Plan One: Buy a $200,000 with 10% down. 7% loan for 30 years. At the end of 20 years you’ll have appreciated to $530,660 and the loan balance decreased to $103,142. Your $20,000 investment is now $427,518. 16.5% a year .

Plan Two: Much More Money

Every 5 years as your properties appreciate, Cash Out Refi and keep bubbling. You do this 4 times. You can start with 20k and end with 6.7 Mil in equity. All properties 10% down.

Benefit #3: Many Tax Advantages

Chapter 2: Being Smart with Your Real Estate Investment

Product Versus Plan - REI is the Product but its useless without a good PLAN

Stock Investing requires technical skills, REI requires people skills

Identify your team. Diane’s Team:

RE Agent, Re Attorney, Mortgage Broker (not loan officer), Insurance agent, Home inspector, Handyman, Escrow officer, cleaning person, bookkeeper.

REI Agent: Always be on the lookout for a good deal, a property with a poblano that can be fixed to raise its value. She uses a story where they found a condo in red hot Phoenix market that sat for 90 days because nobody wanted to rehab it. They got 15% no PMI and cash flow just fine.

RE Attorney: Each state has different rules so hire an expert

Mortgage Broker: Good ones get you good loans and have relationships with underwriters. However, a mortgage broker is an intermediary who charges a fee. A mortgage banker is the direct link to lending more funds.

Insurance Agent: Helps you get the best bang for your buck.

Real Estate Appraiser: Great resource for comps along with maximizing the stated value of square footage. Example: Adding bath to include basement square footage, may not count if it does not have a bathroom.

Home Inspector: “Subject to inspection” when buying homes for safety.

Escrow Officer: Her officer found a discrepancy in one lot versus two.

Cleaning Person: You need systems to reduce as much of your involvement

Bookkeeper: If you don’t trust yourself with Quickbooks

Building Your Team: Be very open in communication & clear with expectations

Build Loyalty: It’s an exchange and they expect something in return like you do

Chapter 3: Your Real Estate Plan

Know what your goals are. The authors of this book focus primarily on large multi family and working class 2 and 3 bedroom homes.

Their goal is to buy distressed, structurally sound properties, at 80% off.

Many investors hit a wall at 4 to 5 properties and in a room full of investors its rare that 10% of folks own any over that amount. Small investors can do their own books, as you grow past 4 or 5, then you’ll likely need help.

Buy And Flip:

Advantages: Build up Cash Reserves.

Disadvantages: Taxed at normal rates, might need to hold longer than planned

Bookkeeping Issue: Make sure you keep DETAILED expense receipts

Buy and Hold - Primary Residence:

Advantage: Cash Flow? After two years, profits up to 500k married and 250k single are not taxed, if you sell.

Disadvantage: Money might get tied up.

Bookkeeping Issue: Need to keep records for as long as you hold property

Long Term - Rental:

Advantage: Cash Flow, Passive Income, Net Worth

Disadvantage: Landlord duties, may not appreciate quickly

Bookkeeping Issue: Learn how to maximize depreciation

Land Development:

Advantage: Done right, can be very lucrative

Disadvantage: Truly is a business, requires lots of involvement

Bookkeeping Issues: Expenses are capitalized, not deducted.

Fix Up and Sell:

Advantages: Profit

Disadvantages: Be careful creating another job for yourself, contract out

Bookkeeping Issues: Keep very detailed records

Fix Up and Hold:

Advantages: Forced appreciation and Cash Flow

Disadvantages: Be careful creating a job for yourself

Bookkeeping Issues: Might have to capitalize repairs, credits available pre 1936

Part 2: Tax Secrets

Chapter 4: Intro to Tax Secrets

IRS agents are given just 3 days of training so they may give bad advice.

3 Stage Tax Formula:

Income

Deductible Expenses

Multiply Taxable Income by your Tax Rate - Learn to make use of your graduated tax rates, not all of your money is taxed at one rate.

Chapter 5: 3 Types of Income

Earned Income, Passive Income, Portfolio Income.

For taxation, you want as much passive income as possible.

RE Losses Loophole: Find a way to qualify as a RE professional, more “losses”

Appreciation - Allows for Tax Free loans when it happens, almost always.

Tax Advantaged Income - You want as much Tax Free income as possible

Tax Deferred Income - One way to do it is through certain business structures. The other is a 1031 Exchange.

Tax Free Income - One way is a ROTH IRA, the other is by deducting $250,000 (if single) of the gains on the sale of a home you've lived in for 2 years, of $500,000 if you're married.

