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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.

David:
What’s up, everyone? Welcome to the BiggerPockets podcast, the biggest, the best, and the baddest real estate podcast in the world. I am your host, David Greene. I’m here with my skilled, talented, handsome, buff, and brilliant co-host, Rob Abasolo.

Rob:
Thank you. I appreciate that. That’s what I needed on a Wednesday, my friend. How are you?

David:
I’m good. Did I leave anything out? I suppose I could have said ripped, artistic, wonderful lover.

Rob:
Two out of three is not bad. Listen, for everyone at home, we have a pretty incredible story for you today. We’re here with Donovan Adesoro. Donovan started investing in duplexes right out of college in the Houston market, my backyard. He has grown quite a portfolio in his short time as an investor, and has started building duplexes himself.

David:
So if you’ve ever been frustrated by the lack of inventory, wanting to get deeper into real estate, but traditional paths don’t seem to be yielding much fruit, today’s show is for you. You’re going to hear about how Donovan selected a product that was needed in his market, saw where the demand was, and move forward mitigating risks on how he did it. What an awesome story and incredible young man. Let’s bring him in.
Donovan, you started investing in duplexes right after college, not something that everybody does. What year was this, and why did you choose duplexes specifically?

Donovan:
So, in 2020, after I bought that first duplex, I realized there’s just not too many in Houston given how vast the land is. So, duplexes was a small niche market, and I felt like I could be a little bit more competitive there than compete with the major single family home builders.

David:
What year was it when you were graduating college?

Donovan:
2019.

David:
All right, so 2019, you get out of college. You’re stepping into the whole COVID matrix, and you decide, “I’m going to buy duplexes.” Give me a better understanding of what you were looking at when you surveyed this vast array of land that you describe of and why duplexes stood out to you. What caused the shining light of brilliance to shine upon the duplexes?

Donovan:
After college, I was listening to BiggerPockets podcast on the way to and from my engineering job. A big thing was having multiple exit strategies, and when I was looking at the numbers on a single family home, they just wouldn’t pencil as a rental if worst case scenario we had to keep them. So, the downside of the duplex was like, “Hey, if we can’t sell, it’s okay. We can refi, and make 8%, 10% cash on cash.” So, having those two exit strategies was really what drew me towards it.

David:
Okay, so you were not a purely cashflow buy and hold investor. You were actually looking to buy properties, improve them, and sell them, I’m assuming, and then you thought, “Hey, if I can’t sell it, at least it’ll cashflow. I could hold it.”

Donovan:
Exactly. Yeah, I wanted to have both options available.

David:
All right, and were these new properties that you were looking at, or were these existing inventory?

Donovan:
There were all new that I was looking at, so I bought… The one I moved into was brand new, construction, house hack, and it was because I can barely change a light bulb, so it needed to be hopefully maintenance free for a couple of years.

David:
Perfect. How much did you pay for this deal?

Donovan:
This one was 275, right at 275.

David:
Whoa. Did you say where you’re buying these at?

Donovan:
Houston, Texas.

David:
Houston, Texas. Rob, you didn’t tell me that you could buy duplexes for $275,000 out there. Have you all been keeping secrets?

Rob:
Well, back in 2019 maybe, but have those numbers changed pretty substantially since then, Donovan, or is it still in line with that?

Donovan:
Absolutely. That same duplex is 430 now, give or take.

Rob:
Okay. So, you spent about $290,000 on your first duplex. Walk us through some of those numbers. What did you put down? Give us the whole rundown on that.

Donovan:
For sure. The duplex put down 0% technically. The way I did that was there was a mortgage through… At the time, it was Cadence Bank, but yeah, they had a 0% down program for a one to two unit, so brought like $3,000 to closing just for closing costs. The projected rents were about 1,350 per side, and the mortgage payment with taxes and insurance was like 1,886. So, it wasn’t a perfect house hack, but because it was a new construction, I felt a little bit more comfortable being a little bit more thin on the cashflow.

