, so we’ll just have to see. But what’s in it? The three major things are the Child Tax Credits is indexed for inflation. So that’s good news. So that’s increasing. The other one is the R&D costs. So R&D costs, I believe it was at the end of 2022. So 2023 was the first year that this hit. It used to be that you could immediately expense R&D costs, which makes sense for the most part, but now they’re requiring a five-year amortization.
So what that means is, if I am running a technology company and I’ve got a million dollars of cash and I’m spending a million dollars of cash on labor, and so I have zero cash at the end of the day, my $1 million now has to be amortized over five years. So I can only write off 250K of that today. So even though I have zero cash in the bank, I’ve got to tell the IRS, I made 750K this year. Not very good and not ideal, especially now that it’s been a lot harder to raise capital from venture funds. So there’s a lot of panic in the tech space, but what’s in the bill here is basically unwinding or rolling all that back, pushing the start date out of that. So in 2023, you’ll be able to immediately expense all of your R&D costs assuming that this bill gets passed.
And then the big one for real estate investors is 100% bonus depreciation. So again, as I mentioned in 2017, the Tax Cuts and Jobs Act implemented 100% bonus depreciation. It was 50% bonus depreciation before that, but starting in 2023, that 100% was supposed to drop to 80%. And then this year, 2024, 60%, 2025, 40%, and so on and so forth until it reaches zero. Now this bill is basically delaying that phase out, so it’s going to roll back to 2023, make 2023, 100%, and then basically you get 100% for 2023, 2024, and 2025. So it’s just kicking the can down the road. We’ll deal with it later in 2026.
Those are the main three things. And there’s some other few things in here too. If you just got done filing all of your 1099’s, this bill proposes increasing the cap from 600 to 1,000 bucks. So a little bit less reporting for us. But the interesting thing about this bill is that it’s primarily funded from ERC claims, employee retention credit claims. So what was happening during the pandemic is you could do the PPP loan, you could get the employee retention credit, and over the past two years, promoters of ERC monies basically came out of the woodwork, built massive businesses really fast, and the IRS is estimating, I forget what percentage, but it’s an insanely high percentage. It’s like… I’m going to probably not say this right, so don’t hold me to it. But it’s something like 90%. It’s insane amount of these claims for refunds are fraudulent, are not good.
So the IRS is basically stepping up enforcement, and this bill is basically going to pay for itself with recovering those ERC refunds from taxpayers who claim them. So it’s almost like there’s a very small portion that is actually funded by, it’s like 300 million or something, but the rest of it is all ERC enforcement, which is pretty interesting. So it’s a really small hit to the budget. So with that coupled with it being so popular, people are basically thinking it’s going to pass.

Henry:
And I’m sure that they may fast track this, for the people, not because they themselves own real estate. I’m sure it’s for the people.

Brandon:
Yeah, exactly. There is one other thing too, 163(j), so if you’re a, and I forgot to mention this, but if you are a larger investor, Section 163(j) might be of interest to you. So this bill is helping you out there, and I’m not going to go into that, but that is also being worked on too. So you’re going to have a better result with deducting business interest.

Dave:
All right. So it sounds like overall the bill that is getting bipartisan support and looks eventually poised to make its way through the House, the Senate and gets signed into law is overall a net benefit for real estate investors, which is something I’m sure we all want to hear. Is there anything else in this tax bill, Brandon, that just investors or just Americans should know about?

Brandon:
Not really. I mean, there’s some other things in this tax bill, but nothing that is necessarily going to impact your day-to-day life. Although-

Dave:
That’s what I wanted to hear.

Brandon:
… there was an issue with getting this bill across the finish line. There were some holdouts on both sides of the aisle in high tax states like California and New York. They wanted to put salt repeal in this bill. So again, back in 2017, the SALT limit, state and local tax limit for itemized deductions was set at $10,000. And that crushed people in California and New York, especially in New York City. So with getting this bill to vote, there were holdouts on both sides of the aisle, both Republican and Democrats that basically wanted to see a SALT repeal back into play because they have constituents that are in their minds paying out the nose and taxes and they want to be able to deduct those state and local taxes that you’re paying via itemized deductions. They ended up huddling with the house leaders and then they ended up flipping their votes to yays.
So we were thinking, “Okay. There’s probably some SALT bill that is going to be on the table.” And then it was confirmed later that there is a SALT bill now on the table as well. So a SALT bill has been proposed and it would essentially raise the cap, only for married filing joint taxpayers, interestingly, at least as of today. But it would raise the cap from $10,000 to $20,000. So now on your Schedule A, if you’re itemizing deductions, your property taxes and your state income taxes, you’ve been capped at 10K, but now it might be 20K. So we’re watching that bill too. There’s the possibility that that one will get combined with the house bill that just passed if they’re both in the Senate at the same time. So we’ll just have to wait and see on that.

