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Do it Yourself Cost Segregations w/ Bill Smith

https://youtu.be/3gF1se6dpXk

Hey Simplepassivecashflow listeners. Today, we have Bill Smith here who is going to tell us all about the, do it yourself, cost segregation. For those of you guys who own single family homes or rental properties on your own, this can be a great cost effective means for doing a cost segregation, but hey Bill help me.

Let’s start at the top. No investor left behind. What is a cost segregation before we start drilling into this, do it yourself one. Okay. Okay. Essentially a cost segregation study, a real estate asset, mostly residential. What you’re dealing with is 27 and a half years or 39 years.

And so that’s your straight line depreciation. You can take that deduction every year to reduce your. Tax liability. What cost segregation does is we break down a building, essentially dissect it into its component parts, like when you were in eighth grade and you’re in biology and it does dissect a frog and take everything out.

all those parts, we put a different life to them. So those parts have a different life. And by short life, in those certain components that the IRS allows you get greater deductions upfront, realizing time, value of money. And then you can invest in more properties. So essentially that’s what we do is.

Dissect the building assign a new life. They call reclassify that property. And then you have higher deductions in earlier years. Very elegantly said. and if you guys want to learn more about cost segregation, go and check out podcasts. One 37. We did a little bit more deeper dive into the topic.

And I have a master cost degradation guide. If you are more of a reading and on your free time type of person, go to simple, passive casel.com/cost SEG. And while you’re on the page, you can also put it in your email and sign up for the newsletter to get the free Gootee there at, which is the K one tracker form or those syndication investors who have all these K ones all over the place and keeping track of your deductions, which.

You get those deductions by doing these cost segregations and on some of the larger deals, I can see like almost 50. It is 80% come back or what they invest as first year depreciation, but that’s all fine and dandy on the big deals, the syndication deals. But what we’re talking today is this cost effective.

Do it yourself. One that really makes it worthwhile to do on a smaller property. When I do it on my apartments, bill and I were looking at, This last deal and going to cost say get out. We don’t know the exact price yet, but it’s in the range of what, four to $6,000 typically on a large building and on a smaller building, it can be, you’ve got to send a guy out there and there’s a lot of modeling.

but there’s another way of doing it. And maybe bill, if you could go through that, what we’re talking about today, the paired down version. Yeah. so DIY cost sag is a platform we developed after being in the industry since 2002 and doing, well over 15,000 studies and we saw a need in the market for smaller properties under a million dollars.

And whether it’s a single family, residential, duplex, or triplex, we cover those, or it might also be a dentist office or any other kind of commercial property under a million, we actually go up to $3 million, but it’s a lower cost quicker alternative. So how that works is we’ve built a modeling system and we’ll model the property.

So it’s a non inspection product. It takes essentially. Five or 10 minutes to input the data you put in your credit card and you get your results instantly. So what happens with that is you’re done and you get your results. So it is going to air conservative and because we’re not inspecting it, there’s been a lot of talk like on bigger pockets.

Maybe you’re focusing on to BiggerPockets about these solutions. We have tremendous supporters and people that have questioned it, mostly competitors. But we provide audit protection. So in the event, you’re audited, which is very rare, but if you are audited, we are going to send an engineer out there and do a full engineering study, which we do.

again, we’ve done well over 15,000 a year, since 2002. So we will defend you fully. So you’re protected, but it’s a quick and easy solution, whether it’s a one to four family. With the discount code that you’ve got through here, with lane, it is a $640. That’s a one to four. It doesn’t matter.

What’s a single family or quad anything in between. And if it’s under a million dollars in five plus units, it’s 1200 and $1,390. That includes the auto protection is one 95 it’s insurance policy. So basically. It works great. It’s a good solution for the right situation. Certain, there are plenty of properties that are under a million or right in that borderline that justify the full asset detail that you’d get from a cost segregation study for.

A future of abandonment and disposition and things that depending on your purpose with the property and what your plans are with it, I talked to folks and say, this is your best option, or this is your best option. Are you looking to maximize your depreciation and do a lot of value add? Or are you just looking for quick deductions?

And an answer here, if you’re a real estate professional or not, sometimes that makes a difference. how valuable are these, tax deductions to you for an option? And it also takes into account like, how long are you going to put onto the property? It’s just like a turnkey rental that you’re going to dump in three years to go to syndication deals.

Maybe it doesn’t make sense. But if you’re costing out maybe a little bit. Larger property, especially in California, maybe that might be just enough to get some tax savings, to save up more money and eventually, go into deals and get cost segregations there and then sell the properties and not have to do a 10 31 exchange as I don’t like at all.

but you guys can go to against civil pass, a castle.com/costs say, and then there’s the link there with the discount code SPC, but I really wanted to dive into. there’s some controversy with this stuff when they go that’s so let’s speak to it. That’s how that mature conversation about the risks of what they are and some of the cons.

Okay. So you’re asking him what the cons are. The cons are, you have to have a habitats liability and you have to be able to use the benefits. I talk to people to say, okay, I want to get this. I heard about this depreciation. I want a bonus. I want everything.

It’s like Laurie real estate professional will know you got a deputy job. Yes, you’re good. They don’t have that much income where potentially straight line can almost neutralize their needs. they have to actually need it and have the doctors because there are passive, of course, if it’s a business property, and not residential, or it’s Airbnb, I talked to a guy the other day, he was calling about this and he’s doing Airbnb.

He was like, put this on my schedule C and I’m like, yeah, you could, because it’s a 39 year commercial property based on your tax situation. that’s a discussion with your CPA. So he was looking at getting these deductions on a schedule C, which actually did make some sense, but again, we’re not CPAs.

We don’t give that advice. So I talked to folks what makes sense for you? What’s your tax need and is this the right thing to do? And anything from, $58,000 single family, we did the other day with a guy in upstate New York. Too, we just did a $120 million, building in Atlanta, which obviously is a full cost.

Yeah. I’ll, I’m not a CPA, but I’ll walk people through the quick math in their heads. So basically we all know that on the residential rental property. You’re able to deduct one 27, the building value every year. So on a hundred thousand dollars property, let’s just assume that half of that property value is the building value, but in a lot of places that we like to invest in the Midwest and South with lower land values, that probably two thirds of it, but let’s just go at $50,000 and a hundred thousand dollars purchase price.

Now you divide that by 27. so 50,000 divided by 27. You’re roughly talking about a couple of grand a year of deductions, which is great. But. When you do a cost segregation, the general rule, as you’re looking to bottom third of the building value in the first year via cost segregation using utilizing bonus depreciation.

So one third of that building value 50,000. So you’re looking at 18 something like that. Yeah. So 18 grand compared to about two grand. So maybe a little bit less than 10 times, the amount of deductions you withdraw out in that first year.

That is right. But I think in the market, you’re talking about, you’re giving a lot of value to land because you live in Hawaii and usually in a CPA like Brandon Hall, he always wants to use the assessed value. And if the assessed value is below 20%, you go with the assess value. If it’s not, you look at the 20% is the rule.

A lot of people use. I’ve got people to use 10%. On pretty aggressive properties. We have to be able to support that. So we’re going to, it’s a problem. We’re going to say, wait, we can’t justify that land value for you, but usually 20%. So that a hundred thousand deal you’re looking at 80,000, let’s say it was 20% just at a conservative number for a house that’s a $20,000 deduction in year one with bonus depreciation.

And that goes to the end of 2022, unless the new administration happens to change that. we don’t know if they would or can and. And how quick that would actually happen, but it won’t happen on January 23rd. We know that, I’ve got a couple more years thinking and employ this strategy, but it’s ultimately, it sounds great, right?

You’re getting 10 to 15 times more deductions of first year, but there’s a cost to this. And when I do it for my large apartment buildings, I’m usually paying five grand or so on that thing to do this, to extract it out. but that requires sending, out a guy, unexpensive to travel out there, but that’s obviously not cost effective to spend $5,000 to get $20,000 of deductions at 25% tax bracket.

That’s a break even. So that’s where this do it. Yourself. Cost segregation product comes in. But bill, let me put you on the spot here. Why would lane spend $5,000? What else am I getting in my costs say that somebody’s spending 600 bucks and one of these things is getting. Just sitting no eyes wide open what they’re going into.

what does a huge difference? And I think on your bigger deals, if you’re spending 5,000, you’re not getting a very good study. You need to spend more than 5,000. They’re usually between five and 10. So on an apartment complex, it might be 7,500, six, six to eight, depending again, on the engineering that’s done.

So on a full study, we look at it and I think anybody else would look at. What are the engineering hours it’s going to take to do the work? Cause we send somebody on site. We count everything. We qualify everything and we do all the asset detail. So in a full study, you get complete pass at detail, meaning.

All your roof deal tale, all your HVAC detail, all your straight line detail, as well as all your short life detail, carpeting, flooring, cabinets, everything you’ve got. and we give a, a hundred page report back to you showing out all that detail. And we go into everything, electrical breakers, no one else gets the breakers.

We need things that people don’t do. So we wind in our deeper, but everybody goes in an engineer’s pretty deep and gets all the outlets and things. So that’s what a full study is. It’s a lot of pages. It’s a lot of research and a lot of documentation with the guy on site, too. Oh, yeah. You always see a guy inside.

Yeah. You always seen a guy inside an engineer. We send our own engineers. Some people would send picture takers and interviewers and stuff, but somebody all wasn’t goes on site. That’s pretty much what happens now with DIY it’s a non inspection product. So DIY means we’re modeling. So we are going to air conservative.

So if we would have gotten a 25% results by going on site, we might get 19% by the. DIY, because you’re not sending somebody on site. If in fact, you’re audited, though, again, as I mentioned, we will go send somebody on site and we will do that a hundred page report for you. But what you’re going to get with DIY is a model solution, which is what a lot of the people out there do models and residuals and sampling, and they add pictures and some engineering.

But what you get is a one-page report that gives you your five, seven, 15 and 27 and a half year. And then some categories of generally what it would be, and then a receipt. And then your data inputs, because some people input the date wrong. We fix it for them. We don’t charge. You’re afraid of that. you get a very streamlined report, but that’s all the CDA cares about CPR.

And 100 pages, they want five, seven, 15 and 27 and a half to put on your tax return and they’re done. So that’s what DIY does. So it gives you a lower number. It’s a lot less expensive. And so that’s why it’s good for the lower value properties where maybe you can’t justify a five or $10,000 study or for that, and then we also have a hybrid.

So one of the things to think about which I did, we did a million to house and sound like Hawaii, but that’d be a small house and wine LA this year we did a desktop. So a desktop takes our fully engineered study methodology. We use an engineer, but we don’t inspect. We ask the homeowner for answer a few questions.

Maybe get a few more pictures because the appraisals usually don’t have good property pictures. If they have a listing, like this was an Airbnb listing, then we had a lot of great pictures, had a swimming pool and tree. amazing grant, great landscape, good view. We got 52% of the property value for her.

She was blown away. She was like, wow, no, that’s not, doesn’t happen all the time. But that one, she’d been just a little bit under it, it might’ve got a DIY would not get near that because we just don’t know these specialty Palm trees and some nimble hot tub and the things that it says pool. So we’ll do the valuations, but it was, and that’s going to be a lower cost product about halfway between the DIY.

And the, full study, but so on a big house like that, they’re usually in the three to $4,000 range, but you’re going to get a full study, fully defendable, and you get a lot of detail. And that’s the thing, when you do one of these studies, if you were due to one, I would really suggest you guys get the audit protection.

So how does that kick in. I think there’s a pretty low chance of getting audited if you were. I dunno if like the percent chance, but I think it’s pretty dang low. It’s very low. of all the tax returns they get out at 4% of all returns get pulled for audit, which is a low number four or five.

and Cost segregation. Depreciation does not trigger on it. We’ve done over 15,000 studies. We’ve done plenty of audits, but relatively speaking, very few, but cost segregation has never been the trigger for the audit. People have got an audit for something else and when they get an audit. Of course, they look at everything.

They come in, they’re looking at everything. So now they’re going and depreciation schedules on the trip. So they say, okay, we need to check out why you did this or whatever. We send a report. If they asked a specific question, we answered their question. We showed the documentation to the report and the auditors happy.

Cause there’s somebody out of college, working for PWC or something and they go check and they’re off to the next thing. They got a list of 30 or 40 days or so. They’re happy. Our report is Bulletproof. And we’ve helped defend people that have been audited themselves. They got in trouble.

We’ve gone defended them. When guy was an honor, for two years, we did a quick study. We did a 27 page engineering letter, like a study summary. They send to the IRS in two days, the closest case. He had three more plants and was building a fifth plant. And so we, we got a client for life out of that.

Yeah, audits, but they’re rare. you want to anticipate the worst and expect the best. so walk me through this. Like I get the cost SEG, right? If I’m two bucks or so, you use my code to get a little off of that and maybe that helps pay for half of the audit protection and another a hundred bucks.

like a couple of years go by and the audit, maybe something else that gets flagged in my tax return. And he started digging into this. What do I do? so like, all right. I email bill and say, all right, man. the audit protection thing I bought, what’s the steps at that point?

You guys like, all right, man, we got it. We’re going to send the guy out and what’s the timeline and what are the steps? So what’s going to happen in the event. There’s an audit, your CPO, get involved, they’ll call us and say, Hey, we’ve got an audit and they’re looking at your depreciation schedule and say, yes, this one will not support an audit.

So we will then send somebody out onsite. Do the study, get it back and defend it. Usually have a specific question. So we might be able to defend it and just answer those specific questions. But if we need to go out and do a full study of it, and if we go to a full study, we’re going to find five, 10% plus more.

So you’re going to make sense. Oh, thanks for auditing because we actually have another $25,000 in appreciation. We didn’t claim. So we’re going to do a 31 15 change of accounting method. And where do you get this? And actually you owe us a refund. It may not go like that. that’d be a really happy ending, but we will find a lot more detail and we will get more benefit for you.

So there’s no chance there’s going to be any problems. Yeah. I think the do it yourself model is pretty dang close. Anyway. It might be so negligible. That it may not even matter, but I don’t know if that’s true if you do get audited and they do blow things up and you do find that your costs sake comes back even stronger, that you should go back and refile it seems like you should write, maybe just wait till the dust settles and refile next year.

So you don’t piss off that particular auditor. they forget that they’re not that’s that, but if you’ve done it in the year you purchased it. So you’ve already done component level depreciation. So actually you can’t go and do another 31 15 change of accounting method on the same thing you’ve already done.

I had someone ask me if they could reverse it because now they’re real estate professional. Two years later, go back to straight line for two years and then do it 31. I said, no, you can’t that’s well, there’s a lot of tax. I had to go to CPA on that one. And what if they didn’t pay for that insurance a hundred bucks.