David:
Folks, take note of how Donovan said they were about 1,886, which is funny that you said about with the number that specifically accurate. That is not a coincidence as to how Donovan went on to be successful with his story that we are going to be getting into. I thought that was hilarious. They were about $1,880.37 cents a month, give or take two cents on either side. So, you got this property, which I mean most people listening to this would be salivating in just the thought of these numbers. Maybe I should ask, were they in good neighborhoods? This just seems a little too good to be true even in 2019.

Donovan:
You probably have to change your definition of good, but I thought it was reasonable. The location was good. It was 15 minutes south of downtown. It was close to the medical center. It was still in an early gentrifying area, but because I was living by myself, I was willing to suck it up to be honest with you.

David:
There you go, so realtor speak, up and coming neighborhood. All right. You mentioned a program that you used to buy the house. Can you tell us more about that?

Donovan:
I think it was called the Affordable Home Loan or the Freedom Home Advantage Loan. The purpose of it was 0% down up to two units as long as you bought in a LMI tract or a low to moderate income tract. So, that was another… one of the reasons why I had to buy in maybe an up and coming area. It’s because I really wanted that 0% down.

David:
Smart. How did you find the lender that had that loan program?

Donovan:
I actually was about to go under contract on another deal on the listing. They were pitching, “Hey, buy this duplex with 0% down,” and so I found it through a previous listing, and then just took that same lender to this new construction duplex.

Rob:
Makes sense. So, you put 0% down on your first deal. Obviously, that’s more so because you’re actually living in it, and it’s available to that first time home buyer is my guess. But how did you scale your business after the first deal? Because I imagine you started to probably be in need of capital to start buying more properties, right?

Donovan:
Exactly. Yeah, and I didn’t have any capital. That $3,000 I brought to closing was 60% of my liquid net worth, so it was all tied up in that. So, I was able to raise money from investors to go on to build new construction, because I didn’t have any capital myself at the time.

David:
Bro, did you just calculate 60% of $3,000 in your head while doing this podcast?

Donovan:
I like 5,000 liquid, and so I brought 3,000 to closing. I think that’s 60%.

David:
It’s a round number. That is 60%. I just still think this is hilarious that you pay attention to this much detail. I don’t know why we say the devil is in the details, because the success is in the details. You don’t think about success when you think about the devil, but this is great. All right, today’s guest, Donovan got started with $3,000 and a little bit of other people’s money, but how did he scale from there? We’ll hear about that and how he continue to find funding and the smart way that he structured his deals right after this break.

Rob:
Welcome back. We’re here with Donovan Adesoro who said no housing inventory, no problem, and literally started building his own duplexes.

David:
All right, so now, this first deal worked, but you had no money. We got no food. We got no booze. Our pets’ heads are falling off, and you’re still able to pull this thing off by pulling all the strings. How did you scale after that without having cash?

Donovan:
It was a combination of just leveraging social media to be honest with you. So, I leveraged social media on the investor front to find partners who could bring the capital, and then I also leveraged it on the front to connect with wholesalers and realtors to send me their off-market land deals, because I still was working my full-time job at this point, so I didn’t have time or money to spend on marketing. So, that’s how I leveraged social media in those two ways.

Rob:
All right. A lot of people come on the show, and they say, “Hey, I use social media, and I think conceptually, we understand that the power of social media can actually help you get those lenders or those partners or private money partners.” Could you just give us a tangible example of something you did that actually resulted in some level of result?

Donovan:
Absolutely. One of the first investors I got, I think he was my second investor. I was in the real estate rookie Facebook group, and I saw an investor comment about out-of-state investing. They were just asking some general question, and I would specifically target out-of-state investors posting. I would say, “Hey, would you like to partner on a duplex in Houston? I’ll be your boots on the ground.” Now, again, I’m oversimplifying it. I got rejected probably 30, 40 times before this, but eventually found an investor who was like, “Hey, I’m interested in that. I’m willing to partner with you.” That’s just one example.