Henry:
And given the timing of this possibly not being signed into law until you said March, we all know taxes are filed in April, what advice would you have for real estate investors who are working with their CPAs now or maybe they’re not. What should they be doing to prepare or be ready for this?

Brandon:
Yeah. First is give your CPA some grace. Whenever we have these mid-season swings like this, what happens is, there’s a whole bunch of second and third order effects. It is very easy to just say, “Yeah. Hold off on filing your tax return,” which is what you should do. If you have bought property and you are using a caustic study or you’re bonus depreciating improvements or you bought a vehicle and you’re going to bonus depreciate it, you should seriously consider holding off on filing your returns because 100% versus 80% could be a big swing. If you file at 80 and then it’s retroactively deployed like this bill passes, then you’re going to have to amend and file at 100. So there’s going to be issues. If you bought property placed into service in 2023 and are using 100% or using bonus depreciation, you should hold off filing the return.
But the problem is, is that if this bill passes, then all the software companies have to update their software. So it’s not just like, “The bill passes now we can file.” No, it’s the bill passes and now we have to wait for all the software companies to update their software to reflect the passage and then we can file. It shouldn’t necessarily stop you from going ahead and starting the preparation process, but I would just hold off on actually green lighting that filing until we know what’s going to happen with this bill. And if it is going to pass, then I would just wait until… We are holding off on it with our clients that acquired property and are using bonus depreciation.

Henry:
And just as a point of clarification for people, when you’re mentioning companies updating their software, I’m assuming you’re meaning the companies who do the cost segregation studies, essentially it’s a piece of software that runs this cost segregation analysis, and so they would need to update that software to reflect 100% instead of 80?

Brandon:
So that’s a good question. They need to update their softwares, yes. They’re probably not going to rerun the cost seg studies. We could extrapolate what 100% looks like as long as we have the cost seg study. What I’m talking about is the actual tax prep software. So we all use enterprise level tax prep software. We use CCH, there’s Thomson Reuters, there’s Drake, there’s all these big software companies that enable professionals to file returns on their behalf. Or even if you’re using TurboTax or H&R Block, however you file your returns, unless you’re handwriting? You’re going to have to wait until that software company updates their software to reflect the changes in this bill. So that’s just another set of time.
And it’s even worse for GPS of syndicate and funds because not only do you get to wait until everything’s done, but you also have a bunch of angry investors that want to file their returns. So if you are a GP of a syndicate and fund, you should probably proactively go out and say, “We are watching this tax bill. It’s going to impact how we file taxes. So just FYI, we might not necessarily get it to you by March 15th.”

Dave:
All right. Brandon, thank you for joining us to share your knowledge and coming on to so quickly to help everyone make sense of the changing tax landscape right now, especially in the couple of months leading up to tax season. If you want to learn more about Brandon and his firm, make sure to check out the show notes. We have all the information there. Hopefully, we’ll see you again real soon for some more updates on the tax code.

Brandon:
Thanks guys.

Dave:
All right. Big thanks to Brandon Hall for joining us. Henry, I want to know, did we achieve our goal? Did you get up from your two out of 10 that you said you were on tax knowledge before the show? Are you at a three now?

Henry:
I would say I definitely have expanded my knowledge. Well, first of all, Brandon does such a great job of making complex tax topics understandable for everyone. But he did a great job not just explaining what it all is, but talking about some of the implications of what is the long-term impact of bonus depreciation. So I learned a lot there.

Dave:
Yeah, same. I think it’s really important to know that taxes, like most things in investing come with trade-offs. There are some short-term benefits. Maybe there’s some long-term downsides and you need to work with a professional and to understand these things to make those decisions for yourself. And hopefully this episode and what Brandon taught us all collectively here today helps us all make better decisions.

Henry:
And one last point of clarification, my knowledge is probably up to a three now, and that is okay because I’m good at hiring tens.

Dave:
That’s so true. Exactly. All you need to do is be able to understand most of what the people you trust are talking about, and it sounds like you got that a lockdown.

Henry:
Absolutely.