Sharon’s how much legal fees or CPA fees does that take to defend something like that, just going out and doing a study or getting a study, you just have to go out and pay that $5,000 for a study, So you do have to defend that. So it’ll be certainly defendable. there’s no issue.

It’s not gonna be wrong. You just have to give them the detail. And that’s what the one big audit we did for that client. He did it. He was basically right. the CEO when they were doing, rubber for Nike and a whole bunch of stuff, he was basically right, but he didn’t have the backup details.

IRS wants you to detail out what you did. And that’s where our study with, our traditional study has straight-line components completely broken out. No one else does that. Unless you pay for an asset detail report. And they’ll charge again, another five or six grand on top of that original five or six brand they charged.

And so okay, now you’re looking at, 12 grand when we get an ELB for maybe seven for a thousand more that you’re looking at because we do the detail on everything. And what happens when you have that is you get dispositioned abandonment, which creates expense. So expense is great. So what you’re not going to get from, let’s say you’re doing roofs and things.

So you get a roof. We’ve put a value on it for if it’s about to be changed and we’re not going to high value with visit, it looks like it needs to be, it’s not a 30 year roof. We might have 20, $30,000 right on the roof, sat in an apartment complex. Like I’m one of the, one of your bigger projects or even a, on a house, houses that , we do with.

So what happens guys are during the shingles that rip off the shingles on the dumpster, they haul them away to landfill and then boom, throw them away and you put on a new $200,000 roof. On residential, you can’t expense it on commercial. You can expense it. Expenses are always better depreciation, but what happens?

You had $20,000 for the value on that roof. You just throw it away. And so at a, a 33% tax bracket that is $6,600, you just throw away. If you don’t have the asset detail and don’t know how to dispose of it or retire that asset that you’re replacing on a straight line. which is actually requirement from the IRS and their TPRS tangible property rates from 2014.

So that’s why asset detail’s important when you’re going to be doing a lot of repairs and maintenance, especially the straight line. It’s also important for the short life property. But now since a hundred percent bonus is in place, anything is five-year property carpeting things you’re replacing. Once you’ve done hardship bonus, it’s already written off.

You’ve disposed of it. It’s off your books. And so you just basically put in five years, so you spent 10,000 on flooring, you put 10,000 five-year life flooring, So when we help our clients identify, life components when they get replacements. Yeah. And the farm is pretty dummy-proof, it’s pretty easy.

Then you can do it in five minutes when I was looking at it. but yeah. So when people, they. Oh, you guys, this insurance, are you guys? Self-insuring it. It’s not through a third party. We’re self-insuring okay. Okay. So you guys, yeah. I’m sure you guys stand behind that percent chance of audit.

Cause your guys, the one, owning up if it’s the higher than that, right? that’s, that’s IO people always ask Oh, what do you think? The steel’s good look, man, I’m putting in my money. That’s what I think. And in this way, you guys are like, self-insuring these audits and not, you guys are going to do the work.

If we had charged with this kind of insurance policy that you guys have in place. so the odds are very low and we’re going to be Aaron conservative. So you’re not going to get maximum benefit. But you’re going to get good benefits and you’re going to get actually very similar to what some of our competitors do because they’re using modeling solution.

They’ve done a little bit engineering. We’ve actually done some tests and comparisons. We actually go up to 3 million now, on that net goes up, it’s not 640, that’s just for a house, but it goes up to close to 3000, I think for, a higher property. And we also, then we just, we do them on mobile home parks.

Those, we almost manually do our guide behind the curtain. He works on those, DIY is a great solution. It’s been really well adopted. A lot of folks in bigger pockets are big fans. A lot of folks are a lot of CPAs that use it for the smaller clients that have investors. I get a lot of calls and I get calls all the time.

They’ll go onto our website. Hey, I’ve got this house, let me know. And so we’ve got it. a number of big CPAs that also refer us when they have a smaller client. I talked to them and I set it up and they got 10 houses, or I get one, got a guy that had 10 houses. We’d get on Thursday. We connected and did 10 houses last Thursday.

All right. So yeah, to close things out, this, the why is this important guys, while you get the passive losses from these things, and you can offset your. Passive income. But if you’re super smart, like how we work our taxes, we played a real estate professional status. There’s a lot of nuances to that which we talk about every other week in the mastermind group, you guys can learn more about that.

It’s full passive cashflow.com/journey, but you can do tricks like this and. Now, I’m sure people who’ve listened to podcasts awhile. No, quite really don’t like 10 31 exchanges. I don’t know why anybody does them, who is a syndication investor, because, here’s my tax form that I have to display.

This is on the cost SEG website, simple passive cashflow.com/costs. So this year was I think, 2017 or 18 when I sold seven of my single valuable rentals. That previously done a 10 31 exchange. So I know all what they’re all about. I would never do one again and I don’t recommend it for most people, but I had a $200,000 capital gain see here on line 13, but because I was doing all these syndication deals doing cost segregations, like bill does, I was getting all these losses and they’re just piling up.

So when I had this big capital gain, I just brought it over here on line 17 to knock it right out and no gain. Without a 10 31 exchange. if you guys are thinking a 10 31 exchange, please don’t do it. Read this article, please don’t waste your money and don’t be a sucker or distressed. We call them the suckers, but they’re distressed buyers.

Whenever we want to sell an apartment, we jumped for joy when there’s a 10 31 buyer, because they are distressed buyers. But yeah. So coming to this page, that’s the main thing we’re talking about today is do it yourself cost SEG bill also does regular cost eggs. He’s looking at some of my apartments right now, to do it the, heavy duty way.

But this is the pair down for the show, slowly on 10 30 ones, because 10 30 ones. for some people generational wealth handing to the kids and what it was really designed for back in like the thirties or something like that. But people not using, Oh, I just want to get rid of taxes.

They use it for the wrong reason. And there’s so many, as you showed a great example, you don’t need a 10 31 necessarily to reduce your taxes. So I’m not a fan of 10 30 ones either. There’s a guy in those internet form that always gets into like an argument on the internet forums.

So to me and buck had 30 ones, he’s a 10 30 ones. He sells 10 31. So they always this is outrageous. You’re like 10 30 ones are like the best, no, man, like just looking at your small world, like this is the bigger picture. yeah, maybe in that world it is the best strategy that you know of, but I know something that’s a little bit better.

That’s right. And Joe Biden had said, he’s going to, the first thing he did was to go after his 10 30 ones is a low hanging fruit. And I don’t know if he’s at that’s just political talk or why, politicians say anything to get elected, but he said 10 30 ones showed more risks than bonus depreciation this point.

I will see what happens. I appreciate it. I don’t think people understand like that. You can depreciate an asset like with bonus depreciation. So therefore it’s out of the vernacular of the common American, like ABC can make an article on it basically. So yeah. let them have the tender one is what I say.

yeah. Yeah. Should we actually say, what bonus depreciation is done? And we define that. Did we. Yeah. Yeah, I think so. And, we also did mention a little bit that it is going to be going away in 2022, I think like stepping down 20% every year. So it’s not going away entirely, but.

Let’s cross our finger and it gets, renewed, right? Yeah, it will. What’s going to happen in 2022 and now it’s a hundred percent. And in 2023, it goes to 80% and then it goes to 60% and it goes to 40%. It’s been a hundred percent once before, and it’s been 50%, several times to infuse the economy, And so let’s say you bought a property in 2020. You didn’t realize cost you do it in 2021 and 2022. You will still, if we knew cross sag in the future and do what we call it, look back study. You still get bonus depreciation in the year that you paid for it. Bonus depreciation was in fact, or if you bought some in 2016, Wayne you’ve introduced me to a whole new world.

Oh my gosh. I bought this $5 million book apartment complex. And in 2016, we can do a site study on that. Now get that lost opportunity in 2016. 50% bonus depreciation. Of course the key thing is all a five-year we’re doing a catch-up you’re going to get it all in year one anyway. So what bonus appreciation is besides the word?

Everybody knows. Okay. We’ve heard about it. We’ve talked about 27 and a half year, 15 year, seven year. And five-year seven years. It’s your phone lines, but your short life, anything that has a shorter life than 20 years. You can depreciate in your one, it’s an election on your software, your CPA software, you still put in your five, seven and 15, but that bulk number, which might be 20 to 25 or 35 or 45%, I’ve seen some multi-families go to, you can take it all in year one doesn’t mean you get extra.

It just means you get it to take in year one. So you get that big deduction like you got in your properties. So you all set that big capital gain. So now you’re going to have to buy more properties next year to offset your other capital gains. So it just keeps going and you’re going to keep building your portfolio and your wealth.

So that’s how it keeps working. I call the, I call that the simple passive cashflow gravy train. Once you keep rolling and rolling. And people always ask don’t you sell your properties and you’ve got to pay back the depreciation and recapture and the capital gains, yeah.

But hopefully in the meantime, you went into dozens of deals and then you accumulated all these passive loss and then you take that money that you did make and put it into two or three new deals. Get the good towns rolling. That’s right. that’s the other thing that people that I don’t like as well as recapture all recapture and like 10 30 ones are also great recapture so bad.

Not necessarily because, one, we know tax rates are going up. And especially capital gains rates. So if capital gains rates go up to ordinary income, right then recapture, you can recapture anyway on your straight-line property. So do you want to, you’re going to pay taxes on that money either in the future or today just saw your tax rates are lower today.

So recapture is not such a bad thing. if you’re using the money, if you’re buying one house and you’re sitting on it for years and you might sell them, buy another house. Yeah. It’s probably makes sense. But if you’re investing. And turning your money. We have big clients. I won’t say the names, but they do it on everything.

They bought hotels in Hawaii, their bicep, all over the country building and buying they’re opportunistic. They might sell it, but they’re using that money. And the return they get on that money is greater than the tax rate they’re paying capita. So again, it could be bad. Again, it depends on your situation, but recapture and especially if.

Ordinary income tax rates or cap gains go to ordinary income tax rates. It makes it a moot point. You’re going to pay me now, pay me later. but the money in your pocket today, but yeah, there are, people are looking at this myopic thing. they’re looking at in one off deal one property and yeah, you do have to pay the depreciation recapture back, but I tell them like, Hey dude, look at the big picture.

You better be in like, 10 20 deals, right? Like in the next five, 10 years. Like they’re not only having one. you’re in multiple deals that are all kicking off these passive losses. So they all help, like in the big picture of things, right? Yeah. you’re going to pay tax on the recapture money anyway, so you can either pay him later in the future or pay them now.

And are not paying now and that’s what cost segregation as it differs, if it’s a tax deferral strategy. so anyway, what, what else? I love all your pictures there. All the parties you’ve had are all the groups, masterminds and networking groups. It’s fun out there in Hawaii.

Yeah. that’s where you get all these strategies, right? It’s not just like the neck when I read about this stuff in a book, because this stuff changes so quickly, right? Like bonus depreciation is a rather new thing, but that’s, I’m always preaching on develop your network.

Right? Most people, myself included when I started out, the best thing was like listening to the senior worker and to keep it going. That’s absolutely not the guy to listen to for financial advice. Yeah. Finding your peer group of pure passive upgraded investors doing this stuff. And that’s when you’re going to find these still chicks tips like this, just like the, do it yourself, cost sake, which, yeah, again, check it out.

As simple as a casper.com/cost say great for smaller property and mango airport folded on it. Cool bill. appreciate it. We’ll talk a little bit later about some loose. They, the larger ones, largest cost variations, but, yeah. Of you even want to get a hold of you? I’m gonna duct you’re contacting for, if not, they can reach out to me and I can do I’d have to you guys later on.

It’s pretty simple. It’s bill. At ELB cost seg.com. So ELB cost SEG is our firm cost segregation. It’s CLB consulting, but the website ELB costs. So just build an ELB cost side. And my phone number is four zero seven four seven five five four seven. It is my cell (480) 747-5547. Perfect. And, if you guys want to learn how to get these costs, surrogation bonus appreciation stuff.

That’s where the syndication deals come in, get yourself educated, pick up the new, go to simple paths to casel.com/syndication to check out the free guide there and see if the e-courses for you. But we’ll see everybody next time. Thanks very much.

Is a Cost Segregation Worth it on a Single Family Home?

https://youtu.be/ymmIjpid8v4

How much does it cost segregation cost? It doesn’t make sense to do it on a smaller property, or is there a certain rule of thumb that you have. In general. It’s hard to say if there’s an exact rule of thumb, but I have done studies on single family dwellings that were purchased for under a hundred thousand dollars.

And actually they, they worked. And one of the reasons is because we’re able to do those studies generally for under $2,000. And that the benefit that will be real honest from a cost segregation study will exceed the cost of doing it. Buy enough of a margin to make it worthwhile. And that’s in a situation where the owner is looking to own that property for the longer time, horizon five, 10 years plus disposing of the property a year or two later, it’s probably not worth doing.

The New Great Depression w/ James Rickards

https://youtu.be/4eVAskRng9Q

Today. We have James Rickards here, author of the new great depression. Check it out on Amazon. It should be out now, but let’s dig right into it because a lot of you guys know who James is and he writes a lot about, bat girl economies. And I thought bringing him on would be a great way to get a little bit of different contexts or different viewpoint on things too.

When you’re reading headlines, how do you take it in? But I guess James, let’s start off with you’re saying that we are in the new great depression. If you can explain that to us. Sure. It’s important to understand the distinction land between a recession and a depression.

A recession has a kind of a technical quantitative definition. It’s two consecutive quarters of declining GDP. There are a few other bells and whistles involving employment, so forth, but two consecutive quarters of declining GDP is a good rule of thumb. There’s actually a body that determines that it’s a national Bureau of economic research in Cambridge.

So the, they call the Boston strikes on recessions. They tell you when to start it when it ended, they said, pardon me? That this recession began in February, , 2020 . I think that’s correct. They haven’t said it’s over, but we can look at the data and. Pretty much see that it was over by probably July a third quarter growth was very strong, not strong enough to get us out of the hole we had fallen into, but but strong enough to end a recession.

Depression is different. Depressions are much more long lasting and people incorrectly assume that well, Jay, if a recession is two quarters of declining GDP depression is versus depression must be 10 quarters of declining GDP, like a really long recession. And that’s not the definition of depression.

Is you can have growth in a depression, but the point is it’s depressed growth. In other words, it’s growth below trend. For example, take the expansion from ten-year expansion from 2009 to 2019. The economy grew for 10 years. It was the longest expansion in us history, but it was also the weakest expansion in us history.

Average annual growth was about 2.2%. And all recessions are all recovery since 1980 average growth was 3.2%. So in other words, you were growing at a full percentage point less. Than the trend. And so it’s that below trend growth, depressed growth relative to trend. That’s what makes the depression.