David:
All right, Donovan, it sounds like you had this moment where the first duplex worked out, and you knew you were going all in on duplexes, which is not something I think I’ve heard a lot of other people say. Paint me a picture for what was going on mentally when it clicked, and you said, “No, I got a duplex. I want to get a fourplex, or I want to flip a house.” Most people experiment in the beginning with different elements. When did you say, “I’m going all in on this strategy?”

Donovan:
After I closed on that first house hack, I realized that it took me six months to do that, and there’s tons of other people like me in my shoes, early college graduates or mid-20s, early 30s, and they just couldn’t find anything. So, the first idea was, “Hey, I want to build fourplexes or triplexes,” which is what everyone looks for. The issue there is in the city of Houston, anything three units or greater is considered commercial, so you have to go through an entirely different commercial permitting department. It’s a bit confusing because we’re taught residential mortgages are for one to four units, which is true, but on the permitting side of things in construction, it’s been treated as commercial.
I was like, “Okay, I’m all in on duplexes,” because that’s the best and highest use of land I can get while still going through the residential permitting department, which is a lot quicker and cheaper.

Rob:
Now, you had the luxury of buying your first property. I think you said it was a new construction, right?

Donovan:
Correct.

Rob:
Okay, so you’ve never really understood the pain of buying an old creaky house. What was your strategy moving into the next set of properties?

Donovan:
It was definitely to continue on what was working. I had evaluated a couple flips, but I could just never get comfortable with the thinner margins. Even though I’ve done this a few times, I still make tons of mistakes, and so I like to have a good healthy margin of error, and with new construction, I felt like I had that, versus on the flips, the margins were just a bit too tight for my liking.

Rob:
So, as you moved on into your partnership, I think you said that you found someone social media. They fund it. Are they funding a brand new property? What type of property was this?

Donovan:
They’ll fund the land acquisition, so me and the partner will create a new LLC. We’ll split it 70/30, 60/40, give or take. They’ll put in the money for the land acquisition, as well as for the permitting fees. Then we’ll use that land as collateral for the construction loan so that we’re not coming out of pocket any additional capital. Then the lenders is funding all the construction.

Rob:
When you went into the idea of partnering with people, bringing on private moneylenders, was the strategy to basically build new construction duplexes or multifamily with them?

Donovan:
Exactly. So, I had my pitch deck, and it was specifically for a new construction duplex in this zip code. So, I got really granular with what I wanted, and I felt it made it easier for the partner to come along.

Rob:
There’s such a long payback though with new construction, because you have to permit it. You have to find the land. You have to actually do the construction. How was pitching that to investors that, “Hey, I’ve got this really cool opportunity, but there was a bit of a waiting period before we see tangible results?”

Donovan:
For some people, they were definitely turned off by it. Then for others, they were like, “Well, I can only make 8%, 10% in the stock market anyways. So if I’m waiting…” At the time, it’s about a year, give or take, four months for permitting and six months for construction, maybe another month or two to sell it. They were like, “20%, 30% is still better than what I can get in the stock market.” So, that’s how I compared it.

David:
Did you think, Donovan, about how much work you’re going to be taking on, because that 30% with what you’re doing is not the same as 30% in the stock market, right? This is significantly harder, and there’s more risk. How did you factor all that together to know this was the right move for you?

Donovan:
I don’t think I factored quite how much work it would be. I was like, “I can figure it out.” It’s that mindset I took, and once I got into it, I was like, “This is a lot of work for maybe little relative return compared to how passive the stock market is,” but my whole thing was I really want to get the experience so I can leverage that into bigger projects one day. So, for me, it wasn’t too much about the money. It was about making the investor happy, getting the experience, and hopefully parlaying that to something bigger one day.