Dave:
All right. Thank you all so much for joining us for this episode on the BiggerPockets Podcast Network. If you learn something useful in this episode that you’re going to use in your real estate business or talk to your CPA about, make sure to show us some appreciation, show us some love by giving us a review either on Apple, Spotify or give us that sums up on YouTube. Thanks again for listening. We’ll see you next time.
On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

David:
This is the BiggerPockets Podcast show, 889er. What’s going on? This is David Greene, your host of the BiggerPockets Real Estate Podcast joined today by the handsome, talented, successful, and incredibly wealthy cohost, Rob Abasolo. And we have cooked up a great show for you all today.

Rob:
Wealthy and quaff hair. Listen, I’m in my head today because I don’t know if I wore this shirt on the last podcast that we did, and I only have three or four and I try to cycle them out, so it may look to anyone watching on YouTube that I’m wearing the same shirt for the last month.

David:
Insecure much?

Rob:
A little bit.

David:
My goodness. This is why I introduced you as incredibly wealthy, so people would just assume you’re like Mark Zuckerberg and you wear the same shirt every day.

Rob:
Not wealthy in confidence. But you know what? I am wealthy in an amazing podcast show that we’re going to have today. We’re actually bringing on Whitney Elkins-Hutten, and she’s going to be talking about how to create generational wealth that lasts, and the biggest levers that you can pull to stop losing money while you’re building wealth through real estate.

David:
That’s right. So many investors get into real estate because they have this drive to build wealth, but not just by themselves, but to create generational wealth for the others in their family. And the good news is, even if you don’t have a family, even if you’re brand new to investing, Whitney’s advice is still going to help you build wealth smarter and faster.

Rob:
And listeners may remember Whitney from 340, which resonated a lot with investors, and now she’s written a book. It’s called Money for Tomorrow: how to Build and Protect Generational Wealth, and you can actually pick up a copy over at biggerpockets.com/m40. Use Code MFTPOD for 10% off.

David:
Whitney, welcome to the show. Great to have you back. Okay. So let’s talk about your book. Who did you write this book for and who could benefit from the content?

Whitney:
Well, thank you so much for having me back. It’s been a few years, so I’m super excited to be here. I wrote Money for Tomorrow, originally for myself and my family, and as a blueprint for my daughter, just in case I got hit by a bus, heaven forbid something happened to me, she would have a full understanding on how all the lessons and learnings that I had accumulated over a couple of decades of investing she would… And ordering all the steps on how to create wealth, grow and scale the money in our portfolio as well as protect it. She would have all that laid out for her.
Now, I’m putting together this blueprint for my family, and I’m also mentoring several people on the side on scaling their real estate portfolios, and I kept hearing some of the common themes over and over again like, “I make good money in my job, but I still feel broke. Or I don’t know if I’m doing the right thing when I invest, and will it be enough when I get to retirement. Or I hate talking about finances, I just want to do deals.” And that’s when I realized I’m like, “Wait a second. I have this blueprint, this framework that I’ve been developing for my family. Let me test this out with some of my mentoring and coaching clients.”
Lo and behold, we saw amazing results for it. Now, who does this book most appropriate for? I would say one of two camps of people. And I would say almost every single one of us falls in one of these two camps, and that is somebody who’s just starting off on their investing journey that wants an end-to-end blueprint on how to create wealth, protect it, grow it, and then pass it on. And then somebody who’s more of a seasoned investor that knows a lot of these strategies, these rules of the wealth game already that wants to go back and make sure that they have a very fortified foundation and that are prepping either for retirement or to pass this wealth on to the next generation.

Rob:
Out of curiosity, when you’re working with somebody, do you prefer to work with a newbie investor or a seasoned investor in that? Seasoned investors, I imagine probably have a lot of habits that you may have to correct, but do you have a preference?

Whitney:
Both are fun to work with. I feel like with a new investor, I get to mold them. I get to lead them along the way, but the more seasoned investor, it can be really fun because they tend to have money set aside. They have a war chest of funds ready to deploy so we can get… Once we get the foundation cleaned up and it gets really fun on helping them deploy capital.

David:
Okay. Now, Whitney, you also point out that even for people who build massive wealth, it’s extremely common for them to lose that massive wealth, which frankly is very rarely ever shared on podcasts or something called survivor bias, which basically states that you only hear about the story from the survivor. The people who had a bad experience don’t get a chance to share their side of the story. When people lose money in real estate or lose money in business, they’re not typically going to Instagram to post that information or the worst selfie that they ever took or the snot coming out of their nose pictures.
Everything we see is very carefully curated. Part of what’s working against people is what you call the four horsemen. Can you tell us what those four horsemen are?