You want to reduce EARNED income as much as possible and transition it into as much passive income as you can.

Chapter 6: Legal Deductions

There are very few tax deductions available for the W-2 wage earner and, even worse, as their income rises, they begin to lose both tax deductions and tax exemptions. Real Estate IS a business with significant tax advantages.

From the IRS, regarding what is tax deductible: “There shall be allowed as a deduction, all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”.

Pretty Vague, open to interpretation. Necessary and Ordinary up to YOU.

Most Commonly overlooked deductions:

Auto Expense - You can buy the car in your business and deduct all associated maintenance. Plus, you can deduct interest and depreciation. Or, you can buy or lease the car yourself and deduct mileage at the reimbursable rate but LOG YOUR MILES.

Business Startup Expenses -

Legal Expenses - Some are amortized over 60 months.

Business Structure Setup Costs - LLC costs, etc.

Filing Fees - Business licenses, state fees, etc.

Accounting Fees - Paying your accountant

Office Equipment- Any kind of electronic tool

Office Furniture -

Cost of Investigating Business - Seminars, Books, Travel, Advisors Fees

Office Setup - Logos, Business Cards, Stationary, Website design.

Meals and Entertainment - Up to 50%. Keep the receipts along with a note of WHEN It happened, with WHO, WHAT was discussed.

Travel Expenses - If you take a trip and spend MORE Days doing business related than non business related things, it’s deductible.

Kids - You can deduct THEIR salary, plus up to $4,700 a kid. Make sure you log their activities in the business, how many hours, at what rate you paid them.

Pay the a salary so they can open up an IRA at age 18 and balloon from there.

Home Office Expense - As long as you have a room dedicated to doing business related activity, you can deduct home office expenses. Whatever portion of that room is relative to where you live, you take that ratio and take it from your total expense for being in that building and its deductible. Mortgage Interest, property tax, Rent, HOA dues, Maintenance and Cleaning, Utilities, Insurance, PMI. Sketch out a floor plan, with pictures, that illustrate building.

Phantom Expense- All properties qualify for depreciation even though invisible

Important to consider, Costs that go into CREATING an asset are CAPITALIZED and DEPRECIATED versus being DEDUCTIBLE (what you want instead). Try to separate REPAIRS (deductible) from IMPROVEMENTS (capitalized).

Chapter 7: Tax Rate Magic

No Tax - Consider investing with your IRA and make sure you maximize your Principal Residence Gain Exclusion (note to self, WHAT IS THIS?)

Deferred Tax -

Installment Sale - FSBO is separated into two parts, Principal and Interest. Interest will always be taxable like portfolio income, but Principal is only partially taxable depending on how its apportioned between gains and returns.

This changes if you’re considered a “dealer”. Consult a Tax Professional.

Buying property through your Roth or when you do a 1031 Exchange.
Capital Gains - Broken down into two parts. When you sell, all depreciation is recaptured. Capital Gains rate is applied to sale. Get a Tax Pro again.

Chapter 8: Loophole #1 Principal Residence

One strategy is to find fixers, renovate them while you live in them, sell it after 2 years and before five, and take out the gain tax free up to 250k single, 500k m.

All you have to do is sell, no other rules.

You can take short departures, no longer than a year. IRS Offers hardship exclusions for things like relocating at work, health reasons, divorce etc. It gets prorated.

This is in ADDITION to the home office rule. Only caveat is that your mileage expensed to and and from your home office is now slightly tweaked.

You cannot take a “loss” on your home for taxes but you CAN if biz or rental.

What if the gains exceed the tax free amount? 1031 Exchange.

Chapter 9: Loophole #2 Accelerating Depreciation

Phantom Expense - Your Depreciation can offset rents and you pay NO TAX!

Classes of Property-

Step 1, separate the value of land from the structure. Land isn’t depreciable.

Step 2, valuate personal items in rental using appraiser or FMV

Step 3, separate building value from personal property values.

Step 4, separate depreciation for building from items, different depr schedules.

Step 5, in California you are required to keep depreciation schedules.

How to Catch Up Past Accelerated Depreciation?

If you forget to separate building and belongings, can do a 3115 form to recover

What happens when you sell? You have to recapture depreciation at ordinary rates, and pay capital gains on profits. Or you can 1031 exchange.

Common Mistake? Some taxpayers don’t deduct deprec on rental property.