David:
That’s brilliant. I’m glad you mentioned it, because you often see gurus post things like, “I’m getting 28% returns,” and so people compare that to 5% they could get on a CD in the bank. It looks better, but they’re not mentioning the risk they’re taking, the headache they’re taking, the work they’re taking, and the fact that sometimes you lose money on a deal too, and if you add that into the 28% return, it factors down to be much lower, but what you hit is really important. I’m learning something. I’m gaining skills. I’m learning how construction works, permitting works, engineering works. Tell me a little bit about some of the skills that you’ve built since you started with construction, particularly what it’s like working with architects, ways that you found to save money that maybe somebody else doesn’t know.

Donovan:
One of the things I like to do with the architect that I figured a little bit early on was to optimize the square footage a little bit. Most people, most buyers when they’re looking at a property, they’re primarily focused on the beds and bath, right? So, whether a house is three bed, two bath, 1,900 square feet versus three bed, two bath, 1,800 square feet. In the buyer’s mind, generally, they don’t really notice that 100-square-foot difference. To me, that’s huge because if it costs me, I don’t know, $120 a square foot to build, that’s $12,000 I can save, and still probably get pretty close to that similar comp that sold that was 100 square feet bigger. Because the delta on the square footage is not too large, the appraiser usually isn’t going to take too big of a haircut on you.
That’s one of the things I did was optimize the square footage to be 100, 150 square foot less than some of my comparing properties that I was looking to compete against.

David:
What you’re saying is you may have had a little bit less square feet, which would save you money on the building, but you made sure that the bedroom count, the bathroom count, the amenities, the type of kitchen, the materials that you’re using were the same or better maybe than your competition. So, an appraiser looking at two condos, one of them is 1,400 square feet. The other one’s 1,550. In their head, basically, that’s the same thing, but you’re spending less on the build.

Donovan:
Exactly. That goes straight to the bottom line.

Rob:
What do you mean by that? Can you explain that concept of going straight to the bottom line for people that may not be familiar with what that means?

Donovan:
Yeah, great point. In that example, saving $12,000 on construction, that goes straight to your profit. So, any money saved on construction is like a dollar earned almost in the sense of… It’s probably the same thing with the flip as well, right? Save money on the rehab, that goes straight to the profit generally as well. So, that’s what I meant.

David:
That concept works for haircuts as well, actually. I save money there.

Rob:
I think it’s a really overlooked thing to see the bottom line concept, because this is something we talk about with maximizing revenue in our portfolio where it’s so much easier to try to increase revenue on a property that’s already profitable, because every dollar that you increase revenue by goes straight to your bottom line, is an extra dollar of profit that you actually get to keep, versus going out and buying a new property or doing a new construction, and having to start all that work to start the whole process over, and try to be profitable there. It is just a very long-winded process, where I think trying to maximize from the get-go will make you the most money over time, which brings me to my next question.
Obviously, duplexes were your thing here, but did you ever go into the mindset of maybe trying a triplex or a quadplex? I’d imagine you’re already doing all the permitting. You already have the land. I’d imagine profitability is higher on those types of properties.

Donovan:
Yeah, we looked into it. Again, one of the big pieces was the difference in permitting. So, instead of going residential permitting, if you went a triplex or above, you would have to go through the commercial multifamily building department. Basically, that’s the same department as they evaluate 200-unit complexes. So, it just takes longer, probably double the time, give or take. It’s more expensive. The other thing too was as you build more units, you’re spending more on construction, which means you’re having to sell that at a higher price point. For example, if I built a triplex, I would probably have to sell it at 600, 700 plus. In Houston, the median is 350, so now I’m almost selling double the median.
In my opinion, I feel like there’s a smaller buyer pool for that as well. So, I was trying to keep in mind making sure it’s somewhat reasonable for a lot of first time home buyers as well.

Rob:
That point makes a lot of sense. Then if I’m hearing correctly from your first point, there’s a level of effort that goes into triplexes and quadplexes where the juice may not be worth the squeeze for you, because you found such a comfortable groove in the duplex world, right?

Donovan:
Exactly. Yeah, it would extend the timeline from 12 months to maybe 18 months, and so definitely impacts the returns a little bit from the investor point of view.

Rob:
Makes sense.