Whitney:
Yeah, so I learned about the four horsemen in reading a book published by Garrett Gunderson and then also again from my own mentoring coach, financial coach, Chris Miles. And just really quick to list them out, the four horsemen are interest, insurance, taxes, and fees. So these are four of the big seven gaps that I pretty steadily see in people’s portfolios. And if we can learn how to plug these gaps in their portfolios, fortify what I call your financial emote, not only are you going to be a more fortified investor should the market turn south, it has in the past 12 to 24 months, but also you’re going to have more capital to deploy in the future and create greater velocity with your money.

Rob:
Now, the concept here with the four horsemen is there are these four different aspects that can creep up on you is my guess. And if you’re not good at mitigating them ahead of time when there’s a perfect storm, you get hit by everything, then it could pretty easily put you in a bad situation.

Whitney:
They’re really sneaky. I mean, a lot of people call them money leaks, and so a good example would be interest. A lot of people listening here might know Dave Ramsey and they might study his snowball approach to eliminating debt or his debt avalanche approach to eliminating debt. You would assume that paying interest is bad. We should eliminate all interest, but really there’s a difference between destructive interest and productive interest. And so if we’re picking apart this horseman, we want to put that debt, evaluate that debt and put it on a sliding scale between being destructive and productive and really figure out, “Okay, where does it lie on this sliding scale? Is it hurting me or is it helping me?” And then clearly evaluate it and take the next steps to eliminating that.

Rob:
Sure. Do you think you could clarify? I mean, I feel like I have a good understanding of interest. Insurance is a big one. Just found out, I haven’t told you this, David, but our insurance on our property, the premium went up $4,000 last week.

David:
Again?

Rob:
Yeah. So that’s fun.

David:
It already did that.

Rob:
Yeah, I know. It just keeps doing it. Help us, Whitney.

David:
Insurance is a big one. Especially property insurance rates have gone up across the board across the United States.

David:
Yes, they have. Fun fact, I actually started an insurance company and then couldn’t do anything with it because we literally can’t get policies in California. The insurance companies will not write insurance here and in Florida it’s getting to be the same thing. This is the one thing that’s not talked about in the world of real estate investing, and so people don’t hear about it until it’s too late.
Is this something that you find there’s a category of things that are just not discussed amongst real estate investors and it’s sort of oversimplified and glamorized in a way that isn’t realistic?

Whitney:
Yeah, absolutely. I mean, I think what I run into with real estate investors often is maybe not so much about insurance or taxes or anything like that, but they get the steps out of order. They’re so focused on the real estate as a vehicle to grow cash flow, grow equity, create tax benefits for themselves that they forget that there’s some foundational work that they should do here, which is understanding how they’re creating wealth for themselves, and more importantly how to protect that wealth as they’re creating it.
So I think those are the things that don’t get talked about. Circling back to the four horsemen, people do a ton of due diligence on an investment for themselves to figure out how to protect the capital, generate cash flow, grow the equity. But when it comes to their personal finances, it boggles my mind that they don’t take all those lessons and learning these translatable skills and apply it to their personal financial situation.

David:
I love your points about starting from a strong financial foundation in order to build wealth. I echo those sentiments myself. We’re going to take a quick break, but when we come back, Whitney will break down the most impactful things that you can do to keep your wealth, including some ways that you might still be able to save on your taxes this year. So stay tuned.

Rob:
Welcome back. Whitney Elkins-Hutten is here with us talking about how to build the kind of wealth that lasts for generations and how not to lose money along the way.

David:
The last book that I just wrote, now that you’ve written a book here was called Pillars of Wealth, and I cover these principles that real estate investing is one of three pillars that you need to do if you want to get wealthy. The other two are making money and saving your money. We have bookkeepers that will look at a profit and loss statement for a property, and we will meticulously look at every expense. Where’s my insurance? Why is it going up? Why did maintenance cost this much? How much CapEx do I need to set aside?
And then when it comes to our own personal budget, it’s like people don’t pay attention to it at all. They put zero effort into where all their money is going, and they’re working so hard getting frustrated at not having success with real estate investing while all of the work that they’re doing for everything else in life, that money’s just flying right out the door and they don’t even pay attention to it.

Whitney:
Absolutely. Yeah. I mean, I have a coaching client that I’m working with right now. I’m not going to share any specific details, but it’s a theme that has cropped up. Again, they are very proficient at creating income and deploying that into investments, into growing their business, but the personal finances are, for lack of better word, is hot mess. We’re going back and they need a certain amount of cash flow to be able to exit from their business. And I’m like, “Great. We could spend all this money over here growing your investments,” which granted we could do, but we also can go back up here and pick up probably another three or $4,000 a month and just your personal financial statement. That’s less money going out the door. That’s less income that you have to generate to cover it.