That’s what we’re in now. So we had growth in the third quarter. That’s fine. We’ll probably have growth in the fourth quarter, although the data is that they keep revising the data downwards. So that target gets smaller for the full year to 2020. It’s going to be one of the Weakest year as largest negative growth, largest drop in GDP ever recorded.

The question is where are we now? My view is when a second technical recession in. The depression, by the way, this happened in the original great depression from 1929 to 1940, there were two technical recessions. There was a recession from 1929 to very severe. And then there was growth in 1933. It was one of the best years in the stock market.

34, 35, 36. We had growth. But the problem was we had dug such a deep hole. That even with growth, you weren’t back to where you were. So in 1934 or 35, unemployment fell from 25% to 14%. That’s sounds good. Except it’s still 14%. In other words, it’s still so extraordinarily high. And then 1937 38, we had a second recession and that’s what prolonged it and turned it into the great depression.

We’re going through something similar right now. I would we’re going to have a recession. In the first quarter of 2021, the quarter we’re in right now this will be what they call back-to-back recession. We had a recession and pretty much the first half of 2020 and a newest session beginning in the first quarter, at least of 2021.

All in the context of a great depression. So I focus on the depression aspect of it. You can have growth, you can have declining unemployment. There are certainly investment opportunities, but you’re looking at the press growth. You’re looking at prolonged period change behavior. We’re not going to get back to normal or there’s forget about normal.

We’ll live through it. We’ll cut out the other side, but things will be permanently different and that. Affects all kinds of expectations about growth asset allocation. And that’s really what I focus on in the book hit some of these COVID questions here at the end, cause that’s a little bit more of the micro cycle, right?

What we’re talking about today is more of a longer time horizon. So just to understand it correctly, from my perspective, you’re saying depression is you can still have growth. In a depression, but it’s just not at the pace of 3%, 4%, 5%. Correct is depressed growth in other words, right? One, 1%, 2% a year over five, 10 years, that can still be in the technical term, but depression is what I’m understanding.

That’s right. But again got to go back to the 2009, 2019 recovery ten-year recovery. And I said growth was 2.2% trend growth. Prior to that, going back to 1980, it was 3.2%. If you want to go back to the end of world war two, it was more like 4.2%. So that’s the kind of goes, so you say Jay, 2.2, 3.2 it’s only one percentage point.

What’s the big deal. No one percentage point apply to a $20 trillion economy. Compounded over 10 years, that has up to four to $5 trillion in lost wealth. In other words, yeah, we had an expansion, but it would have been $4 trillion greater. There would have been $4 trillion more wealth created. If we had been able to get back to 3.2% at which we did not The same thing is true today.

So yeah, you had growth. The numbers are in the first quarter, going back to 20, 21st, first quarter, GDP was down about 5%, second quarter down about 31%. And the third quarter, it was up about 33% and people go well, okay. We went down 31%. We went up 33%. Aren’t we back where we started? The answer is no, because the 33% was applied.

To a much lower base. In other words, if you start the year at a hundred, say 2019, is your baseline. Just call it a hundred percent of 2019. You go down 5%. And then you get down 32%. Now you’re around 67% of the old baseline. So even if you go up, let’s say 30% or a little higher at 32% that only gets you back to 87.

It gets you to 20 points. You get us back to 87. You’re still. 13 points below 13 percentage points below the old trend. And even if we have say 10% growth in the fourth quarter, which is some estimates show, okay, that gets you another eight points, but you’re still back to 95. In other words, you’re still.

Below 2019 baseline growth. We’re not going to get back to 2019 levels of growth until 2023 at the earliest. We’re not going to get back to 2019 employment levels in terms of total jobs until 2025 at the earliest that’s if nothing goes wrong in the meantime but I expect a number of things would go wrong, including a new recession right now.

Lot of people don’t know lane Yeah. They know that the stock market peaked in a night, October, 1929, and it crashed 89.2% by 1932. So almost 90%. That’s what a real market crash looks like. And then you ask people when did they get back to the 1929 level? When did it get back to the old high and people go, Oh, it must’ve been late thirties, early forties.

No, it was 1954 and it took 25 years. To get back to the old high, the Nikkei index in Japan hit 40,000 in 1989. It’s still not there. That’s, be able to talk about the last decade. We’ll try three last decades. Here we are 30, over 30 years later and it’s still nowhere near the old high.

And so that’s, I would say Japan has been in a depression the whole time. So that’s what depression is look like. They’re multi-year, they’re actually intergenerational You can have growth, but it’s not try and growth and it’s not enough to overcome the damage that was done. So we’re still way below, even with growth in the third and fourth quarters, we’re still well below the 2019 base.

And we’re not going to get to that level for several years, at least. So I think a lot of people understand this as, if you have your stocks drop a bunch where it’s going to almost have to come up twice as much to get to where you were, that phenomenon with numbers. And then you also mentioned something there too.

I think a lot of us, we understand what’s going on in Japan the last decades. Do they have negative GDP growth or is that kind of what you’re alluding towards that you. The U S is going towards, they have both I think the U S is going to resemble Japan. I think it has resembled Japan since 2007.

Going back before the global financial crisis, but I think that will continue. So just use Japan as example, I said during the 30 year depression, which they are, they’ve had a series of technical recessions. Now the recession might last. Six months, nine months a year, sometimes longer.

And then they have growth, but they never get back to trend growth. They never get back to the old level. That’s my point, not Japan’s nitrous in place. And I had a conversation with. He was known in 19 years and said, Mr. Yan, he was the assistant finance minister of Japan. But I was talking to him about this.

So we’re in Korea, about exactly what we’re discussing now, which is that Japan is growth has been very weak within and out of recession with a prolonged depression, but some growth along the way. And he said, yes, but you have to understand that the population is declining. So , if you calculate Japan on a per capita basis, They were actually doing better than on an absolute basis.

Absolute growth has been very weak, but if you spread that growth with a much smaller population, the per capita numbers, they’re actually significantly higher and which is true, just, fifth grade math

so where are you? Ended up as one person knows the whole country and he’s the richest guy in the world? That’s the deal ad absurdum of what he was describing. He was technically correct, but is that doesn’t work in the market? May our population is increasing we’re a country that likes growth.

We like both at the individual level and at the national level. So the idea that we could be satisfied with we growth in a declining population is just, it’s just not going to happen. Could be inappropriate long bout of weed growth. And then the policy question as well.

How do you change that? How do you get out of that? How do you deal with it? Yeah. So if you guys haven’t heard of this term of, changing worlds, demographics, aging, and birth I think that was in. Mr. Rickards last book. She just want to check that out, but definitely a big impact too.

So America’s population is growing. Barely, it’s funny looking at it as a great question. You look around the world. Japan’s population is declining. Russia is declining. Europe is declining. China is flat, but they’re approaching a level where they’re they’re not going to be at replacement levels.

Chris, this is the legacy of the one child policy, which is, we don’t have to do a deep dive on that, but that was one of the great plungers of history and aging rapidly. So Japan is flatline now until recently. United States population had been growing not at a high rate, but faster than all those other countries.

I mentioned mainly because of immigration , the natural birth rate of people in the country was not much better than Europe is at, or slightly below replacement level, but we had enough immigration to increase the population, but pardon me, partly because of policies during the Trump administration that immigration has been truncated.

So we may now be closer to a flat shall we say a population growth. And of course that, that affects output. There are lots of ways to think about GDP, the four part definition consumption investment government spending and net exports. But there’s an even simpler way to think about it.

It get to the same place, which is how many people were working and how productive are they? It’s working population times productivity. Productivity has been flattish, not very strong for reasons that are not entirely well understood, but it’s just the case. And population growth. Here, we’re talking about the labor force not the total number of people, from coast to coast, but how many people are in the labor force that labor force participation has been declining and fell very sharply during the technical recession that we had , in 2020.

If your population’s declining and your productivity is declining, your GDP is not growing very much at all. That is the situation we’re facing in the United States. And also like the way they keep those statistics on who unemployment has been changing to make it look rosier than it really is.

Yes. But I would say there’s another statistic, which is more important, which is labor force, the labor force participation rate, which is down around 61% now. But as recently as the 1990s, early two thousands, it was around 67%. So that’s a six and a half point decline or 10% decline if you think of it as a percentage of the whole that’s a big deal.

That number is the lowest. It has been since the 1970s, when women first started coming into the workforce in large numbers. Now, if you don’t have a job. But you’re not looking for a job. You’re actually not counted as unemployed. The unemployment number we saw and yeah, declined from it was hit about 13% last spring.

It came down to 10 . Now it’s around a seven or so, maybe slightly higher. That’s still high, but it’s a significant improvement over where it was last April, let’s say, but that’s not the number that matters. The number that matters is labor force participation. So what’s happened is.

Tens of millions of Americans have, I’ve left the workforce there and I’m talking to ages 25 to 54. I’m not talking about, a 68 year old who wants to keep working or a teenager, or we’re not talking about disabled. There are perfectly good reasons for people not to be in the workforce.

There are always some, but. We’re talking about able-bodied individuals between the ages of 25 and 54 prime working ages who have left the workforce. If you’re not, banging on the door of the unemployment office is looking for a job. They don’t count, it was unemployed but you’re not working and you’re not producing.

And so I look at that number because to me it’s a better gauge of economic growth

displayed right here. So that’s just simply Google and the labor force participation rate. Kept up by the U S Bureau of labor statistics. And is this pretty much it, this is what makes it hard, right? Cause everybody hears the news headlines and we know they’re always just trying to sell news headline, just like other talking about how collections are horrible, but I don’t see any of that issue happening.

In other words saying that unemployment’s down, but is this really the way they cut through that noise? Yeah. This is a more manual chart than the unemployment rate. Again this is the labor force participation rate. Now you notice you’re heard a lot of talk and last March, April may, about the V-shaped recovery and pent up demand and all that.

And you look at that chart and look at labor force participation while you see the steep decline at the time of the pandemic. Okay. Got it. It came back, but that’s not a B that’s like a half a B in other words, the bounce now it’s flat and going down again. So yeah, you had a little bit of a bounce back.

That was to be expected after the, we got through the original round of lockdowns in in may, in June, she had that bounce back. But then it flat lines and now it’s going down again. And that’s consistent with what I said earlier, which is we’re heading back into another recession right now. Because there’s a new round of lockdowns.

You don’t need a PhD to figure this out. You locked down half the economy, you’re going to get a reception. It’s as simple as that. And the other thing lane is that People go, Oh, the stock market’s at all time highs, my 401k is back where it was or even better, et cetera. There is a major disjoint, if you will, between the stock market indices and the health of the economy, you have stock markets who are back to all time highs, but I look at the S and P 500 and I call it the S and P six, or maybe S and P seven, if you want to count Tesla now.

And that was the S and P 500 is the cap weighted index. That means if you have a larger market capitalization, you count for more, in the index itself? 40% of the index is a Dell seven stocks and you know what they are, it’s, Amazon, Microsoft, Google, Facebook, Netflix, Apple, and now you can throw in Tesla and maybe one or two others, and they’re the ones going up.

They’re the ones that least affected by the pandemic. They’re overwhelmingly digital. Okay. Amazon owns whole foods and Apple has some showroom type stores. But not much, mostly they’re online and they’re selling digital products and advertising and data mining, et cetera. So they were not only unaffected by the pandemic, but did better because that was the only place people could shop or communicate.

But what about the S and P 490? What about the other stocks in the S and P 500? Have a look. They’re all the kind of flat to down there. Yeah. There’s some individual cases that have gone up, but on average they’re flat to down. So we’ve bet our whole economy on so there’s six or seven stocks.

So there’s no. Relationship between how the stock market and the seas are doing and how the economy is doing. When we get back to the economy who suffered the most and who continues to suffer the most small and medium size enterprises. So restaurants, bars, nail salons, dry cleaners Boutique shopping on and on.

There’s a long list and people look down their nose at that and they go, Oh, you’re a small business who cares? You’re not Apple, computer, whatever, sorry. Those small businesses are 45% of GDP and 50% of all jobs. That’s half the economy right there. If you crush it, you’re going to crush the economy.

I don’t care where Apple stock goes. It’ll, I’m not going to short it’ll probably go up more, but you’ve crushed and destroyed half the economy. And we’re doing it again with the new outbreak in COVID cases and fatalities, which are actually higher. Then they were less March and April when everyone thought the world was coming to an end, it’s worse right now with this second wave and it may get even worse because some of the new variants or strange, or whatever you want to call it, it’s not clear that they will be controlled by the vaccine, even if they are.

It’s not clear that the virus won’t mutate further. To escape the vaccine, they call it mutation as escape or the immunity escape. In other words, the idea is that the virus first of all, the scientists and I’m a sheriff is alive or not. I talked about that in the book.

It’s a it’s something, it’s got some RNA in it. It’s got a shell and it exists. We can see it under electron microscope. It’s not clear that it’s alive, but it’s really good. At replicating a cell by taking over cells and cell infection spread. Now, if you create antibodies to the virus, so you can get antibodies through a vaccine and you get hit with a virus, your body can fight back.

That’s what vaccines do. But so the virus think of the virus is trying to survive, right? It, all of a sudden more and more people have the vaccine more and more people have immunity get close to her, to immunity. The virus has nowhere to go. Every time it jumps from one body to the next, it runs into the antibodies.

Or as I say, the vaccine or whatever what does it do? It mutates in ways that do an Enron around those particular antibodies, you need new vaccines, new antibodies to stop it. This is just how viruses behave. It’s been true throughout history. It’s why you get these second waves or in our case remain.

B heading for third wave. So this pandemic is far from over, right? The vaccines. Great. That nice job. The pharmaceutical companies, the Trump administration did a great job of funding it and getting bureaucratic roadblocks out of the way. And it was in redundant record time for something of this magnitude.

That’s all to the good, but it doesn’t mean it’s over because we actually already, with this new UK, South African. Strain or variant could be saying the virus like Houdini escaping from the existing antibodies and finding new ways to infect people. So I want to go back to wrapping up the depression discussion.

So you, you mentioned productivity and the percent of. Labor force participation rate. What is the cause of that? I don’t know if you can speculate. Maybe it doesn’t matter, but what do you think is the general cause of that? Is this people lazier these days or, no, there are a couple of causes.

One is demographics, as I said, the populations aging and not expanding as fast as it used to so that some of it’s demographic people get to retirement as, no reason you can’t work it. 68 years old. Bernie Sanders has gone strong and he’s just getting close to 80. But the point being that is a time when people retire and check out, then the workforce has to decline and you don’t have as many younger people entering the workforce.

You have millennials now gen Z is coming along, but I’m not quite at that replacement level, but that’s not the only factor. The other factor is Because so many jobs have been moved to China and elsewhere, it’s not just China, but China’s probably the biggest culprit. Where are the the mining jobs, the steel jobs, the assembly line jobs, the skilled craftspeople, et cetera.