David:
All right, let’s talk about the construction process itself. Since at 27 years old, you’re managing entire ground-up constructions, which is incredible, and congrats to you. By the way, if you guys know anyone out there who’s saying, “I’m still young. I’m 27. I don’t have to take life serious.” We have a 27-year-old here who not only owns real estate, but is building it and selling it from the ground up. You are literally a real estate developer, so kudos to you, but I want to hear for those of us that have never including me, built something from the ground up, what’s the process like? Give me an overview of the steps, and then we’ll dig in on the details.

Donovan:
For sure. There’s probably five or so big ones basically. Like most things, you’re starting with the foundation, so you’re putting… In Houston, that’s generally a slab on grade, which is basically just concrete on top of the dirt, so pretty straightforward there. Then you’re going to frame the project with your lumber or however else you’re going to frame it. From there, you’re going to start on some of your rough ins, meaning your initial plumbing, initial electric, initial plumbing, electric and HVAC. Then from there, closing up the walls, putting the drywall up, and then that’s when you get into your finishes, so foundation, framing, rough ins, drywall. Then you’re finishing stuff like cabinets and tile and flooring, almost like a rehab at that point.

David:
All right. How long does it take from the point you start to the point where it’s finished and ready to be sold?

Donovan:
Generally, for me, it takes about five to six months from when we start and pour the foundation to when we’re finished. There’s people who are quicker, but my whole thing is my GC is a little bit slower, which is okay, because I get a pretty good price. So, it’s that balance of I want to make sure someone knows what they’re doing, but also needs to be affordable to where the project pencils out. So for me, about five, six months.

David:
All right. That is from the point that you said the foundation’s poured. What about getting the permits and getting the land developed? What’s that process look like for you?

Donovan:
Generally, that can be done in about three to four months, give or take, from when you first submit the plans to when you actually get the building permit and are ready to built.

Rob:
So in this entire process, talk about the funding a little bit. Obviously, you mentioned that you were working with investors. What’s the actual tangible loan product that you’re using to get this to the finish line?

Donovan:
We go to a construction lender. Sometimes it’s a bank. Sometimes it’s a hard moneylender fund that flip, where now they’re called upright. They provide hard money loans on construction, so you’re putting the land down as collateral, and then they’re giving you similar numbers to a flip, where they’re looking at 70% of ARV, and giving you and loaning construction amount based on that.

Rob:
When you say that you’re using the land as collateral, that basically means if you pay $50,000 for a piece of land, you’re buying that part cash. Then you’re going to the bank, and then you’re saying, “Hey, I’ve got this land that I own free and clear. You can take this away from me if I don’t perform on the loan?”

Donovan:
Exactly. Almost act as the down payment basically.

Rob:
Perfect. I think this is a very underutilized loan product. Just new constructions are really, really great. I tell people all the time that it is one of those things where you’re going to get the best return, in my opinion. You just have to wait for it, but I like this process so much more because you get a brand new shiny house. You don’t have to worry about all the maintenance and CapEx right at the very beginning of it. You have some time to build up to it. So, tell us a little bit. You finished this project. How do the numbers actually work out? What do you build it for? What do you sell it for? Run us through some of that.

Donovan:
For sure. One of the more recent ones, we probably buy the land for 70, 75,000. We pay that in cash. We’re getting a construction loan for about 200, give or take, and we’re selling them at 370, 375.

Rob:
So, does that put your all in around 270?

Donovan:
I’d say with permitting and closing costs, maybe it’s 285, 290-ish.

Rob:
You said you’re selling these for how much, 375?

Donovan:
375, yeah.

Rob:
Wow. Okay, cool. So, close to a six figure spread on that, but 80 to 100,000?

Donovan:
Yeah, and then the investment in that scenario is about the land plus 10,000. So, say they put in 80, we’re technically taking home 80 again before the profit split between me and the investor.

Rob:
Tell us about that. So, you work it out with your investor. From a partnership or equity standpoint, are you basically 50/50 on that, or how do you structure that?