Rob:
Sure, yeah. Well, we’re going to get into a few more of the horsemen, the four horsemen here that you were talking about. But before we move on to a couple of these, I did want some clarification on the insurance side of it. Is there something that investors can do to mitigate insurance because that seems like one that’s out of your control for the most part.

Whitney:
So really in the blueprint, what I see more often is that investors are not using insurance wisely in order to outsource their liability. Really, whenever you get an insurance policy, that’s what you’re trying to do. And so I hear you, Rob, you’re trying to… Maybe the question or what I hear here is, “How do I lower my insurance cost or maybe cost compare that line item on my profit and loss statement. Really there, you’re calling around to get the most optimal policies, try to compare apples to apples.
But more often than not where people are actually missing a gap here is that they don’t have the right, say, type of disability to guard against their job loss. There’s type of disability policies that guard against you working your current job, like current line of employment or any line of employment. Let’s guard our income. Let’s guard our health. The number one type of insurance that’s going to be tapped into is probably going to be somebody’s health insurance. But what most people do, they try to get the cheapest policy that they possibly can thinking that nothing’s going to happen to them.
And so health insurance, auto liability insurance, renter’s insurance. As an investor, if you’re an investor or a business owner and you have a home office, you need to understand if your home office is actually covered on your insurance policy. Oftentimes a homeowner’s policy does not cover a home office on the policy. It doesn’t replace that equipment. Or if you have to shut down your business for whatever reason, say, like there’s a natural disaster in your area, it doesn’t cover any of that loss. So we want to make sure that we’re utilizing insurance correctly in order to outsource a liability.

Rob:
Got it. So we’ve got interest, insurance. Those are two of the four horsemen. What are the other two?

Whitney:
Taxes and fees. Taxes tends to be a really fun one that most real estate investors love because they’re drawn to real estate because they hear, “Oh, I can use all these losses that offset my income or earn tax-free or unearned income in real estate.” And that’s great, but you can also do the same thing with businesses as well. So there’s an amazing book out there by Tom Wheelwright called Tax-Free Wealth, and so I really highly suggest everybody pick that up.
But really the five things that he’s trying to teach in that book is how you’re going to utilize deductions. A big deduction in real estate is depreciation. How do you use these to offset the income that’s coming in? How do you shift your income from earned income to passive income? That’s another tactic to implore here. How do you take advantage of lower tax brackets?
So for me, I can take advantage of my tax bracket for me as my child. I can take advantage of her tax bracket. She gets taxed very differently than I do. I can also take advantage of other dependents tax bracket. If I had a parent that was living with me or something like that, how can I take advantage of other tax brackets? How can you take advantage of tax credits? Hey, that’s a one-to-one offset on your tax liability. And then how can I defer income using retirement accounts, qualified retirement plans, pension plans.
Most of us are taught to do the last one first. Get a good job, buy a house, get married somewhere in there, right? Yeah. And then stuff, money in your 401K. There’s four other things that we should be looking at, probably first in order to optimize our taxes.

David:
Okay. So we shouldn’t just be thinking, get a paycheck and stick it in a 401K. There’s a couple steps that we can look at to save us money in taxes before we get there. What are those things?

Whitney:
Now, if you just don’t have a business or don’t have any real estate, you have very few deductions available to you, but as soon as you open a business or buy a piece of property, you have a wealth of deductions that are open to you. You learn to use those wisely. And I think the number one deduction that most people miss, especially when they start off investing in real estate, is using depreciation wisely. So make sure that you’re partnering with a tax professional that is not scared to take that depreciation deduction.

Rob:
That’s a huge one. I mean, that’s really one that most people are, I feel too lazy to really dive into that and learn why it’s so powerful. And you’re just like, “Yeah, deduction. It doesn’t really change things too much or one way or another.” But when you are a full-on real estate professional, meaning you are in the business 750 hours a year plus it’s more than half your time or you’re self-managing your short-term rental, you can really start unlocking the tax depreciation in a very significant way with bonus depreciation. And this is really something I wish that I had learned as a real estate investor at the very beginning of my journey.
I feel like as real estate investors, we really don’t worry about taxes until it’s tax time, and then we owe a lot of money, and then we’re calling our CPAs and we’re like, “Dude, what can I do to save 10 or $20,000 really, really fast?” Whereas what it sounds like you’re suggesting is implementing the right systems in place, learning about it, having a foundation at the beginning of all of this so that you’re never really scrambling in the final hours.