Worksheet on Page 68 to itemize all costs associated with rental property

Chapter 10: Loophole # 3 Real Estate Professional

For most people, the max you can claim as RE losses is 25k. For high income earners, they cannot benefit at all. The trick is to be a Real Estate Professional

A. Have to spend more than 750 hours a year as a real estate professional

B. More than half the time you spent performing personal services in ALL trades or business spent doing “qualified RE pro activities”.

Qualified RE Activities include:

Developing - Meetings with engineers, architects, etc or do this work yourself.

Redevelop - Meetings discussing demolition and redevelopment

Construction, Reconstruction, Acquiring, Converting, Renting, Managing, Leasing, Selling of Real Estate.

List of most roles that qualify: RE appraiser, Civil or Structural Engineer, RE Agent, RE broker, RE attorney, Mortgage Broker or Banker, Tradesmen, Architct

Question for self: How could you QUANTIFY tax benefits of being REI pro?

Chapter 11: Loophole #4. Sell now, tax later.

Taxable gain calculated as difference between depreciated basis. Recaptured Depreciation taxed at ordinary rates, or capital gains rates, and the rest taxed at applicable capital gains rates. Costs of sale, prorated interest and taxes, deducted.

Things that increase the basis: Capital improvements, broker commission, lawyers fees, zoning costs, installation of utilities, title search, etc

Things that decrease basis: Depreciation, percentage depletion, easements etc

How do I avoid paying the tax on the gain?

Like Kind Exchange - You must notify an exchange expert, transfer the cash to an intermediary, close on a new property within 180 days. If not, the portion you keep called “the boot”, will be taxable. This a Tax DEFERRED transfer. You may have taxes due when you sell the property you “stepped up” to.

2 ways to avoid future tax:

Roll the sale of the 2nd property into ANOTHER 1031

Sell the property through a CRT (charitable remainder trust)

Things to consider before doing a 1031:

Consider paying the current capital gains tax. 18% (low as 8%) historically low.

Consider depreciation of new property. At some point you lose the advantage of the phantom depreciation loss.

Consider the REQUIREMENTS of the 1031 rules.

Consider the COST of the 1031 exchange.

Make sure you have a GOOD team help you facilitate the 1031.

If you want to get cash out of a 1031. Buy the 2nd property, then Refi.

A CRT has 2 beneficiaries, Income Beneficiaries and Charitable Beneficiaries.

How it works: Property is donated to a CRT. At death, the charity that receives it can do anything it wants with it, it is out of your estate. You benefit by avoiding taxation and you get a deduction based off its value. A minimum of 5% of the income generated must be distributed annually.

Installment Sale - Only for non dealers, gains prorated over life of payments.

Chapter 12: Loophole #5 Getting money out of your property.

Don’t sacrifice cash flow for appreciation. That’s a risky route to take.

With Real Estate use other folks’ money to build your assets through leverage

Chapter 13: Loophole #6 REI with your pension plan

You can do whatever you want with your ROTH and a self directed IRA can be used to buy SFH, Up to Quads, Multi's Apartments, even land.

Chapter 14: Loophole #7 Tips for Qualifying for a Loan

Tip #1: Add back depreciation to inflate your income

Tip #2: Pay back all possible payments through your business. Try to buy things and pay for them under your business, minimize personal debt.

Seller Financing ( Question, what are the drawbacks to seller financing?)

Part 3: Intro to legal secrets

Dealing with tenants means dealing with the public. PROTECT yourself.

Even with documents and agreements, LEGALLY protect yourself proactively.

Chapter 15: Homestead Exemptions

Fluoride is the most protective of property owners and the protection is unlimited. Nobody can take your home so long as its your primary residence sitting on an acre or less. Homesteads must be filed for in advance.

Every state is different so do your due diligence and learn your own state.

Consider Oglethorpe. Was acquitted in a murder trial against his wife but her family came after his money in a civil trial. He planned ahead with good lawyers and protected himself. (I wish they had a better example to use. Whoops)

Note to self: Study up on California

Chapter 16: Land Ownership and Notice Requirements

4 Types of Estates:

Fee Estates: Provides absolute ownership for an infinite period of time, subject to government laws restricting land use.

Life Estates: An interest in Real Estate lasting for the lifetime of the life tenant. Example: Your mom lives in a rental and you give her life estate. She is responsible for taxes and repairs until she dies and it’s returned to son. (Another cruel example)

Leasehold estates: When you rent out, or lease, your property to a tenant.

Estates at Will: Allowing a tenant to use a property for free. Not much of an estate.