Donovan:
I think on the initial Rookie show, I mentioned I was giving 70, 75% of the profit away. Now that I’ve done it a little bit more, it’s a little bit more favorable. So, what I have now is a preferred return for the investor. Meaning if they put in 70,000, I’m paying them 15% on their money upfront. Then they additionally get 20% of the profits as well.

Rob:
That’s interesting. That’s a really interesting way to do that. That’s a pretty high preference investor, but it makes sense. You’ve got the results. I feel like you could probably negotiate that down a little bit at this point. But that does get me into my next question here, which is you were doing this in the midst of a tough market. I’m sure you’re having to pitch this and prove yourself to investors. How did you even make sure that this specific niche in the real estate business would be so profitable? We’ll get into that and what Donovan is doing differently in current market conditions after the break.

David:
Welcome back, everybody. Rob and I are here with Donovan Adesoro, and he’s breaking down how he’s turning 80 to $100,000 of profit on the duplex is that he’s building in Houston, Texas.

Rob:
You were doing this in the midst of a tough market. I’m sure you’re having to pitch this and prove yourself to investors. How did you even make sure that this specific niche in the real estate business would be so profitable?

Donovan:
I guess going in, it was more of a… I felt very confident in the numbers, because I had the construction numbers. Then I had the land numbers, which were obviously that’s what we paid for it, and I was comparing it to the duplex that I bought. So, because I know the duplex that I bought was 275, I know that’s what the end value would be. Back in those days, you could be all in at 200 or 180. So, I’m not sure if I knew or insured. I guess, I felt comfortable enough that it was a worthwhile risk.

David:
All right, so give me an overview of your all-in costs of everything that goes into your typical duplex, what they sell for, and then how much of that is leftovers profit?

Donovan:
I would say we buy the land for 70,000. We have on our contract right now for 67, we’ll just call it 70, 70,000 for the land.

David:
It’s a big step for you, by the way, buddy, to round from 67 to 70. I see that you’re adapting here on this podcast.

Donovan:
I’m trying to make sure the less details. The construction is 190 with closing costs, added another 10 for interest and whatnot, so call it 200, 270 right now, permitting and impact fees, another five, give or take, so 275. Then we’ll throw on 10 for, I don’t know, contingency budget sometimes, so 285. Then 375 is what we sell it for before commission. I typically… I’m a realtor as well, so I’ll usually save the 3%, and we’re just paying 3% to the buyer, 375 minus the 3%. I then minus the 285 all-in would be, give or take, what the net profit would be.

David:
So, you’re at 365 minus the 285. What’s 65 plus 15? By $80,000 profit. Then you’re going to have short-term capital gains on that.

Donovan:
Correct. Unfortunately.

David:
Any way you figured out how to get around those capital gains, reinvesting the money, anything creative?

Donovan:
Nothing at the moment will be done. So on seven of the duplexes so far, we refinanced them, and so we’ve kept them for a year. Then there’s two that we… Once we’ve crossed that year mark, we go ahead and sell.

David:
Long-term capital gain’s a lot cheaper. Then are you 1031-ing when you sell, or just paying the taxes on the long-term capital gains?

Donovan:
The original plan was 1031, but now with the… We wanted to 1031 into a 12-unit or something like that, or slightly larger apartment building. The market in Houston’s tough on those right now. It’s just tough to make in pencil, so we just pay the taxes on those.

David:
My advice is you 1031 into one of Robuilt’s projects here. He’s always a little mad scientist behind the scenes putting together. He’s got a land with a host of porta-potties in the middle of nowhere that people will travel out there just to use them. He builds tiny home communities in the trees where he rents them out to forest elves, all kinds of creative stuff that Rob’s always coming up with. His dream is to visit the world’s largest potato, and stay the night there to put on his bucket list.

Rob:
I’ve recently launched a bachelorette pad called the Pink Pickles, so always brewing up weird ideas over here.