Whitney:
I would like to even challenge… We’re recording this early 2024. You should be talking to your accountant or a tax strategist on how to plan, what are those moves that you can take during the year, this year to lower your tax bill for your 2025 filing? Get out ahead of it. I see investors, they balk at paying for tax professional help because they think it’s costly. I will tell you, I mean my tax prep bill, it’s a few thousand dollars, but what I save is priceless. I will play that slot machine every single time.

David:
I can think of a couple practical examples because this is a really good example of investors know about depreciation, but they don’t always think about deductions because investors forget that they’re still running a business and they need to think like a business owner. When we talk about passive income in real estate, it gives this idea that you just made one good decision and then you benefit forever. But businesses aren’t passive and real estate is included in that.
So one thing is to set a business up that’s like an LLC or an S Corp with which you buy your real estate through. And then you talk to your CPA and say, “Hey, I am planning on going to Florida for this. I’m planning on going to California for this, and I’m planning on going to Tennessee for this. What would I need to do for this to be a write-off?”
And then your CPA will say, “Well, if you look at vacation, like vacation rentals when you’re there, if you meet with staff like a real estate agent or a property manager or a title company, when you’re in that area, this can now be considered a business trip that you are going to be taking anyways.” A lot of people go to dinner and they just pay for dinners. But if you make that dinner a business trip where you discuss things like business, so every time Rob and I go to Chipotle, that’s a write-off because all we do is talk about-

Rob:
Business.

David:
… our rental property. Yeah, exactly. A lot of people pay for a vehicle. We all have to have one, but your vehicle can be for many businesses, something that the business needs in order to perform. And now the expenses associated with that vehicle become a write-off for the business. And if your income is coming into this business and now you have expenses that you’re going to have anyways, but they’re also necessary for the business, you’re going to use it in your personal life, of course, but you can write it off as a business expense because it’s necessary that… I’m glad you’re bringing this up, Whitney, because this stuff doesn’t come up on real estate podcasts very often, but it’s still a part in building wealth and saving money.

Whitney:
Absolutely. Because every time you can bank some of those deductions, in the case of going to Chipotle or driving your car, you were going to spend that money anyways, but now you can write it off and you don’t have to pay taxes against that income that you use to offset it. Another one is business use of the home. If you have a home office, now a portion of the mortgage interest you pay on the property, the taxes, the insurance get allocated to that home office.
I know for me, I have a desk in a dedicated space in my home that I run my real estate business from. Well, of course I’m going to take that 200-square foot area and write it off against my taxes.

Rob:
Of course.

Whitney:
Why wouldn’t I?

Rob:
Why wouldn’t you.

Whitney:
Why wouldn’t I?

Rob:
Yeah, exactly.

Whitney:
So there’s just things to think about there. Internet. I can deduct through that home office, a portion of my internet. I have a phone dedicated for the house, therefore my phone that I carry, my cellphone that I carry is dedicated to the business. So partner with a professional that understands how to use all these things. One thing that I love about Tom’s book, Tax-Free Wealth is that he views the IRS code is a treasure map. The first 10 pages are all about how you can actually pay your taxes. I’m not saying we shouldn’t pay our taxes. Well, yes, we should pay our fair share, but you can arrange your affairs as such to lower your liability legally.

Rob:
So we’ve covered three of the four horsemen, interest, insurance, and taxes, and right after the break we’ll hear from Whitney about the last horseman fees, including one of the sneakiest fees and how to avoid it. Stick around.

David:
Welcome back, everyone. We’re here with Whitney Elkins-Hutten talking about her book, Money for Tomorrow. Let’s jump back in.

Rob:
So that brings us to the fourth horseman. We just talked about interest, insurance, taxes. What is the fourth one here?

Whitney:
Fees.

Rob:
Notoriously hated amongst everyone. It’s the one unity we have in this world is fees. We all hate them.

Whitney:
Oh, yeah. I mean, there’s the low-hanging fruit, your bank fees, your ATM fees.

Rob:
Ticketmaster fees,

Whitney:
Oh my gosh. Ticketmaster fees.

Rob:
Airbnb fees. It’s more expensive than a hotel. Sorry, carry, carry on. Carry on.