You don’t need a nothing wrong with college, but you don’t need a college degree to. To work on assembly line. You need some training and some smarts but yeah, jobs are largely gone. And what have we done replacing them with? We’re replacing them with, the gig economy, barista, Sarah, and by the way, there’s dignity in all work.

There’s not nothing, wrong with being a barista, good for you or an Uber driver, but those jobs don’t have the benefits and the pay scales and the security that we’re talking about. So a lot of people just drop out of the workforce. Drug use is going up. Obesity is a problem.

Diabetes is a problem. A lot of areas are just totally depressed. There aren’t any jobs around people don’t have the resources to necessarily pick up and move. I remember the 1980s, there was a migration from Detroit to Dallas. People just got to you all and moved to Texas and got another job. That’s harder to do now.

Not just the question, having the resources, there are plenty of jobs in Austin, but they’re the high-tech jobs. You do need an engineering degree or something like that to jump on board there. The quality of the jobs the lost opportunities, the depressed area, drug addiction, demographics, all these things come together and people just say, you know what?

I’ll sit on the couch in front of my wide screen TV and watch a football game and maybe. A relative as a job or someone else is paying the rent or you got some a government check or something, but it sounded long-term solution. And that’s part of what we’re going through.

I’ve heard that there is immigration still coming into America and that’s a lot of the blue collar workforce coming in. And a lot of markets there are new. Assembly, plants opening up, Mazda and Huntsville, stuff like that. But , you think it’s more of a paradigm between the coastal markets and more Southern Southeastern States, Florida?

Is there a different between, people moving out of California or no jobs in California. I know homelessness is really bad out there in Washington and a lot of other cities. Yeah. When you talk about immigration, that mean there are two completely different kinds of immigration going on.

There’s legal immigration with, an H1B visa or some other visas. And yeah, if you’re an engineer from India, come on and you’ll get hired, before you’re off the plane. But that’s okay. A limited number. And those aren’t really creating jobs for Americans or creating jobs for Indians who got an engineering degree, but that’s relatively small compared to the whole, most of the immigration is the opposite.

They’re, coming through the Mexican border. They’re pretty much impoverished. And then they’re not all Mexicans, by the way, they’re from Guatemala and El Salvador and Nicaragua, and actually all over the world. If you can get to Mexico, you can probably get into the United States.

Those people are not getting jobs in Huntsville. They’re they’re either dependent on the state or, yeah. Okay. Landscaping jobs waitress jobs maybe babysitters, et cetera. And again, let me be clear. There’s dignity in all work. So I’m not sure. Disparaging prefer illegal immigration.

I’m not disparaging people who do what they have to do for themselves or their families. And I’m not disparaging that type of work. What I’m saying is that those jobs do not have high salaries. They do not have benefits. They’re not going to lead to a particularly a high growth or higher consumption. Maybe in the next generation, that’s fine but not now.

So moving on to the COVID 19, which we know we’re moving into 2021. Where were we? About half time, first quarter. How do you see this playing out this year? The pandemic is getting worse and it may get worse than that depending on how the mutations go, which are unpredictable while lot mutations mean nothing.

They’re like right. A couple sequences change, but it didn’t really change the behavior of the virus and the vaccines still works, et cetera. Some mutations are favorable in the sense that the virus gets less contagious and eventually it can fail entirely. Those are possibilities. The history of pandemics is that in most cases, not all, but the most that the mutations actually get worse.

And then the classic example of that was the Spanish grow which by the way, lasted for three years and especially in 1918. Okay. But it was very bad, 19, 19 and continued into 1920. So that was really spread over three years. And the first way it was kind of March April 1918, which was horrific, but then it seemed to go away in the summer.

July, August, September were much better. It came back with a vengeance in October, 1918, and most of the fatalities were in that October, November, December. 1918 period, and then it faded again. They came back for third way of 19, 19, not as bad. So the, and that’s true of the Hong Kong flu in 1958. And the several other flu epidemics we’ve had recently.

And I COVID is not the flu. It’s a coronavirus, but some of the mutation dynamics are the same. So the point is the place you don’t know, nobody can sit here today and predict. What will happen exactly, but history and biology and virology suggest that, mutations that, as I say, do this immunity, escape that I talked about earlier can make it a lot worse and we seem to be seeing something like that right now.

But even if we don’t, even if. The vaccines where the mutations don’t get worse in this phase, over the course of 2021, it’s going to take a year by the way at best. It doesn’t mean the economy comes roaring back this whole notion. You’re Larry Kudlow and everyone else talking to me. And last April may is I guess, bad right now we’re locked down.

But we’re at least there’s pent up demand. Where the economy is going to come roaring back. As soon as we get through this and a lot of the policy decisions in March and April were based on the fact that we’d be able to remove the lockdowns by July and August. And they were expecting as they say, pent up demand, but that’s not true.

For example My wife and I, we were locked down kinda quarantined like everybody else in March, April and may. And usually we go out to dinner on a Friday night, but we didn’t because we were locked down. Eventually in June, the restaurants opened up and my wife and I went out to dinner.

We didn’t order 10 dinners. We ordered one. And as if we had skipped nine weeks of dinners and then went out, we ordered one dinner. Those other nine were permanently lost. That was not a temporary loss. That was not a timing difference. That was a permanently lost income permanently lost revenue, besides which when a restaurant let’s say had 20, the waiters and cooks and maitre D whatever, and you shut down.

And then you reopened in the summer. You didn’t hire back 20 hard back 10 maybe because capacity was reduced. People still weren’t going out, et cetera. That’s if you even reopened at all, a lot of small businesses did not reopen those. Those losses are permanent. Again, I’m not talking about Apple computer, I’m talking about.

The other half of the economy, which is small and medium size enterprises. And there’s data on all this. I’m not just speculating, and this is all in my book. By the way, in the book it’s got 200 end notes. So you might want to buy it just for the endnotes alone, because I I researched everything.

I read over a hundred peer reviewed papers, and I should more than that. And and all the citations are there. So if I’m saying something, I tell the reader, don’t argue with me, argue with scientists. Cause they’re all footnoted and you can look at the source papers, but we have data on all this.

Now we didn’t have as much data. In may and June when I was writing a lot of the book, but then the publication date got pushed back a little bit because of supply chain problems actually in the printing industry. But that gave me an opportunity to freshen it up in September, even as late as October.

So we have the most recent data and it shows what I’m describing. This is a mess migration. Out of New York, Los Angeles, San Francisco, Seattle, Chicago, Philadelphia, and Baltimore, and a few other cities. And the people are going to, Phoenix, Scottsdale, Miami, Nashville, Portsmouth, New Hampshire Boulder, Colorado, Denver, and a few other places.

And part of the reason is climate’s nice, but there are jobs there, but the taxes and the crime, you didn’t have the kind of rioting and destruction that you saw in New York and Seattle and Portland you don’t see that in Phoenix and some of the other cities I mentioned or Miami for that matter.

So whether it’s high crime, high taxes, density, functions, lost jobs or whatever, there is this massive migration, which is interesting because. In certain sectors, residential real estate is doing extremely well. Usually residential and commercial kind of move together based on interest rates and economic cycles.

They can go up together or down together in a recession. But right now there’s is a bifurcation residential real estate in the destination, cities and suburbs is going up very strongly. Commercial real estate is nowhere near the bottom. It’s just going to get worse. At least through 2021, probably even longer.

veteran, you mentioned in your past book the move towards the urban Exodus. I like that idea. That’s why we try and stay out of the city core out to the more suburbs investing in those multi-families out there. And I think, with the pandemic, I don’t know if you want to expand anymore, the big cities are mostly blue.

Mostly bird moving up to the red States any other kind of newer developments on that? That’s, I don’t really I don’t really get into politics. I say in the book, the virus is not a Republican or a Democrat. The virus just wants to kill you. So the virus, you need to understand epidemiology and virology and what’s going on, but yeah.

It by itself. It’s not political. Now you can politicize it if you want to. And a lot of people have but I would simply make the point that the reason commercial real estate is down. Across the board, even in stronger cities like Miami and Phoenix, that’s suffering. And clearly the exit of cities as I call them New York and Seattle and others is suffering even more.

A lot of that has to do some of it has to do with crime in the streets and the mayors and all that. Yes. But a lot of it has to do with the work from home environment, which very few large companies would have said. No two years ago, Hey, I think everybody can work from home. We’ll figure it out. We’ll get some software or whatever nobody was saying that but in the pandemic and the shutdown last March, they had no choice.

You had to work from home, because of the lockdown, it turns out it worked pretty well. There are pros and cons. We all get a little tired of living on zoom, a little bit. Personal contact is socializing is a good thing for your mental health, but that aside from a purely business point of view, the work from home model still works.

So if you had 10 floors of a, Midtown office building prime location in New York, And they’re vacant because everyone’s working from home. You’re not going to go back to 10 floors. You might go back to two floors. You might have a locker room. Not like we had in high school, but yeah, a nice facility with a lot of attractive office space where people can basically reserve the office.

So you’re working for him. You call up say, Hey, I need an office and a conference room two days next week. And you book it as yours. You come in, you open your locker, there’s a laptop and a sport coat and a tie or whatever you need. Nice scarf. And you go sit in the office and you do your business, and then you go back and work from home.

If that’s the environment where everyone, it’s not quite like a, it’s a kind of office Sharon, but it’s not, we works in the sense that everyone’s crammed in together. You could have a nice facility, but if it’s always temporary and always rolling over. You only need two floors instead of 10 floors.

So first of all, that’s slams the landlord, but the ripple effects are huge because it’s not just that it’s okay, what about commutation? What about public transportation, food trucks, restaurants, cleaning staff, maintenance, staff shopping is so all the things that surround people coming to cities and working in fairly dense environments, that’s down 80%.

And it’s not coming back because the model’s not coming back. We’re a long way from the bottom. I understand what the stock market’s doing. I would say again, B seven, not the S and P 500 and query whether that’s a bubble, I don’t want to go short Tesla right now. You probably get the getting run over by an 18 Wheeler, but I don’t want to buy it either because I do see it as a bubble, something that’s going to reverse fairly.

Severely wants this new stage, two of the recession sinks in, but again, commercial real estate and small and medium sized enterprises, including a lot of retail, which has half the economy have been slammed and are not coming back quickly. So our listener base is pretty smart.

They don’t just read general headlines on, people are moving out of the cities. They understand somewhere in the pilot, there is an emerging market out there that is doing better than the rest. Any particular emerging markets in America that you like or. Yeah. As I said, we already talked about residential real estate and the target cities, I would say again, Nashville, Miami, Phoenix, and others as attractive 10-year treasury notes are set to rally and we’re probably going to get to a negative yield to maturity and yield matured in a 10 year note is set by secondary market trading.

So that has nothing to do directly with the fed funds policy rate, which is Yeah, with basically an overnight rate. The fed can stay at zero, not go negative in terms of the policy rate, but there’s nothing stopping 10-year treasury notes from having a negative yield of maturity. All it takes is, secondary market trading.

I’m a seller, you’re a buyer. There’s this triple coupons associated with. The tenure note, the minute you pay me a price, that’s greater than the present value of the coupons and the principal. You’re going to have a negative yield to maturity. Now that’s okay. There might be a lot of reasons to do it. One might be that you think rates are going to go even lower so you can sell to somebody else at the higher price.

The other thing is, if you’re a foreign investor, you can lose on the dollar denominated, yield maturity, but make money on the currency. If the dollar gets stronger against the Euro. Based investor can make profits in Euro, even though the cashflow in dollars was negative because you have higher exchange rate.

So there’ll plenty of reasons for it. And we see this all over the world. Buns are a negative buns, Japanese government bonds, awesome. Bond markets have negative deals to mature. There’s no reason to doubt the treasury, no market can’t do the same thing. If it does, you’ll be looking at huge capital gains because right now the.

Yield to maturity is about 95 basis points. So if you go up from 95 basis points to, let’s say negative 50 basis points, that’s a huge capital gain because the interest rates go down prices go up. And so that’s how you You capture your profits. So that can be large. I like gold. For about 10% of your portfolio, there are opportunities and alternatives.

Again, we talked about residential real estate funds, but I think natural resources, water, agriculture, some other sectors will define this also room for a big allocation to cash. And people go, wait a second though. Why would I want cash? It has no yield a couple of things. Number one if you had deflation.

And I think right now, deflation is a greater danger than inflation. If you have deflation, even with zero return, your real return could be. 2%. It could be your best performing asset because in deflation prices are dropping. So you’re not getting returned a nominal return on your cash, that the cash is worth more because the price has dropped.

So there’s a real gain there. But number two and probably more importantly, cash has huge optionality. If you have cash. That’s the functional equivalent of not the money call option on every asset class in the world. And we’re going to need greater visibility and you need to be nimble to decide what to do.

So you can have some investments today, but if you go all in. You say why? No. I want to be all in residential real estate or all in some alternative funding, whatever it may be. And you find out six or eight months from now that OJ to places worse than I thought, maybe inflation’s worse. And I thought maybe this particular sector is not so hot.

It can be very expensive. If not impossible to get out of. Those asset classes. Try getting your money back from Henry Kravis ahead of schedule. It’s you know, good luck. So the point is the person with cash can be more nimble because as we get greater visibility, you have no impediments to the pivot.

You can pivot here or there, depending on where the opportunity lies. And that’s valuable. The most people, a lot of experts will say, you know what? The fed printing all this money. It’ll be leading towards inflation, right? $3 trillion, $4 trillion in the last few months. Pop the stock market. And that’s one of the ways it’s shown its ugly head, but you’re saying the complete opposite it’s deflation that’s coming.

Maybe why is the whole inflation story? Not true, first of all, it hasn’t been true for 13 years. Go back to 2009, between late 2008 and 2009, the federal reserve expanded its balance sheet from about $800 billion. Two something just under $4 trillion. So they increased it by the 300% and it was like, Oh my goodness, they’re printing all this money.

We’re going to get inflation. We never got inflation. We didn’t have inflation for 10 years. We still don’t. The money supply has nothing to do with inflation. Milton Friedman was wrong about that. The Austrian school was wrong about that. The Neo Keynesians are wrong about that. Inflation is not caused by money printing.

Inflation is caused by velocity of money and it was this, the turnover of money. So you can take the fed balance sheet to 7 trillion. My friend, Stephanie Kelton, she’s the big brand of modern monetary theory. They say, why can’t it be 10 trillion? The answer is, it could be 10 trillion, but it’s not necessarily inflationary unless you get the turnover.