David:
There you go. So if you’re that type of clientele, DM Rob. Now, I want to know about your clientele, Donovan. Who are the people that you are building for, and who’s buying your properties?

Donovan:
Most of the people I’m selling to at this point are young professionals in a similar position as me. Either they’re a nurse or engineer, but somewhere in that 25 to 35 range, and this is usually their first home. On my Instagram, I try to talk about the benefits of house hacking, and so that’s where I get a lot of the buyer flow from.

David:
All right, and then give me the avatar of what the buyer who buys your properties is like. Are these young married couples buying their first properties? Are these investors who have already got a portfolio looking to scale? Who’s picking these things up?

Donovan:
Usually, a young single person generally, typically no kids, working professional, graduated school four or five years ago, looking to buy their first home, and no longer rent in the nice apartment downtown.

David:
So, they’re a house hacker mostly.

Donovan:
Exactly.

David:
Then how many of these duplexes have you kept, and how many of them have you sold? Do you have a ratio of what you’re trying to hit?

Donovan:
It’s more of depending on rates. We would love to keep more. We’ve kept seven of the… I guess we just about finished number 25 now, so yeah.

David:
Drives you nuts. That’s a harder number to do the math in your head. Seven doesn’t go into 25 really easy. I could read your brain as you were like, “Oh god, I hit the 60% number earlier so good. I’m going to ruin my reputation here at the end.”

Donovan:
Yeah, I need a calculator.

Rob:
Donovan, obviously, you have a really impressive portfolio. You’ve done a lot. You’re young. I don’t even know what you’re going to do by the time you’re 30, but obviously you’re crushing it. One thing I do want to ask though, because I think a lot of people, they’re seeing many of us who had success in the last five years, and things have changed a little bit. So, can you tell us a little bit how things are changing for your business now? Have you pivoted? What are the numbers looking like in 2024 as opposed to when you got started?

Donovan:
When I got started, pretty much, you buy any single lot in the area where I’m building, and you threw a duplex on it, it would sell. Didn’t matter what it looked like. It could be the most hideous things. I’ve seen a few. I’m no artist myself by any means, but there’s been some rough ones. So, design wasn’t a factor when rates were at zero, basically. Now, design’s a big factor, and land prices have caught up as well. So, one of the things I’m doing to be a little bit more creative is buying slightly larger parcels, and instead of only fitting one duplex, there’s some I have now where I can fit three duplexes. There’s a new ordinance that came out in Houston called Livable Places where I’m now doing a duplex in ADU, where I can get a defacto triplex while still going under the residential permitting code. So, those are some of the things I’m doing to make sure.

Rob:
Now, going into the triplex world, well triplex-ish, pseudo triplex with the duplex and ADU accessory dwelling unit, how would do those numbers look compared to a conventional duplex build? Is it more profitable, or is it just a wash now with the way rates are?

Donovan:
I expect it to be more profitable. This will be, I think, one of the first ones in Houston that I’m aware of. So, we’re very, I guess, conservative on the exit value. But to give you the numbers on that, the duplex and ADU, we’re doing a slightly larger duplex, so it should cost about 220 just for the duplex, and another 70 for the ADU, so like 290 construction. The land is 70, so 340, all in 350, 360, plus permanent cost, call it 380, but we’re expecting to sell at 550, a little bit larger spread, we think, because there are some just standalone duplexes selling for 550 themselves. So, we feel good about getting duplex and ADU to sell at 550.

Rob:
Interesting. One thing that stuck out to me is that you said that you’re building these duplexes now to be a little bigger when your initial strategy was to go a little smaller. Why the change these days?

Donovan:
We’ve seen that the two-twos is what I did previously, and I still do those now and then. A lot of the house hackers are looking for a three-bedroom unit just because it’s easier to rent out from their point of view. So, we’re doing probably a little bit less two-twos, and a little bit more three-twos as we see the demand for those increasing.

Rob:
Cool. Final question for me, because you’re good at raising money, you’re good at what you do. When you’re going out and pitching investors, how is that process these days compared to a few years ago? Is it still an easy sell for you, or do you have to work a little harder to get some of these private moneylenders involved? How’s that going?