Whitney:
I 100% agree on all those things. Then if you’re a real estate investor, you’ve got your closing title fees. Right now I’m getting a house under contract to sell, and they’re like, “Here’s your title fee. Here’s your closing statement. Here’s your inspection.” And all these things that we have to split with a buyer. And I’m like, “Oh, boy. Okay. More fees for this transaction.”
Now, those are all great. We go into detail on that in the book, but I think the one that most people are taking their eye off the ball on is actually the fees associated if you have retirement funds. I don’t know about you, but if I’m setting money aside in retirement, I will probably want to have more than a $500,000 in that retirement account, which means when I start taking the required minimum distribution as I approach retirement, it’s going to be above my standard deduction. So my husband and I, we’re married, okay? We get a standard deduction of about $26,000 a year. I plan on retiring or pulling more than $26,000 out of that account.

Rob:
$26,000 per year?

Whitney:
Per year, per year. My living expenses are much more than that. So now here’s the thing. There’s two things that are compounding in here. One, there’s the fees that I’ve paid on those investments the whole entire time. And I challenge, people should do the math on this. They think that 1% total fee or 1.5% or maybe even 2% total fee in their retirement account just to administer the account just to be in the stocks, bonds and mutual fund doesn’t is worthwhile to them. You compound that out over 30 years, you’re losing not just tens of thousands of dollars, but in some cases hundreds of thousands of dollars just to fees. Okay?
But let’s say you get to retirement, that money’s all gone. You’ve lost the ability to compound and grow that. You can’t generate velocity with that money. It’s gone. But now you want to retire and you want to start pulling the money out of your retirement accounts, okay? It’s going to be larger than your standard deduction. Now, there’s a thing here called provisional income that you’re potentially triggering, which means you now get double taxed on things like social security.
So this can be a big train wreck for people. And so again, I really want to encourage people to model out what kind of fees that you’re paying as you grow your retirement accounts, but also sit down with a professional and fully understand, “Am I going to be triggering this provisional income whenever I start taking things out of my retirement account?” This is why we hear a lot of people doing Roth conversions, the five to 10 years before they start approaching retirement because Roth IRAs are not subject to provisional income.

Rob:
So one of the things that I’ve heard, and this probably goes into the fee side of it, is the compounding effect of having other people manage your money, which again, this is the standard way of doing it. Usually hire a professional, you’ll get charged a couple percentage points to do that, but over time, that compound actually eat away at a lot of the earning potential that you’re actually stacking away in your retirement accounts, right?

Whitney:
Oh, absolutely. In the book, I walk an example of somebody who is invested in their company 401k, getting a match, but they have a 1% total fee load between expense ratios, fiduciary, plan administration, all that, which is quite honestly pretty low.

Rob:
Yeah. It seems like very innocent, like a very innocent feel.

Whitney:
Yeah. Great. 1%, that’s no big deal. I’ll pay that all day long because somebody else is doing the work. Now, again, like you said, that’s compounding over time. You want your retirement account to compound, but the more money you put in there, the more company match that goes in there, those fees compound over time as well. So it’s innocent enough in your late 20s or early 30s, you might just be paying a couple hundred dollars a year. But by the time you’re pulling that money out 30 to 40 years later, you’re probably paying hundreds of thousands.
You’ve already paid tens of thousands of dollars in fees, but you’re going to be accumulating a hundred thousand or more in fees. I have a hang-up here. I really do.

Rob:
And I’m curious because it is sort of the standard. What’s the actual solution to that? Because I know self-directed IRAs seem to be very popular, and this is the notion where you get to control where the money is being put into. So a lot of real estate professionals like them because they can effectively use it to invest in more real estate if they wanted to. But is there an actionable step for real estate investors on maybe how they could not pay six figures and fees over time?

Whitney:
Well, I think it’s going back to those five steps that you need to take in order to eliminate and significantly reduce your tax bill that Tom lays out is that make sure that you are opening businesses like real estate, your investments, whatever you can to take advantage of those deductions, that you’re shifting your income as much as possible from earned income to passive income to change how it gets taxed, that you’re taking advantage of other tax brackets.
If you have a business, pay your kids. That’s a neat little, I shouldn’t say trick, but it kind of is. Why not? I pay my daughter. We have a camper van rental business. And not only is she learning good skills in managing a business alongside of me, but I can now pay her because she now has earned income and she can now put that in her Roth account. That’s a very powerful wealth transfer and wealth building strategy, and it’s completely legal. And then we can get into tax credits. And then the last part, if you still have funds left over that you need to tax shelter, now we can start getting into how do you best leverage these retirement accounts and qualified retirement plans? So it’s not necessarily an either or, it’s just making sure that you’re doing things in a laid out strategy and in the right order.

David:
Now, Whitney, you mentioned your daughter and how you pay her. I think that that’s brilliant. You’ve also mentioned that she’s one of the reasons that you wrote this book. Can you talk about how you’re passing on generational wealth to her and not just through wealth, but also through knowledge and action that she sees you taking?