Tenants can hold 4 types of estates:

Fixed Term Tenancy aka a LEASE.

Periodic Tenancy aka a RENTAL. Could be week to week, month to month, etc

Most common, a 30 day notice to evacuate is plenty.

Tenancy at Sufferance. When a tenant remains without landlords consent. Inherited, month to month tenant.

Tenancy at will. When a tenant remains with landlords consent but no payment arrangements exist. Unless written, tenancy remains until death of tenant or owner.

Get a good real estate attorney where you want to invest that knows the laws and be sure to ask for any and all fees before meeting up to avoid surprises.

How to Evict. (Research eviction law as in the states/cities you want to invest)

Fixed Term Tenancy: When the lease expires, eviction can proceed.

Periodic Tenancy: Week to week? 7 day notice. Month to month? 30 day notice

Tenants at Will: General rule is 30 days but varies by state.

Tenants at Sufferance: AKA squatters. Laws vary by state as well so know them

Bottom line, some states are more tenant friendly than others.

Chapter 17: Landlord Liability

Starts with an example of a tenant’s dog bitingly neighbor and the property owner getting sued.

The Duty of Care - It is advised that you live up to being a “good landlord”, having enough insurance and having right business entity to protect yourself.

Duty to Inspect - Advised that inspection take place once a year, lease renewal

Owner who owned and rented a piece of paved land was sued when a customer buying produce from a man he rented space to, slipped and fell.

Duty to Disclose Dangerous Conditions - Give renters a heads up. If you know of any serious crime, you have to disclose it. (Question to self, how much info are property managers/landlords obligated to provide?)

Implied Warranty of Habitability - Your rental has to be in good living condition.

Things to look out for: Dangerous animals, Unfinished Repairs, Broken Fixtures, Poorly maintained locks, doors, gates, lights. Continuous criminal activity.

Chapter 18: Insurance

Example of two friends who suffered fires to their buildings due to lightning. One was very well protected due to insurance that covered things like repairs to bring building up to code and lose rent. The friend had very little insurance.

Insurance Broker - A good one will know local nuances like required sprinklers in homes in Napa, insurance for your employees if they use their cars for work.

If a property has had too many claims filed, an insurance provider may NOT want to offer you coverage so research the property history called a CLUE report at www.choicetrust.com

Chapter 19: Joint Tenancies/ Tenancies in Common/ Land Trusts

There is a myth among the public that real estate protection is easily achieved through jointly owned or trustee administered property. NOT TRUE.

(Long story about a couple who thought they were protected by having joint ownership in a duplex, still got sued left and right for different accidents at it.

Tenancy in Common - When tenants own fractional shares of where they live.

Joint Tenancies - When two or more people agree in writing about splitting ownership, undivided, in property. Tenancy in Common is divided.

Tenancies by Entirety - Exclusive to married people. A husband and wife can “split” a property and sell off their interest in the future.

Chapter 20: How to Hold real Estate

Differences between LLC and LP (Limited Partnerships)

Story of old man who owned a auto shop. Had offer to buy the building but didn't care to form an LLC. Customer had accident in repaired car, sued him.

When dealing with banks, you have to disclose to them that for the purpose of estate planning you plan on putting the title in the LLC after close. In the future, if your LLC does well, the bank may loan to your LLC directly.

The bank/lender still hold you responsible for fulfilling loan terms
Once your title is in the LLC, future credits cant come after personal assets
The borrower: You have personally guaranteed loan, but any claims against the LLC will protect your assets.

Doughnut shop owner had two shops, wanted to open third. Bought a commercial building for 3rd shop and quad for passive income. Employees sued him, brought him down because he bought the properties under S corp of the doughnut shop rather than setting up each new property as its own LLC.

George owned multiple properties and a "swamp" in Florida. Each had their own LLC, houses all in Nevada. He got sued and they could only come after Florida assets when a gator bit a teen. That LLC had less than 10k. Other thing to consider is some states much more protective than others. Nevada > NY.

Chapter 21:

Structures for your RE Tax Considerations

S Corp: S Corp is a flow through entity. Taxable income flows through to individual owners and be taxed at their individual rates. It’s not subject to self employment tax but neither is RE income so little value to RE investors unless you’re a self employed flipper to avoid that tax.

C Corp: Might make sense with foreign ownership or if publicly traded.

No tax advantages to personally holding property but as we saw, major risk.

Partnership: Limited Partnerships are ideal in Real Estate.