So I’ll give you a simple example. Let’s say I go out to dinner and I tip the waiter and the waiter takes the tip money and takes a taxi or an Uber home, tips the driver. And then the driver takes the tip money and puts gas in his car. My $1 had velocity of three. It supported $3 of goods and services that, the restaurant tip the taxi tip and the guests.

But what if I stayed home? And watch TV. Then my money has philosophy of zero. I didn’t spend my money. There was no turnover and I remind people $7 trillion times zero. Is zero in others. If you don’t have velocity, I don’t care how much money you print. If you don’t have velocity, you don’t have an economy.

Velocity has been dropping for 22 years. It started to drop in 1998. It’s been coming down ever since our head larger spikes down and the 2008 global financial crisis and the 2020 pandemic collapse. the clear line has been going steeply down and it’s still going down.

So my point is, And we need inflation. Inflation is not good in some ways, but you can’t print your way out of a liquidity chap. You can’t borrow your way out of a debt trap. The only way to get out of it is with inflation.

And the only way to get inflation is to change the psychology because it’s not controlled by my supplies control by how people feel. And right now they’re. They’re savings. Savings rates are sky high is precautionary savings. People feel it, prices are going to get lower, so they defer consumption.

Now I’m talking about consumer price inflation, which is what the fed looks at and what’s policymakers. I got a few, if you think the stock market is a place, I can call it an asset bubble. Yeah. Stock prices are going up. That’s not inflation as. Economists and policymakers understand it.

Those are just asset bubbles and they are happening. So the money has to go somewhere. I’ve heard of people got these $1,200 checks last. Think around last June, may and June, they’re probably going to get another $600, in the next month or so. What are they doing with the money?

Some people were paying the bills, but a lot of people are investing in stocks. You’ve got all these newbies, they’re on Robin hood, their first time investors. They don’t really know what they’re doing, but they know that stocks only go up. They’re not spending the money they’re investing in the stock market.

They’re just in plating the bubble, not doing anything for the real economy, which would come from spending. And there’s something to be said for savings. But that’s what people are doing, the saving the money and investing the money. They’re not spending it. So the money printing doesn’t work.

Yeah, no, that makes total sense. The money’s out there, it’s just, the government needs have to try and find a way to incentivize throwing it into the real economy. Getting abundance mindset for consumers. That’s right. And there is a way to do it, which I talked about in the conclusion of the book.

Not to tease it, but yeah, it’s out there. What I tell people is that policymakers don’t. I understand that. So I explain it clearly. I give two historical examples, two different presidents, one Democrat, one Republican of the 20th century who pulled this off successfully. So it does work.

There is historical precedent for it. Central bankers have forgotten it if they ever knew, so they should read my book. If they want to know how to get in place and get out of the debt trap. But the point I make for the reader is even if the central banks don’t do it, even if the government doesn’t do it, you can’t, you can personally go on a gold standard one, a hard assets standard and and benefit personally, preserve wealth and make money.

Even if the government doesn’t find a right. So I guess the, I was going to ask you about the Biden camp or anything coming down the pipeline, but it may not matter, if they have another couple of rounds of stimulus checks, this money is just being diverted to the stock market. It’s just not getting to where it needs to go.

That’s exactly why I’m proud to say, I barely talk about politics at all in the book, but partly for the reason you mentioned, which is it doesn’t matter. Monetary policy doesn’t work because of declining velocity, fiscal policy deficit spending doesn’t work it because the debt to GDP ratio is so high that we’re through the looking glass that what people are doing now is they’re saying, look, I don’t know how it ends.

It could be inflation. It could be higher taxes. It could be a debt default. There could be a number of different scenarios, but they’re all bad. And so I’m just going to save more, spend less on a precautionary basis to get ready for that day. When other, inflation kicks in or I have to pay higher taxes or whatever.

, and that pressure by the way, is 90% debt to GDP. Right now, the debt to GDP has gone up from a hundred, 6% pre COVID to around a hundred. 30% today. So this is for the United States. The U S is now in the same league as a, Lebanon Greece, Italy there’s your club. So my point being we will have large deficits.

We will have more deficit spending. We will have more debit. It doesn’t work because we’re through the looking glass. We’re through that 9% critical threshold where now behavior changes and people don’t spend the money. So monetary policy doesn’t work because of philosophy and psychology fiscal policy doesn’t work.

Because debt to GDP ratio is too high and people are getting ready for bed ending. So it, Trump Biden administration, they’re going to pursue the same policies. You can print money, but that’s not stimulus. You can run deficits, but that’s not stainless. I always tell people stop calling it stimulus.

You can call it deficit spending. If you want, you can call it money printing if you want, but it’s not stimulus. It doesn’t stimulate anything. Yeah, no. Very interesting. For the guy under a few million dollars net worth, what would you be suggesting at this point for their portfolio?

Yeah I think I have about 30% cash, but sounds high to most people, but we already explained that I’d have 10% gold or gold mining shares. There’s room for a residential real estate. We talked about that you need the right fund manager but there’s a way to do that. Some for alternative investments, I’ve some money in some venture capital and startup type companies they’re risky, but they can be.

Very attractive, depending on the management again, and the business plan this one for listed equities, but pardon me, and have more than about, Oh, 20% or so in the stock market, people say to me, Jim, yeah, you’ve got 10% in gold. How can you sleep at night? And I go, you’re 90% in equities.

How can you use sleep at night? Because that’s really the risky asset class. Yeah. That’s something, I don’t have any paper assets personally, we’re always trying to move people to alternative assets. It’s either, do they take the money in their home equity or they take their money in their stock holdings or mutual funds?

And I’m like, I don’t know if it were me, I’d take it out of the stocks, but look, that’s just, who knows. but thanks James. For coming on. Folks get his book, the new great depression, winners and losers in a post pandemic world found on Amazon and yeah. Thanks for coming on.

Appreciate it. Thank you.

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Can You Put Cash from ROTH into an LLC?

https://youtu.be/xu1_N2ryVjc

Question. Can you put cash from Roth into own LLC that owns passive income? No, you cannot. That would be oddly what’s called a prohibited transaction. So when you own rental property in your IRA, or any of these self-directed IRA accounts, there’s a arms length transaction rule where you can’t be adding sweat equity.

For example, when you buy a property and yourself director, I R a, you can’t be doing the property management. You have to pay third parties to do that. So by putting cash into your Roth and investing in Roth into your LLC, you also are violating like you can’t self deal. And I believe you cannot even partner with relatives or something like that.

As far as there’s, I’m sure there’s a lot of people that do this thing where they have a good buddy. Who’s good. At real estate, they invest. Their Roth IRA or self directed Roth IRA with their buddy and vice versa the way I see it, I think that’s a good way to getting around that totally follows the rules.

And yet I don’t do that because I don’t do any debt, investing. Everything I do is equity. And I also do that because I get the appreciation alongside of it.

What is an Institutional Asset and Operator?

What is an Institutional Asset?

What is an Institutional Operator?

I am going to be doing a shorter podcast this week because I’ll be honest. I’m a little poop from this weekend. About eight hours a day of pure passive investor networking at the bubble. Thank you all for coming. We almost had a hundred folks join us in the plethora of breakout rooms. I think a lot of people made lifelong connections., this week cast, we’re going to be briefly going over. What is it? Institutional grade, they did investment and operator. Before we do that, I want just wanted to catch up people where we are in the economy.

And what are some of my opinions of things four. the fed almost $4 trillion Into the economy in the past six or seven months, you can bet that this is likely the reason why stocks are now at an all time high. Yeah. I don’t know if this is going to continue, but I do know that true wealth comes to those who create value.

And for those of you guys jumping into opportunities that do value, add. AKA rehab the property to create better living conditions for people who in turn pay more money for that product are the ones who are going to have sustainable longterm wealth. Those people who trade money, like you’ve got our Amazon business or eBay business where you just buy things low, sell high.

It’s just easy come easy go. And the same. About, buying crypto Bitcoin or just trading stocks. What value are you adding there? What value are you adding to society? But anyway, all this money is going into the system prop and stocks up. But what about inflation? Shouldn’t inflation come well, I was just watching some of Richard Duncan’s videos , who is an economist that I follow.

And if you guys want to get more information about Richard Dunkin and see the. Past podcasts. He was on go to simple, passive cashflow.com/dunkin. Check out his newsletter there too. I subscribed to it and while you’re there checking on all the other things on civil pass, a castle.com, but you can never checked it out and join our investor club@simplepassivecashflow.com slash investor.

Now what’s going on here? Why is the money supply growing by leaps and bounds yet? Inflation. It’s not happening. Part of this has to do with, we are not backed by gold anymore, and it is decoupled the correlation with modern money that’s out there and inflation.

It’s just another form of credit. And that is being created by the federal

and that’s why money’s still apply, but it doesn’t really matter. Although a lot of people say when is this going to end? This is all going to come down. People say that all the time, but a lot of these people are, what are they selling to you guys? What’s their product of the week.

There’s trying to sell to you gold, which is why they’re trying to claim the doom and gloom thing. Whereas I don’t know if the doom and gloom is going to happen, but I do know people need a place to live at the end of the day, especially. Good value rents between 700 and $1,200 a month.

What we call workforce housing? Richard Dunkin says that the credit supply is not what counts and he outlines four scenarios here. First snares were inflation. Interest rates remain low. This would probably be the best possible scenario for asset prices. And I think we know one thing. In all these scenarios that the government is going to be spending more money.

I mean Biden’s in there and he’s going to be putting more money into the system, which I ultimately think helps investors. Yeah.

Now the fed is likely to be putting more money into the system. This is going to keep things going, Richard Dunkin actually. He made a comment where he thinks that we are nowhere near the end of seeing the last, the stimulus. He says that you might even go two times. So what we see now from about 4 trillion to atrial and dollars.

So there are two that you talked about as higher inflation with higher interest rates. This would be the worst snare for asset prices. The economy would obviously get a boost from the increased government spending. But significantly higher interest rates would probably come. So those of you guys are watching interest rates on your primary residence should probably be wary of this possible scenario.

Gold is seen as a hedge against inflation, but significantly higher interest rates could actually cause the price of gold to fall. Scenario three. Is higher inflation without higher interest rates. I actually think this is where we are heading normally when inflation increases in interest rates move higher to however, as we sit before the fed is adopting a new thing called yield curve control, which is like quantitative easing where holds the interest rates at this unnatural level.

But it is the new natural. It’s whatever the fed desires, for instance, if they want it at 3%, they keep it at 3%, even though the inflation was at five or 6%.

So this new government spending would boost the economy and it would be combined with lots of quantitative easing or your curve control. And this would likely push asset prices up in this case. Sabers are the losers. If you got money in your cash, bonds, savings accounts, or maybe an equity that lazy equity in your homes or your rentals, you won’t be the loser.

And the last scenario is a short-term rise in inflation and interest rates followed by a subsequent client and vote.

either way. I think we’ve had several guests on even Jim Rickard, who you’re going to hear coming up in the coming weeks, but Richard Duncan, John Burns, they’re all pointing towards this bullish sign and we’ll see what happens if it comes great. Cap rates will fall. And our properties will increase in value, but if it doesn’t, Hey, we still cash all heads.

I’m going to be explaining what an institutional asset is. Now. Institutional asset is a little bit different than what we normally go after. When we’re looking for a 50 to 300 unit apartment complex and institutional asset is the higher grade than that. And certainly it’s bigger than your your single family, home, duplex, triplex, or quad.

The institutional asset normally is around, higher than five to $20 million in purchase price. And in these properties,

usually the largest buildings in the skyline, lower cap rates, somewhere in the two to under five cap rate land. And these are usually what the assets that large family offices, hedge funds. Insurance companies or any other institutional operator that is just trying to invest large sums of money. They’re not quite in it to make the best return, but they more want the reliability.

This is usually what is invested in large clumpy REITs. They’ll go after these markets, situational assets, because it’s a lot easier for them to manage them. Also. Outside of that, these things spike, you get the reliability. It is lower returns.

What is an institutional operator and institutional operator is an operator that manages apartments, mobile home parks, or office space or commercial veto ins is the operator. We’re talking about. , I consider myself more of a middle-market operator. Where we’ve been around, we’ve done deals. We went full cycle on some properties, but we haven’t been around for decades.

a lot of investors always ask I want to work with the operator that has been around since 2008, And I’ll be honest. especially in the apartment investing world, You’re not going to find them. I’ve tried to look for them. They’re not out there. Because they have been around since 2008, what they’ve been doing slowly is swimming upstream.

So they don’t work with small private equity guys. guys that are million dollars, a few million dollars net worth putting in 50 to $200,000 chunks there we’re swimming upstream. So they can eventually grow into large REITs so that they can extract more fees and better profits split for themselves.

So going back to ourselves. I’m the principal of the company, typically the one making management decisions, interacting with third party property managers, or maybe we have them in house. I don’t have, maybe, luckily one day we’ll have an investor relations staff, but we don’t have all these operational staff.

like a manager of operations, Texas director operations, Alabama, for example, I’m the guy. And I think that’s why a lot of people like investing, cause we’re not small, we’re not new, but we’re not also large. And, big and comfy, the reason why people like to work with middle-market operators and why I as LP, like to invest with middle-market operators, because when you start to go to the institutional operators, they charge very heavy fees, acquisition fees, and typically over.

Three to 4%, which is crazy to me. Remember, you have to add up all loan fees, guarantor fees, all these other fees, they’re all acquisition fees. They’re all just tricky ways to make you think that the acquisition fee is lower than it is. so in addition to the fees you also have where splits for passive investors and not necessarily saying that an 80 20 split is good or bad.

the operator’s going to take more as they become more online institutional and as their cost of capital gets cheaper from their perspective. So as an investor, you want to get a good blend of both, and especially when your network is lower than a few million dollars, you’ve got to grow your money.

You can’t just invest with institutional operators in my again, but. Institutional operators have been around the block, possibly five, 10, 15, 20 years in some cases. And they have large bloated staff, a lot of times, a lot of operators. And you’ll see a lot of these companies where they have to continually do deals just to get acquisition fees, just to get that three, 4% of big money to come into the office so they can pay their office staff and keep the lights on.

I don’t want to run a business like that, where I need to do deals just to do deals, just to pay my staff. But a lot of these companies have created this type of infrastructure where that’s, how they need to do it.

So some of my higher end clients, the guys that are over a few million dollars net worths, I may suggest to go into and work with self institutional operators in certain asset classes. But for, a lot of us that are under that, it may not make sense from a rewards perspective, which you definitely don’t want to be doing is working with a newbie operator.

And you guys know who I’m talking about. We talk about a lot of times, these are the guys who just created a podcast out of the blue cause everybody can name podcasts. He speaks, he just read a little script and in front of the microphone right here, And you got yourself a podcast and not, everybody’s like a syndication expert these days.