Whitney:
Yeah, absolutely. Well, we actually started the wealth journey with her at an early age and just by playing games. So we started playing cash flow for kids at a very early age. And then whenever she got to be about seven, eight years old, we started reading a book like the Richest Man in Babylon. And from there we talked about how she could create value around the house, earn an income, doing things in the household, but also outside the household like pet sitting.
Now, she helps out in our camper van rental business. And then we started talking about how she needs to save that, save a certain percentage, but also set aside a certain percentage to give away. And then of course, she has the bucket that she can spend. And then we’re teaching her how to spend that money. Now, this is kind of the scary part as a parent, right? Because you don’t want your kid necessarily just going out. She loves buying Squishmallows. We walk in Costco, she wants to buy every single one of those gigantic three foot round pillows and bring them off.

David:
Oh yeah. My niece is right there with her. Nothing makes her as excited is when I send her a new Squishmallow.

Rob:
Same here, by the way. Nothing makes me more excited than getting a loan when you send me one, David.

Whitney:
Well, David, if you have extra, I’ve got an 11-year-old that would love some. So there you go. But anyways, it’s the cringe factor. She wants to buy these Squishmallows, and I kind of cringe. I’m like, “Really, this is how we want to spend our money?” But I’d rather her make these mistakes now with 10, 20, 50, maybe even a hundred dollars versus later in life with tens of thousands of dollars or even more. So she’s really learning the value of creating value, getting paid for it, learning how to save it, learning how to give it away to charities that she is passionate about, but also how to spend it, which is I think… And it’s not even just spending, but gain a good steward of that money as she moves forward.
And last piece is that we have her invest alongside of us in our real estate deals and various other opportunities. So she’s starting to learn about how her investment babies make babies and continue to grow that way. So I want her to have a very solid fundamental base. And quite honestly, that is the most important thing that I can pass on to her is that knowledge, because she can go out and create her own portfolio from that. So that’s my passion, and it is helping her do that, but also helping other people do the same.

Rob:
I love it. I mean, obviously it’s very clear that’s the mantra of the book here, right? I’ve got one final question as it pertains to this, and we talk a lot about on this show, this concept called financial freedom. But you introduced this concept that we don’t talk about as much, which is impact freedom. What does impact freedom mean?

Whitney:
This is really a journey that I went on as I was throughout growing my portfolio, but even writing this book. So I think many of us, when we enter in real estate, we have this focus that we want to have say, $10,000 a month in passive cash flow, and we’re going to be able to quit our jobs, ride off into the sunset and everything is going to be A-okay. That’s great. That’s a great milestone to have, but what is that doing for you? What’s the why behind that? And if you’ve ever done Tony Robbins, Seven Layers of Why exercise, most people have challenges getting three or four layers in, right?
They say, “I want $10,000 a month.” “Why that?” “So I don’t have to sit at a cubicle for 40 years.” “Okay, great. Why do you want that?” “Well, I want more time back.” And you keep kind of picking away at it. Most people arrive at five reasons that they want to do what they want to do. Financial freedom, which you already said, Rob, but then they say, I want to have choice in my life. They want choice freedom. They want time freedom. They want to have the time back. They don’t want to be told what to do. They want to have it back to do what they want with whom they want, and they want to be able to go wherever they want.
Think of these as freedom milestones. But eventually, and this is where I’m so excited for people, you’re going to have all of those top four freedoms. What’s after that? And that is the impact, freedom. A lot of people actually discovered this early. I think for me, I couldn’t put a finger on it so much for myself, but I just knew that there was something more that I needed to do, and that is creating impact in the world. Now that I have financial freedom, now that I have more time back and I can choose what I want to do with it, and I can do it anywhere in the world, now the world opens up for me and I can create change in other people’s life and create that impact.

David:
Sweet. Well, thank you, Whitney. Rob, I know that you have read BRRRR and Scale, and I’m very proud of you, buddy. By the way, it’s definitely going to be reflected in your Christmas present this year. But do you think you’ll ever read a third book? And if so, what book might it be?

Rob:
Well, it’s going to be Money for Tomorrow because I’ve got a coupon code for everybody at home, which is MFTPOD, M-F-T-P-O-D which will give everyone a little something, something at checkout, including myself. So go pick up a book today, everyone.

David:
There you go, folks. Don’t ever say we did nothing for you. Not only do you get a free podcast, but you also get a discount on Whitney’s book. We’ll get you out of here. This is David Greene for Rob, the Squishmallow Abasolo, squishing away. Squish, squish.