Donovan:
I think it’s going well just because I’ve been, I guess, talking about my progress on Twitter specifically for the last couple years. The people who are maybe hesitant at first now I’ve seen like, “Okay, at least he’s done a few.” Then I explain to them now how my underwriting is a little bit more conservative, and I’m forecasting lower exit values, so just explaining my mindset. I think it’s still… My issue now is more not enough deals. Have the capital ready to go, just don’t have the deals.

David:
Ain’t that something? You don’t remember this, because you were just a twinkle in your father’s eye, but back in 2010, everybody had deals. Nobody had money, and they all complained about the fact that you couldn’t take them down. Then there was a point where there was an even amount of deals and an even amount of money, a nice little equilibrium if you will, but we couldn’t find a contractor to do any of the work. Now, there’s contractors that are looking to do work, and there’s money everywhere, but we have no deals, and that is how real estate works. It is always bouncing around with some form of unevenness, and you, Donovan, have figured out how to take advantage of one of those opportunities by building stuff from the ground-up.
If you can’t find a deal, build a deal. Maybe that’s how you could market yourself on Twitter. Instead of build a bear, you could be the build a deal guy, which is another question. Should I be posting on Twitter? I don’t think that I’ve ever done it. I never quite figured out how Twitter worked. What’s your thoughts on that?

Donovan:
Yeah, I think so. There’s, I’d say, a growing real estate community on there for sure. A lot of them are in commercials. There’s probably less residential, but I think I’ve learned a ton from being on there. I’d say a lot of private moneylenders are on there as well.

David:
Robert, do you have a tweet presence, a Twitter presence?

Rob:
I do. Well, sorry, I have a small following there mostly from people like Cody Sanchez tagging me, or random people, so I don’t curate the content, but I would like to. Maybe you and I could keep each other accountable. We can tweet each other.

David:
Yeah, there’s a situationship. What’s a Twitter relationship called? A twitch and ship?

Donovan:
Checks out.

David:
Very nice. Donovan, if people want to hear you on other shows, I understand you’ve done a different BiggerPockets recording. Do you happen to know the show number on that one?

Donovan:
I believe it’s 123 for Real Estate Rookie.

David:
I believe if you say it’s 123, I feel pretty confident that that is accurate based on everything that we’ve seen about you. Thanks for being on the show, man. This has been awesome, and big congratulations to you for making the moves that you’re doing, and not looking for the easy way around it. Man, I can’t tell you how frustrated I get when people come along and say something like, “David, every opportunity in real estate is hard. Where’s the easy one?” As opposed to you that said, “All right, it’s hard. I’m going to do it.” Maybe it was a blessing you didn’t know how hard it would be, because it might’ve stopped you from doing it. But now that you’re in there, you’re lifting the real estate weights. You’re getting real estate strength, and it is definitely going to pay dividends later in your career.
If I could buy stock in you right now, I would. So, let me know before you have that IPO, and I would definitely be one of your first investors. Rob, anything you want to say before we get out of here?

Rob:
I’m really excited to have you back on the show, Donovan, because what you have accomplished really in the last couple of years is insane. So, let’s have you back in a year, and see what the progress update is.

Donovan:
Let’s do it. Thank you guys so much.

David:
All right. If you want to know more about Donovan, his info is in the show notes as well as Rob and mine, so make sure you check that out after you’re done listening to this. Also, if you like the show, please go give us a five star review wherever you listen to podcasts. Those help us out a ton. If you’re listening to this on YouTube, you see how good-looking Rob is, how handsome Donovan is, and how… Well, I’m also here. This is David Greene for Rob, the perfect, prettiest, pink pickle, Abasolo signing off.

RXR Realty CEO Scott Rechler joins ‘Squawk on the Street’ to discuss why Rechler’s been so outspoken about troubles in the commercial real estate sector, if it’s too early to put capital to work in real estate, and more.