I’ll tell you creating a podcast. If you don’t do it efficiently, there’s no way in heck you can be the primary operator. It’s typically the guy on the blank is really the marketing side of the company. But what you’re trying to do is you’re trying to cut through the noise where the people who are actually doing the work and is this operator or that interacting with.

Are they truly more of an institutional operator or have they been around the block or are they complete newbie? tell, tells are guys still working their it job and they do this apartment investing on the side, but they have a great understanding of Upwork and Fiverr.

And how do you get a VA to do a nice little PDF pitch paycheck? And they have great presentation skills and they can put together a very, concise webinar. So don’t be fooled by all this. they could very well be very new just because they can put together a shiny presentation it doesn’t mean that they can operate or they have a track record.

I’m all for people going after their genes, but I don’t want to be putting in my 50 grand to be powering that I want to see people have to be at least in a few deals. Getting their track record going. And that’s why I prefer to work with more middle of the range operators. I’ve said that a lot of times before, the same reason why I don’t work with certain CPAs that charge our clients 10, 20, $30,000, even though they might be fine and they do a really good job.

I just don’t think it’s worth it at the same time. I won’t go to the low end and I won’t work with like H and R block or do triple tax. It’s just not good quality and you’re not getting all the deductions. I work with value operators and value vendors, and that’s just my brand. Is it a little bit more risky?

Yeah, but I think the risks outweigh the reward and you get the better returns in the middle, it’s very hard for passive investors to distinguish between complete newbies who are pretty nifty with making PDFs and presentations. From those operators who have been around the block a little bit.

that’s why I stopped going to real estate meetups and different conferences these days, because I’m in this business, honestly, Gator, I know all the little tricks and games they play. I know when they say something and it’s complete nonsense when they say it during a presentation, I make a list of these things and still I have a really hard time too.

This is the Next Big Tax Deduction

https://youtu.be/Pdt19mRYNqQ

And there’s a crazier one Lane, you and I have never spoken of, which is the solar credits that are still floating around out there for business use. For example, what’s going to become a big incentive and I can almost tell you that this is going to be a reality. So I’m going to get my crystal ball out and say, you’re going to watch this.

And then we’re going to listen to this in three or four years and say, we were predicting right now if I put a solar array on it and let’s say it costs me a million dollars, I get a tax credit. Of $260,000, 26%. Even if I finance the whole thing, I get a credit. That’s not a deduction, that’s a dollar for dollar credit.

So if I owe a hundred thousand dollars in taxes and I have a $270,000 tax credit, I don’t pay any tax that year. I use a hundred thousand of it and I carry it forward into future years, but I also get to depreciate. The solar United depreciate, 87% of it. So a million bucks, I’m going to get an $870,000 deduction in year one, plus a $260,000 tax credit.

And I think they’re going to increase those incentives. It used to be 30% and then this year went down next year. It goes to 22%. So that solar panel, you can deduct it all in the first year. You can deduct 87% of it. And you get a tax credit for 26%. Maybe I should go around Hawaii and find a contractor.

It makes deals with some people, but some solar panels have just sell off the credits to investors a year. You’re already there. Yep. That’s exactly what they’re doing. So I have a client. That’s what he does. He installed solar, but it gets interesting. What he does. He goes to a utilities, public exempt organizations, 501(c)3 churches.

And he’ll go find a wealthy parishioner and say, Hey, would you put the solar array on and then do a five-year contract on the energy because there’s going to be energy independent. And so they’ll sell it to the charity and say, Hey, after five years, the array is yours. And so he’s taken the big tax credit to have a little tiny bit of income on the.

Revenue that’s coming in because they’re selling them the electricity or they’ll usually they just give a right to the charity. So that washes itself. There’s a deduction. And so you have a little bit of income with a deduction that equals that, but you get that first year. It’s a ridiculous deduction, but where that’s really going to be important later is next year, if the taxes do increase, guess who’s going to be really incentivized to do stuff.

That’d be cool. Like investors bring into capital, they get the tax incentives and the plan owner gets. Cheaper energy. Yeah. What they do is they lock it in and they’ll say your energy, won’t go up for five years and then you have the right to buy it at some peppercorn price. So you’ve already depreciated it.

So you don’t really care. You would recognize all the income as ordinary income. If you sold it. For more, more than your basis. So you have a really tiny basis. So that’s what you sell it to them for you like, Hey, 13% basis or whatever that is. So I just want to not pay anything. Yeah. So during those five years, I have a little bit of energy money coming in and I have a payment on the loan, on the solar that it’s basically washing itself.

So I, again, I’m getting a huge tax credit. I give a huge deduction. I have very little income that’s coming in off of it. So I’m getting a big first year benefit. And yes, there’s a lot of people starting to do those now. And I think that creative syndicators are going to get into that area.

Renting vs. Buying a Home: The Largest Inhibitor to Financial Freedom

Buying vs Renting a Home

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Accredited Coaching Call w/ 3M Business Owner

https://youtu.be/JKLMtMtybQ8

 Hey, simplepassivecashflow listeners today, we have another coaching call for an accredited investor.  Net worth is around a couple million.  He’s got a pretty decent size rental property portfolio. But the question we’re going to try and answer and strategize is how do we get into the simple passive cashflow gravy train, pay less tax as well, work in the day job.

Hey Steve, you there. Yes, I’m here.  , thanks for doing this. I know a lot of people will get a lot of value out of it. And, I think a lot of people will get to your position one of these days, but I want you to give people a little bit of background on yourself and, how you came into this world of alternative investing.

Okay. Thank you. I appreciate the opportunity late and, again, my name is Steve. I’ve, an accredited investor. I actually own a company in the construction industry here in California, where I reside. I’ve been living in California now for about 20 years. originally grew up in Pennsylvania and, made my way West stopped in Texas for a few years where I worked as a mechanical engineer before I transitioned into sales and, made my way to California, even had a background, worked at UBS and financial services for.

Two years in between, doing equipment sales and, ended up, acquiring a business from, one of the competitors, to where I had sold equipment before, which was a nice transition since I had quite a bit of background in mechanical engineering. And, but at the time at UBS did, opened my eyes up a lot about what’s going on.

it was very interesting to see that, most financial advisors there knew absolutely nothing about investing. and I don’t know if I should really say that or not, but it’s true. Most of the financial advisors were really there to gather assets, , and there wasn’t a financial planning aspect.

I shouldn’t say that I learned a ton in the couple of years I was there and it was a good way for me to diversify from my mechanical engineering background and really learn a lot about some other things, before I ended up acquiring the business and really starting to grow that and, really start to build my network.

my first rental property, I purchased a fourplex back in Pennsylvania, next to where I went to university, probably about 15 years ago. I knew some other people,  I knew the area, cause it was, by where I went to school back at pop now. so , I bought a place back there, and , that’s more of a place where you’re going to see it, cash flowing type real estate.

You’re not going to see a lot of appreciation. I don’t know that it was the best investment when I made it, it was a fairly old building and definitely over the years have put some money into that. Cause it was probably a hundred year old building my bought it, for the most part I do get, at this point, 15 years later I get quite a bit of cash flow off a bit.

for the most part that one’s almost paid off. but then I, hooked up with another, property manager there and they started bringing me deals, back there. And then I bought another unit that actually bought the.  the unit next door is the one that I had, which was a vacant building at the time.

The owner really just, didn’t keep up with it and it, lost its occupancy permit at some point. I had the opportunity a few years ago that kind of go and add to my portfolio there and, So , I went and bought that building and, fixed that up. And, that was a seven unit apartment building next to the  fourplex I bought.

And that’s seven flags I found actually, after it took a while and a significant amount of money and, probably more money than I had originally budgeted, which has, especially, that’s again, another, probably a hundred year old building that wasn’t occupied at the time. but it was right next to the building I owned and actually cleaning that one up and getting that fully rented now probably made the building I have next to it.

probably a little bit more valuable, at least that’s one of the, cemeteries I thought about that. let’s pause there, Steve, a little bit. Let’s catch people off. So like your profile is pretty typical. A lot of my investors are engineers technical background. you moved off to a different industry.

But today’s, you’re in sales and that’s something I noticed is very common. the guys who are  the linear path thinkers are the ones that stay in their technical roles. And you guys, I’m sure you’ll vouch for this, that I’ve heard it from a lot of other people in similar situation that the sales job.

That if you can speak the technical language in the sales job, that’s like the ideal strategy and lifestyle and highest pay. Okay. Oh, for sure. and, now I own a company where I hire technical salespeople and, I actually have a very interesting story about how I was recommended to go into technical sales.

I don’t know if it’s interesting or not, but, it, yeah, but if you can actually speak the technical language. And understand the interpersonal relations with people and going out and, convincing them,  and being able to speak in layman’s terms would be able to speak the technical jargon and be able to, accurately and quickly learn products and be able to actually articulate and go out and speak to people.

yeah, you can earn a lot more money than the person that’s just going to sit there and run calculations and not be able to have those effective communication skills. I think, especially now that I hire a lot of people doing that as well, to find that person that can handle both the technical aspect and the people aspect, it’s a rare commodity.

And it sounds you’re in that boat as well with the technical background. Yeah, we can do a spreadsheet or two, but we can talk to people. Yeah. Most anybody can learn to talk to people. I can learn to do the spreadsheet, but it’s, some of those, innate qualities of being able to have the communication skills and, being able to relate to other people sometimes more difficult for.

We’ll learn that side of the business. and I think as a credit investor, that’s the name of the game is building connections with other accredited investors. of course, getting in the right room is a big thing, but once you’re in there at Rome, being able to build organic relationships, which I think kids these days, especially in a pandemic world are just Sol.

Yeah, I don’t, it’ll be interesting to see what happens  I have a daughter  that’s one of the other things about my background. I have an 11 year old daughter now and   last year she finished up her school on zoom this year, know she’s doing two days a week and zoom in two half days in person.

really being able to learn at that age to form those interpersonal relationships is probably one of the most important things in life. If you’re having to do school on zoom and not really having some of the, it’s going to be interesting to see how that affects the long-term impacts of, our society.

hopefully it’s only for a year here, but we can get back to normal and the kids aren’t, they can get back to forming those interpersonal relationships and really, probably one of the best things about learning. At least that’s some of the things I hope for the next generation, especially with my daughter.

 You’re right on the verge here, your net worth is around two and a half million. If we can get you up to four and a half, we can turn that daughter into a trust fund kid pretty easily. So we don’t have to worry about that too much. Yeah. And to be honest, like that’s my net worth excluding my business.

Yeah,  that’s icing on top of the cake. Let’s try and get top of the cake, and that’s how I’ve looked at it from my personal perspective. If at the end of the day, I do want to sell that business. And if I am fortunate enough to be able to get anything out of selling that business, that’ll just be icing on the cake.

I really want to build my net worth and my passive income. So I don’t have to rely on my primary business during the day. And I don’t have to worry about it cause I have seen, and that’s one of the things I’ve seen in my life. So many small business owners really just overvalue their business. And when they go to sell it, they put such a high value on their business.

 They can’t sell it because they can never get as much as they think it’s worth. And I guess I’ve been coached along the way , cause I’ve been on both sides of the fence, working, I did sales and I did a little bit of financial advisory work. now a business owner. So I try to see it from all  sides of the perspective here.

I don’t want to have to rely on being able to sell my business for, an astronomical amount that I might not be able to get someday to be able to retire. I really want to build my assets and my passive income to really be able to take care of my lifestyle outside and my business. And then if I am fortunate enough to be able to sell my business for a good amount of at some point.

yeah, that’ll be like you said, icing on top of the cake and yeah. Yeah. I think what I would like for you is get proof of concept with this 2 million bucks before and see if this is all a sham or not. Yeah, for sure. When you can sell the business, you definitely just triple charge yourself and go into Lightspeed with this stuff.

 went back to the rentals. So like this one, the six Oh six Lake and. This one here you bought.  in a previous life, right? A long time ago.  Where were you at? Like career-wise or like net worth wise back then, or so career-wise, I didn’t have much of a net worth probably then and the six Oh six Lake street, to be honest, I’ve never sold a piece of real estate, gave one away in a divorce one time, but I’ve never sold a piece of real estate.

The six Oh six Lake street was one of my first purchases, but , It’s a condo  in the city that I live in and, I was where it was my primary residence at the time. I was very fortunate in life. When I did go into technical sales, I was able to quickly become probably one of the top technical sales reps in the company that was working for very quickly and became a higher earner.

You know what I’m saying, making a high six figure income at that time. really, I started out of college with. maybe a thousand dollars in my pocket, just from working summers lifeguarding back in Pennsylvania. So I really didn’t have much of a net worth. but I was fortunate, when I did go into sales, I.

Lived off of my base salary. And every one of my bonuses I got from doing sales, I started putting away it started maxing out my 401k every year, as soon as I started, as I moved to California 20 years ago. so that’s really helped as well. But yeah, like I said, the six Oh six, I really didn’t have much of a net worth then.

I was fortunate enough to have a 10% positive. Which surprisingly in 2005, when I went to the bank and told them I had enough for a 10% deposit, they’re like, wow, most people hardly have anything, cause that was the time when everybody was doing negam loans and all kinds of crazy things that, ended up, causing that the great recession of 2007.

But sorry, I’d say, I really didn’t have a lot of a network at that point. I was really just, starting to build from scratch. If you will. I was fortunate enough to be successful at work. I was doing as working as a sales engineer during the day, had a pretty good , high six figure income at the time for being fairly young at the time in my twenties.

But I went and bought the six Oh six Lake straight again, not with my primary residence at the time after I moved out. I just really just turned it into a rental, the one 19, place in Pennsylvania, I went and, acquired that as, startup. Somewhat trying to start building my passive income and, as an investment strategy as well.

But so if you guys have been, also check this out on the YouTube channel, we have the personal financial sheet of then the property, cashflow worksheet of,  Steve was talking, I was playing around with some members here. I got  the amount of equity you have in each of these properties.

And I did some quick calculations on the percentage of equity you have.  so the game plan here is to go after, you kinda know this, You know how this,  we gotta go shoot the or whatever animal you’d like to eat. Buffalo status Buffalo here. So that’s probably looking at like the three Oh one North property that you acquired in 2016.

You have no mortgage on it. Is that right? No. I bought that one for cash and, being that one’s, in the South that, I was fortunate enough to catch  A good rise. And, versus the properties I bought in the Northeast, I would say never really appreciated that much, that one, which was in the South, you seem to get good appreciation down there because so many of the folks are moving from the Northeast and going South the same space.

Exactly. . Yeah. It’s a great shifts. Is the book about that?  what did you buy that one for I bought that for $65,000 cash and I just paid cash for it at the time. but it’s, it was located in a redeveloping area outside of the city, down in Florida. It was a redeveloping area at the time.