LLC- LLC's can decide how to be taxed (how?) and provides ASSET protection.

1031 - If there are multiple owners and you see a 1031 in the future, may want to hold it as Tenants in Common.

For more detailed help with determine structure, read: Loopholes of the Rich: How the rich legally make more money and pay less tax.

3 Reasons why LLC's and LP's are best for RE Investing:

Capital Gains Treatment - Capital gains flow through to the individual who normally pay less tax than corporations.

Tax Benefits - Might also provide pass through loss benefits

Distribution - If you have an S Corp and you turn one property into two, theyre both tied to that one S Corp. In an LLC, you can distribute one of them no taxes

Part 4: Introduction to Selection Secrets

Chapter 22: Property Analysis

What’s your plan? Cash flow or appreciation or both?

Never buy off of pro form numbers. Buy based off current numbers.

Investing for Cash Flow:

Identify the type of property you want to buy. How much do you want to invest and how much do you qualify for?
Identify the area you want to invest in. Typically working class has better cash on cash, high end requires more money up front.
Rely on your team to determine the strength of a potential investment
Assess the property. Cosmetic issues? Comps? Good blue collar is good.
How is the neighborhood and overall community trending?

Ways to improve cash flow:

Charge for storage

Laundry

Charge for covered parking

New fencing

Cosmetic upgrades

Offer rent to own program

Always make offers “subject to inspection and financing”.

Page 164 has upfront costs plus Cash on Cash Return formula.

Always leave yourself a cushion in case you buy for appreciation. How long could you hold the property if everything hit the fan and you lost your job? You can try and gauge the appreciation cycle based off of historical cyclical data for that neighborhood. Do price crest and trough every 7 years? Could be a good indicator but not guaranteed. Ultimately, rents are king and they rarely see a sharp decline.

Chapter 23: Legal Due Diligence

Suggested clause for protection: “The offer is contingent upon buyer’s inspection of the property and acceptance of its condition within 30 days from acceptance”.

You need to send a letter to parties involve clearly stating the deal is off if a satisfactory inspection isn’t completed in 30 days or you risk losing Earnest $.

Good brokers should be doing this for you anyway.

Suggested contingencies:

Review for hazardous waste, obtaining acceptable financing, acceptance of all leases and contracts, acceptance of title report and all documents referenced in the title report.

You may get a loan offer for 6%, decide that’s too high for you and walk away

Look out for title restrictions or easements (other people having the right to make certain use of your property)

Why is a prelim Total report important?

Prelim report outlines limits and extents to which title insurance company is willing to insure the title to your property. The final report provides granular info.

Things to inspect for accuracy:

Addressee: Make sure all names are correct.

Current Owner.

Legal Description of property: Should match purchase agreement.

Plat Map: Provides outline and detail of your lot, adjacent streets

Type of Estate Interest: Most common is Fee Simple Absolute.

Effective Date: Confirms data is accurate up to that date.

Type of Policy Requested: Overview of your insurance policy

Report Number and Contact Person.

Easements. May Include: a third party’s right to use your roads, a utility company’s right to keep certain equipment on your land, a right of entry for certain purposes, a right to provide structural support for another building not yours, a right of light and air not to be infringed for others, a right to water.

Mortgage or deed of trust.

Notice of default.

Parties in possession.

Survey exception.

Mechanic’s Iiens.

State or Federal Tax liens.

4 people can be held liable for waste:

Current Owner

Owner at the time waste was deposited

Those who generated waste and directed it there

Those who transported it

Chapter 24: Real Life Selection Stories

Goes into the benefits of just paying 10% as a cost of doing business for a PM

Key elements of selecting a good one?

Local reputation and references. Good brokers know good PM companies.

Market Knowledge. Have them prove to you they know the market well.

Vendor and Service Contracts - They should have a good network in place.

Reviewing the Management Contract:

Compensation: Usually 5 to 10% of rents.

Management Duties and Responsibilities - Clearly spell out what you want.

The Term and Termination Clause - If unsatisfied, leave a 30 day out clause.

Spending Issues - Clearly list how much can be spent without your consent

Special Contract Issues - Read all the secret traps like broker sales commission if/when you sell the building.

How to rate/review your PM:

Lower Vacancy

Greater Returns for owner

Better collection rates

Lower Turnover

Fewer Complaints

Better condition of the property

Always use licensed/bonded contractors. Don’t rent to people with poor credit.

Advice from one of the stories highlighted, rent near colleges/universities. May risk more damage but tenant pool is extremely consistent.

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