And, it’s funny on that property. I probably get two, three calls a week from people trying to buy that property from me now. But  I bought it for about 65,000. I did have to go in and, it needed a new air conditioner, some new plumbing, some new electrical, but it’s a nice three bedroom, property down there in Florida.

Okay. Okay. And  you don’t put any other like improvements in it. For $225,000 capital gain, is that right?  I don’t know. I guess that’s an estimate. It can be a high estimate too. People always say Oh, I got to check with my CPA. I was like, your CPA, it’s going to take them two hours to figure this out.

And they’re going to ask them the same questions I’m asking you now.  that could be a little bit of a high estimate. Yeah. that could be a little bit of a high estimate on that property, but that’s what, I do get quite a bit of calls. Nobody’s probably quite offered me that for it, but, 

 I guess I did make some improvements on it. Like I did new plumbing, no electrical and do air conditioning. there were a couple of maybe new windows and things like that. And , it was about five years ago, but that part of Florida really seems to have been a redeveloping area.

And I think I got that one for a pretty good deal. I bought it from somebody who was looking to sell it. it was a cash as is deal. So I’m sure I bought that way under market at the time as well. So it was probably also a good purchases of $300,000.  It might be,  maybe it’s only two 50 or maybe it’s even 200, but, it’s definitely, probably it’s in that range.

I don’t know. I’ve always. Put 300 in there. Okay. let me just catch it down to two and 54, just for calculation sake. And then what I’m also trying to do is  you got to add a little bit more, maybe like 20 grand to each of these, for the depreciation recapture.

 you know what that is, right? Like you’re probably thinking of loss on the building value every year. And then this, the property that you bought 15 years ago, 2005, 2006, maybe I’m just going to hard type that in an extra, maybe  50 grand. So  how do you monetize that depreciation recapture, if you will.

because I don’t know, is there a way to monetize that? I’m just throwing it a placeholder of 50 grand.  here’s how you do it. Would you buy this one at the  six Oh six language you buy it at? So I actually paid 665,000 for that one, back in 2005.

Okay. And  where’s this at? Okay. So expensive area. So this is good for taxes because I’m just, shooting from the hip here. Like usually one third of the property value or 0.3, 3% of that six, $665,000 is the. Building value. Yeah. Yeah. The improvements versus the land. Correct. And some of the other ones I’ll use a third for, or two-thirds of the building. So  that’s the total building value is 221,000. And then I’m to divide that by 27 years. Yeah. And I know my accountant on a annual basis on my taxes does. Use some of that. And I don’t know what the numbers are off the top of my head, but I know my accounting firm, the used do depreciate, those assets and the rentals versus the net income that I get from on an annualized basis.

Yeah. So they are probably doing around 8,200 bucks a year. And  we’re doing the math right here. It’s super simple.  it’s not perfect, but it’s close enough for government work for our purposes.  you’ve owned us for what? 15 years? Yeah. About 15 years.

So I’m going to say $123,000 is what I think you should add to your capital gain. Oh, I see. So what you’re saying is, yeah, you’re adding that back into the capital gain. Yeah. So I’m going to do that, the same thing to that other one that you bought in 2008.  that one you bought one about for what? 200 hundred?

Yeah, 189,000. Okay, let’s call it 200 grand just to be more conservative and that’s in California too, or no that one’s in Pennsylvania so that the land value is probably much less for sure there. Yeah. Yeah. We’ll call it half because half the Democrats have for full weekends, stay away from that. I dunno.

I don’t know how, it’s definitely not like Texas or Alabama or Georgia. I don’t know, let’s just call it half. You’ll have a split state, as we know, it was a split state for sure.  and then you own that one for a while? About 14 years. Yeah. So boom, 51 grand.  so then we T we add that to that, and then that this is our real tax one.

This one it’s we could probably do the same math. Sheila, I’ll just, I don’t, I dunno if I want to do that, but I just, I don’t have a central little purchase price. Yeah. Yeah. these are like, you bought it sold little bit and only like a few years ago. it’s probably not much, if I would just be conservative, maybe add an extra 20 grand, I don’t know.

But the big ones we got, right? Yeah. So the reason why I’m doing that is like you’re going to sell these things, but let’s also look at, that’s a two factor decision here. We have to go kill the Buffalo. That is the fattest and not doing anything, the laziest money, which is this one and this one, but we also have to factor in all right.

when we do that, will we have $195,000 of passive losses to offset that transaction? This is the decision process, or instead, maybe we go after this one first that’s $150,000 of passive losses, or I know you went into the last deal with us, in Houston. I don’t know how much you put in, but let’s just say you put in a hundred.

Yeah, I didn’t do the Houston one. I did the Dallas one and the Alabama one. So I did two deals. Yeah. Oh, okay. Okay. Okay. Yeah. The Dallas one thing, hopefully you got your check already. I did, yes. I got my first check from, investing in one of the simple passive cashflow and one of Lane’s, deals.

So I did, I just got it. Yeah, it worked. I got my first check. So my, yeah, check. Oh, you did you get your K one? No, I didn’t get a K one. I did. I invested in that one. it was called the colony. and that’s it now on this summer, what was it maybe June or may you, haven’t got your K one. You’ll get your K one in March for that.

Yeah, my guests that was pre all these, so like  lately, like all these deals have, like these COVID reserves, it’s dilutes the pot, so it lowers the motto, the deduction. So I think with colony. Don’t quote me on this. Of course, we’re on recording here, but maybe you’re going to see if you put in a hundred grand, you’re going to get like 60 to $80,000 of passive losses back.

Okay. let’s just go with that. Okay. So  I don’t know how much passive losses you have. You have to look up. I think it’s the 58 something form. people can figure out this form, go to my taxPage@simplepasacastle.com slash tax. But this is a question to ask your CPA’s okay, can you go to my tax 58, whatever form.

And tell me how much passive losses I have now. , I’m just guesstimating with the amount of stuff you have. I’m guessing you have maybe. A hundred thousand dollars of passive Boston’s plus or minus 50 is what I’m guessing. So with your hospital, I don’t know, off the top of my head, but yeah, usually you’re surprised that you have more than what you’d think.

Typical.  label this pals. So now you have to, you went into the colony for a hundred grand. Let’s just say you get. I don’t know, to be conservative $60,000 of passive losses. So now you’re walking around with $160,000 of passive losses. And then I did the one in Alabama, too, which is I don’t. That was more of a buildup deal.

I don’t know if there’s going to be passive offices for that. yeah. Not until we put the asset in service. So that’ll be on the 2021 K one,  just for. So show the scenarios, let’s see you. That was a regular deal, right? Where it wasn’t a development deal where you got the losses this year, or it was already making money.

 As long as we can we’re making $1, we can do, we can give you the losses that exceed the income. So let’s just say, that one, maybe you got $70,000 of passive losses just saying, so add this up. Let’s just say. You’re walking around with $230,000 of passive losses. So that would allow you to sell this asset, take your hundred $95,000 depreciation, recapture and tax hit, but then you have 230,000 to offset it.

So you have to deduct this from your two 30 and you should still have some leftover, but when you take this deal and there’s what $250,000 of equity and.  That’s the game plan, And you got the deployment tab. We’ll get, maybe we’ll get to the deployment tab on this personal financial sheet, but that might be, I don’t know what your goals are for 2021, but maybe that’s your goal is to invest all $250,000 into two, three deals, whatever.

Okay. And then let’s just say you. You invest that money. And an add a 50% ratio, maybe you get $125,000 or more passive losses to replenish that. That kind of makes sense. Yeah. So if I invested that two 50, I might get another, 125,000 pops of losses for the following year. yeah.

And this is what I call the simple passive cashflow gravy train. You don’t seem like a drug user, but if you were a juggler user or not the old days, this is going from one high to the next.  any questions on that? no, I’d have to get the concept where, you’re redeploying, you’re selling those assets that are appreciated and going back in and, redeploying those assets and something that’s flowing more cash, That’s. Or a higher rate of return. Really? That’s what you’re talking about doing,  you got a lot of things going on. You got the witch Buffalo. You’re going to go on hunt down first this isn’t going to happen overnight. this is positive two or three years to sell all these.

Yeah. And then I also, I’ve been redeploying quite a bit of cash. I made probably four or $500,000 in investments this year alone.  just based off of last year. It was a good year. My income as a business owner now is completely variable, but. In a good year, I can go and invest, significant some that as well.

and I think that’s good. Like you segregate. That’s what I do with my business and education side. Like I segregate my investing and  and sometimes I’ll have, even my wife will have her investment stuff that I segregate even more, just so I can see how I’m doing.  but we’ll look at this personal financial sheet.

And what I looked here is like, all right, what velocity are you moving at? Just set a cashflow standpoint. So   you make about 37,000 of income. your expenses going out is actually pretty good. I’ve seen people that make a third of the less money of you have just as much expenses.

So you’re doing a good job there. the magic number, the net is 27,000 a month. so yeah, you’re in the top, 1% of my investors. I would say if you’re making, if you’re able to net more than a hundred grand, you’re doing super well. Okay. Yeah. And to be honest, like those income numbers are.

They don’t really include the profits of my business either. in good years, it can be significantly higher than not, but in bad years, if you run a business and the type of industry, especially with COVID this year,   we may not make it. We’re certainly not going to make a lot of bonuses or anything like that.

Other than that. Yeah. Yeah. And a lot of my clients are just. Working stiffs, That W2 guys. but there are some business owners. definitely a minority of my clients are business owners so they can relate. But,  but yeah, if I would say whether you’re a business owner or you’re W2 guy, if you’re netting more than a hundred grand a year and your net worth is a million dollars, at least.

 you’re on the, you’re going to be in five or 10 years, you’re going to hit financial freedom unless you spend a lot of money. Yeah. And that is the trick. Cause if it’s sitting there, people tend to spend it. Yeah. Yeah. But I would S the reason why I say, I just want to point that out to you is because you’re doing like better than two and a half times that.

So I would say, you’re going to get there. I don’t know what kind of lifestyle you live, but yeah. Fly first class, buy a nice car, yeah. Relax a little bit. Take your time. Getting there. Yeah. That’s for sure. So yeah, I think that’s just a matter of, you don’t really need to sell 

these types of properties, because you have so much cashflow coming in, you can invest your normal liquidity, but maybe just, I dunno, if these are fun to you, they’re probably not what rental property is fun. just to simplify your life and lower your liability,  getting rid of these rental properties, like I would be concerned with one of these rental properties that 10, the liability and 10 or 20 LP investments.

Okay.  I don’t know what you’re doing with asset protection. Now we don’t have to get into this, but because it’s recorded, but for you, I would definitely be looking into more of an irrevocable trust or something more heavy duty, like a bridge trust. Yeah. We can talk about that. I really haven’t done too much.

yeah, there are certainly things I have done already, but yeah. I don’t know if I’ve done everything yet, either on that. But yeah, definitely get rid of the direct frontals simplify her life.

But yeah. any questions you had, some of the things I really haven’t, you said you are a proponent of the infinite banking thing, and that was something I put on there. and I’ve had a couple of scenarios run and I guess. How do you utilize that infinite banking concept? You yourself have a whole life policy and do that.

It is something I’m looking into, but haven’t really done it, but it is something you’ve mentioned to me before I’ve heard on your things that you do. how do you utilize that and does that help increase your cashflow? I personally do it, but you gotta find other guys that are in your situation, I guess maybe you and I are in the same situation.

a lot of guys in my mastermind, I put them together because they’re in the same situations. They’re W2 guys.  but I need to have a few hundred thousand dollars in case that deal doesn’t go that well, or we need to put money in escrow as a requirement of the lender. So for me, it’s a very good like place to store  liquidity because I need it at hand.

Whereas if you’re just a W2 guy, a doctor, you don’t really need that much liquidity and you can run pretty neat,  I don’t know how you do things, whether you keep cash reserves in the business. I do keep Castro’s within our business as well. And we have, obviously lines of credit with our corporate banking relationships.

We have, lines of credit for things with the business as well. But, I do like to keep some liquidity on hand, but I have gone and invested very aggressively at times and taken that down.  yeah, I do need to keep some liquidity, obviously because of the rental properties. Because things come up, you might need a new roof somewhere.

You might need a bunch of appliances somewhere, but about, if it’s 50 grand, a hundred grand or less that’s me meal, right? Like I’m talking to a capital overlay of a quarter million, half a million for your business that you potentially need. that’s what I skip in that bank for personally.

 but yeah, I would probably put you in the category of just, you can probably run pretty lean with your liquidity. Therefore you can load up your infinite banking and just start investing the majority of it where I, what I’m saying is for me, I load up my infinite banking, but I got to keep it.

In fact,  My thought with the infinite banking was I could load up money in there and then deploy it into something like these LPs or other rental investments or other passive potential passive cashflow. For you, it’s a no brainer.

 But for the guy who’s like under a half, a million dollars net worth, they need to get every penny they have. And not funnel that through something where they’re going to get hit on fees, 10, 20%, their first few years, they need to invest it where  this is  perfect for you because you’re a little bit inefficient with your liquidity.

you’ve got a bunch of liquidity parked in rentals. You got money coming in. I don’t know if I call some of those rentals, liquidity. Yeah. But just, just in your, like your money yeah. Your net, 200,000 plus a year. I don’t know   what’s your practices on your, just personal finances on your checking account savings account?

How much liquidity do you keep in there? But I would move towards keeping most of it in your infinite banking. And, it’d be less than 10, 20 grand in your checking account. Okay. But that’s what you do, some of your cash on hand, you move into the infinite banking. Cause even if you’re getting, that three, 4%, at least that’s what I’ve seen from some of the illustrations that, you know, and it also takes that what, four to five years now, maybe six years to where what you’re putting in kind of hurdles over the.

to you’re actually getting money, you need to be setting it up where that, whole life policy needs to run for a significant amount of time before you start seeing higher cash values than what you’re putting into it. Yeah, but if you would have taken all those like fancy things, they show you, it’s not entirely true.

They don’t have parrot. If you would have taken that money and put it into a rental or syndication, if you do that, that’s going to skyrocket way more. So there’s opportunity lost costs that not taking into effect, but you don’t need to be.  super efficient, right? Like you’re paying costs to  silo to put this money.

That’s tax-free and it is off the table litigators for the most part, there’s a benefit you’re getting, and there’s a cost from paying for it. And for you, it’s a no brainer, but it’s just to what extent. let me just throw something out. let me know what your thoughts are, if you’re able to save 200 grand a year and you’re making a commitment to at least going into a couple of deals every year, so maybe $150,000, you’re deploying every year religiously.

 and that leaves you 50 grand of play money. Maybe I would throw in at least 30 grand a year, I would feed into a policy. Okay. Yeah. I had done looking at 25, but yeah, that’s kinda, I always say, I tell people start off with a lot less than they think. Maybe because when I did it, I did  50 grand a year.

I got a few years and I was like, Oh shoot, this is a lot of money because then I start to go into all these deals that my money disappeared.  yeah, your liquidity dries up outside of, Your cash flow bank, at least. Yeah. Now my deals are starting to go full cycle and cash out.

So I have big liquidity events. So now I’m going to make a much bigger policy for myself to right-size and that’s the idea like once you make a policy, like my strategy is making a policy. They’re usually like five to seven years. Get as the shortest period as you can. And then go in knowing that maybe in the next two or three years, as you , start to see this strategy, play out, you layer up another one on top of it.

You layer another one on top, like layering, whole life policies are infinite banking, concept type policies. If you will, you don’t necessarily need to do it all at once. You can go in and do one and just get the shortest timeframe to where it’s actually,  Cashflow flexible. I don’t think it’s too much of a pain to do the physical thing and do the application.

No, it’s not that  I say that because the life insurance guy is always going to be like, trying to sign you up for the longest line. Like it’s just the nature of the salesman. Yeah. You want the one with the shortest duration. So that makes sense. Yeah. and then, for me, as, especially as a business owner tax reduction strategies really have to be, top of mind and especially living in California,  the,  the California, government seems to be going crazy on us, with what they want to do for taxes.

not to mention, we’re  going to becoming under a new administration. Who’s already talking about maybe increasing taxes as well. tax reduction strategies obviously are. something that are very key, to me as well. And I don’t know if you guys have any good tax reduction strategies or what you do for tax reduction.

Yeah, you’re damn right. We do. this is why like people are interested in deals, but when they come into the mastermind, they start to realize that deals is only one third of the picture. Yeah. The bigger part is keeping most of your money by paying very little taxes. Yeah, because that’s, I feel like I was fairly tax efficient, but my tax bills are enormous.

And not even just to the federal government, also to the state of California where,  they’re significant sums on annualized basis. There’s ways to better recapture some of that, I’m definitely open to listening to that. And where is your current. AGI at L ox event, Bentley adjusted gross income.

 last year it was probably after certain adjustments, like I said, it is variable. I don’t know. It was probably in the six, $700,000 range last year. Sure. Yeah. So you’re probably in the category of most doctors, so the general ideas we’re trying to get you out of the red zone, which is under 330,000 or so.

Married filing jointly.  yeah. Are you’re married? No, I’m filing single now. Oh no.  we got to find you somebody who’s willing to just say nevermind. Yeah, it was funny because there’s plenty that would probably do that. But,  I got a lot of, pilot, single pilot investors personally, like four or five of these guys and I keep telling them the same thing.

So this whole real estate professional status, 750 hours. You can’t do it. My friend. I’m sorry. , this is another idea. Maybe for the next five to 10 years is you sell your business and you become more of a passive entity, right? This is another hierarchy thing you need to be thinking about is  changing our income from ordinary to passive.

And most people think of it as terms of changing their W2 job to more rental properties indications. But it can also mean changing your business, whether it’s a chiropractic business or your business where you’re just.  you’re not an operation you don’t do work. You just have other people work for you and the business category to the eye category.

But maybe you can munch on that in your head, over the holidays or something like that. But for now, certainly I always try to adjust. and my income, this not all of it comes out as W2 income. Certainly a  large portion comes from distributions, from profitability on the company.

Versus W2 income. But again, in a perfect role, if you could maybe sell the business to some other poor soul wants to do all the works, create a royalty stream for yourself in a way. But I know the guy that we ran a corporate office building and I know the guy comes around on the first of the month or he did before he passed away, that he owned like 10 of those buildings.

 

Kind of an interesting guy and just yeah, you work way too hard for all your money goes on the first of the month. I just drive around and pick up checks. So exactly. that’s where you get to,  like for me, I don’t make much active income.  it all comes as passive income now. Yeah.

Yeah, but, and that’s what I’m trying to get to the point where I am generating more passive income and I’ve taken some steps. I still think your highest and best use is just keep doing your business because you do well there. Yeah, for sure. I’m not gonna, I’m not looking to give that up anytime soon, but I also want to have that safety net of,  substantial, passive income that, I can, Switched back into a lower gear if I need to at some point, or, If something happens or if I cancel the business, I want you to keep working your day job because that’s your highest and best use.

That’s like Tom Brady when I don’t know how old he is, but he’s just keep throwing the football. Tom’s almost my age. I don’t know how he’s still through it. He’s younger than me by I think a year or two, but I don’t know how I can still throw a football like that. I went out on the beach and was throwing a football the other day in a flag football game.

And. Yeah, this is actually like even a year or two ago. And I was like, I don’t know. My arm was about to fall off after. Yeah. The same analogous shape for me. I bet. I bet he’s super sore still too. I think his arm is falling off, but at the same thing for you,  I know that the business gives you headaches, but I think just do it a few more years, maybe five or 10.

I don’t know, get it to a level where it’s manageable, but like now you’re trying to create legacy wealth from your family. You’re going to blow past four and a half million. I’m looking like we want to get you to eight figures. yeah, I think it’s definitely within the realm of possibility, with my trajectory and, obviously the, you got get a few lucky bounces or along the way, and you’ve got to hope nothing catastrophic happens and you got to plan for the word, you got to plan for the best, also, make up.

contingencies in case something bad happens. But yeah, if everything keeps going the way it is and keeping fortunate, like I have been in my life and keep working hard. I think I should be able to blow past that. I’m just on the precipice of, starting to build wealth, and like I said, I acquired that company about 10 years ago.

And when I did that, obviously all of my rental property purchasing stops, all those types of things and everything up. Dumped into the company. And now I’m just actually getting to the point where I’m starting to get out of the company. some of everything I had to put back into it when I first started it years ago.

so again, real estate professional status. but we’ll talk again, if you ever get married, try and integrate that. And for people listening, what we’re talking about is, using the passive losses to lower his. AGI down to that 300 level or when Biden starts to, just destroy people over that $400,000 AGI Mark.

But, that’s the game there, but since I become comment just as, so as soon as I become a real estate professional, if you will, then I can net off these passive losses from investing in your LPs or from my other real estate properties  against my income. And you do 750 hours of active participation.

Okay. So that’d be, yeah, but you have to do whatever it does to get qualified as a real estate professional. You’re right. You’re right. But because you are a single guy and you operate a full-time business, it ain’t going to happen for you. I know. I mean my account one that I actually had my real estate license at one point when I went and just got it years ago, when I started doing some real, I let it lapse now I don’t have it anymore, but that’s a misnomer.

So that’s not going to help you get the 750 hours of active participation. Yeah, it’s not in your personal portfolio is going to be those rental properties or what a lot of guys will do is they just get a little dinky short term rental and play that off.

Or they do a little thingy flip  just pure for taxes, but they can’t have that full-time day job, which is why. You need a spouse that is willing to not have a day job. That’s difficult. Yeah. There’s plenty of those out there. Looking for that position. We should have a dating thing.

That’s why in the mastermind thing, I put it here. No, we’ve got to match, make people we’re just going to get together and talk about it. Dating tips and stuff like that.  so for you, like the only thing that you have is And  I don’t do these myself personally, but I know a lot of guys in my group does them is like the land conservation easements, donating money at a five to one multiplier at most staying out of like the prohibited transaction or the greedy land where you’re abusing the system to bring down your taxable.

Like AGI or different other strategies like oil and gas investments, which isn’t the nicest, the best thing these days. And it’s really hard to find the operator in that. but really those are the only options to you.  The analogy I use a lot is  the passive loss is real realistic professional status.

That’s  good diet and exercise, good sleep, right? It’s the holistic solutions to good health. You can’t do that. Steve,  we can only give you like Lippert tour or whatever, like high blood pressure, like keeping you back from the edge right now. That’s all you got. And ideally you don’t want to be doing that stuff forever.

We got to get you to a point.  but yeah, whatever life choices you want. Yeah. I want to start working on building more of my life resume and, not so much at the office, I guess at some point, but, yeah, I got to keep doing the office thing for a while longer, for sure.  To get to that point, but right.

But that’s, that those are your options and . If you’re at $600,000 AGI, and the goal is to get you around 300 or less, maybe throw in 50 grand into a land conservation easement to get $250,000 of, lower your AGI. But there’s a max.

You can do that. I think. And this is where all the things always change. And this is why we mastermind about this stuff. And we have that group, we’re just going over this on a high level, but not getting advice. Yeah, I’ve not heard of that land conservation easement. I’ll have to do a little bit of research into that or, yeah, I, there’s a page on my website that kind of has an overview.

I think it’s that simple passive castle.com/land. I think currently you can deduct, you can only do 50% of your income now. So I don’t know if it’s AGI or GI or what, but.  you can’t drive your entire AGI down to zero.

be able to qualify for a loan again either. Yeah, no. Would you want to, but  there’s been a lot of scrutiny over these things, which I think is a little overblown, but people are doing these fee simple arrangements where. I don’t entirely know what the heck it is, but I know you for fee simple, you can only drive it down 30%, but I think still think that’s good enough, right?

Like I’m not saying go from 600 down to 300, but maybe this year, if you want to try it, maybe you put in 20 grand to get a hundred thousand dollars deduction. See how it works. Yeah. Okay. Yeah, definitely do a little bit of research on that. Thank you for the tip. I hadn’t heard of that before. It’s a it’s in December already.

So you got a couple of weeks of research study. Yeah, I guess I’ll have to get on that for sure. Yeah. But yeah, guys we’ll do this every year. Especially doctors high paid W2. Guys. They’ll do this in combination too, with real estate professional status. So you don’t burn out their passive losses. Okay. How does the doctor go about getting, a real estate professional designation?

A lot of times they have a spouse that it was a homemaker. I said, yeah, they’ll go do it.  that’s pretty common, right? Yeah, no, it is. Yeah. it’s, Actually, I do get a lot of clients where it’s like both spouses.  I have the  onboarding call with them and they both come.

I’m like, okay, this is refreshing. And they’re both super excited about this financial independence stuff. And I’m like, Oh my goodness. don’t tell me, you guys both love your job. we both love our job and Oh my goodness, how is that possible? So I was asked like, what should you guys.

Dislike your job the most, or I don’t know, we got a word in our special way, but,  typically there’s one person that’s yeah, I’ll quit my job part time. Okay. That’s the ideal arrangement? that’s what I do. I just use what I strategize with my accountant and said we just use them.

We just burn up our passive losses to drive it down to nothing. Got the texts about that thing because their logic is a tax savings. I could probably make more money than a potential to pay 10, 20% less taxes in a future year. If you can eliminate taxes, that’s the best thing, but the second best thing is delaying them.

And if you can delay it by having, offsetting them, by some of the losses into and reinvesting into the future year. yeah, plus we’re making money on all of , those investments in the meanwhile, here’s the argument for example,  mr.

Sanders scenario, where you, again, where you have $230,000 of passive losses, Yeah. And let’s just say you already driven your HEI down to 150,000. And for folks listening, if your AGI is less than $250,000 chillax dude, like you’re not paying that much taxes for you to thrive it down even more and to  execute and  activate these passive losses that get you even lower.

It may not be worth it because the  lower your AGI goes, the less taxes percentage-wise you pay because we’re not progressing tax system. So what I was  telling Mike, my accountant was like, why wouldn’t we save this extra a hundred thousand dollars and I’ll pay some taxes, but they ultimately got me to side with their strategy.

But I think in different situations, it’s different for some people. So not one situation fits everybody. At least  you and I can intend on the G have this conversation and take that information and tenancy co converse with our tax accountant because the tax accountant is not going to really be mindful of this stuff.

Yeah. You have to guide them. Yes. Yeah. You need to guide them in the know somewhat of the overall strategy for sure. But, yeah. anything else, anything, any other strategies that you were looking at? I made, it sounds like I should probably be looking at the infinite banking system.

I haven’t, I get what you’re saying about maybe,  taking the equity out of some of the properties I have and start to redeploying that at , higher yielding assets, and possibly, limiting liability by going into some of these. And I was happy to see, I got my first check this month from the first deal we did.

So that’s working so far, you got a lot on your plate, man. You gotta sell assets. You gotta go into deals. You gotta infinite banking and you got a.  I got to run a company on my spare time. Maybe do land conservation, EAs conservation.  dude, join the mastermind. like I guarantee if I don’t  double your money.

Once you paid,  let you blog I’ll refile. Like it is a no brainer, man. Like you need to talk, even build your network with the right people around you. Okay. Yeah. I definitely have some high net worth friends as well, but some of them are much higher net worth than me then, they aren’t necessarily doing some of these strategies because they’re already over that.

That’s the problem there. Second generational wealth people. I have friends, yeah. That are like second generational wealth. And they didn’t start with zero in their bank account when they got out of college and started. Yeah. So when I can’t say I had zero, I was fortunate. At least I didn’t have huge loans that were overbearing, but, I didn’t have, obviously that thing, I didn’t have anybody to lend me a ton of money or to give me a ton of money to start with.

I was, started by saving and just, driving the first car. I had 200,000 miles.  this is your tribe, man. this is all first-generation. guys, and they’re like 35 to 55 range.  They got kids your age. They’re in that one, the $4 million range. this is your child.

Yeah, definitely. I look at it then. And how often you guys meet with the mastermind and, Oh, we just, we do a live zoom call every couple days, week. So whatever you got going on, we can take care of. But what I say is I don’t want you guys to spend more than a few hours a month with this group.

Just jump on the calls. We’ve recorded them. So that’s going to keep you busy, but use the database to just book a call with every member and see who you get along with. You got a lot of people in California and you meet up for beers or something like that. Okay. So you do have a number of members out here in California.

Yeah. I’m sure at least a dozen or two in California. that’s majority of where folks are at for guys too much taxes up there as far as for people paying all the taxes. Yeah. Yeah. But then we’ll show you the good stuff, like which word it puts your passive investments to circumvent the state taxes.

 That’s the one that I’ve been learning about from some folks lately. Okay. Yeah. I’d certainly be interested in learning more about that. If  were ways to play some of these, passive investments so that, the state of California can, not, have their greedy hands out into everything, but yeah.

But, but cause Steve, thanks for doing this. All right. thank you. there’s always a good talking to you lane and, so far happy with the deals I’ve done, so far, looking to see how they continue progressing and, be interested to see what you guys are putting out next year. I think, next couple of months I’m rebuilding up my cash reserves again, and then I’ll look to start deploying some stuff.

I got lost here in the research as well, too. Yeah. Yeah. It helped let me know, man. but yeah. Thanks everybody for listening. if you guys want to DDS, put yourself out to the world, shoot me an email at lane@simplepassivecashflow.com And, thanks for joining us, Thank you.