All Forum Posts by: Ben Zimmerman

@Timothy Metra  Grant Cordone is both a genius, and an idiot, depending on how you want to view things.  The first thing you should understand about what he is trying to do, is that unless you are making a ton of money, your chances of being audited is on the grand scheme of things very, very low.  He uses this fact to his advantage because every year that he doesn't get audited, is a year in which he basically pays nothing in taxes.  He pushes the law so far, knowing that even by pushing the limits he probably won't be audited and thus he will get away with it.  And on the off chance that he is audited, he just has to be able to justify his taxes enough so that it's not deemed criminal tax evasion.  Otherwise he simply pays the IRS what he should have owed them in the first place,  plus possibly a small fine.  Over the course of many years, if he is audited twice, but he gets away with it 48 other times, then financially that is a huge success because what he saved is dramatically higher than what he had to pay out in fines.  This is easily summed up by the old expression, "It is easier to ask forgiveness, than to ask for permission".

As for your four bullet points.

1. Nine exemptions:  He isn't saying you should claim 9 dependents on your actual taxes on Apr 15th, (that would be fraud), he is saying you should claim 9 exemptions on your W4.  All this is doing is reducing the amount your employer withholds on a monthly basis in taxes.  This means that at the end of the year, you may end up owing the IRS money, however his whole goal is to do other creative things in order to reduce his tax bill enough so that this doesn't happen and he doesn't owe anything.  Most people claim 1 exemption for themselves, plus one for each dependent, but the form does specify that you are able to adjust this based on "projected tax credits".

4.  No refunds:  This is out of order but it ties into point 1.  Getting a refund at the end of the year, means that during the year you OVERPAID on your taxes, this generally happens by not claiming enough exemptions on your W4.  This means that essentially you gave the government an interest free loan for one year.  Instead of the government holding onto that money all year long just to finally give it back to you, you could have invested that money into an investment account earning additional interest or returns.

2.  Business deductions:  Owning a business is probably the single best thing you can do as far as taxes are concerned.  Although he doesn't dwell on it, he does say that you should try to get the business to succeed, but even if it doesn't its still beneficial because you can now claim many things as business expenses, and also have access to the wonderful home office deduction.  Buying a new computer?  -Call it a work computer and write it off as a deduction.  Do you have a cell phone that you also use for business use?  -Write off a percentage of that too, along with a part of your internet bill for that new computer of yours ect.  A home office deduction can be huge as well.  Because now you can write off a percentage of your electric bill, rent, heat, mortgage, depreciation, certain repairs ect or take the new simpler deduction based on the sq footage of the office. 

3. 100% car deductions:  Please reread my intro statement for this bullet point, because by claiming a 100% deduction he is basically daring the IRS to audit him.  If they do he will attempt to justify it (maybe he gets it to work, maybe he doesn't), and if they don't audit him then he gets away with it by default.  Depending on your particular line of business, a very high % could be completely appropriate and still not be obnoxious like the 100% is.

Many of his tactics stretch the law to their limit (100% car deduction), and would be frowned upon ethically.  But what is ethical and what is technically legal are not always the same thing.  You did mention that you were less concerned with ethics however, and more concerned with what is strictly legal so some of this stuff may work out for you although I would still suggest toning it down one notch.  I would highly suggest educating yourself on some of the finer points of a few of his tactics by reading publications put out by the IRS (they actually have some pretty useful stuff that everyone can understand).  Because you first have to be familiar with the specifics of what the law says, in order for you to know how to properly bend that law to your advantage because often times the devil is in the details, and as always consult a real tax professional.

@John P.  Diversification is wonderful for sustaining wealth, but terrible at creating wealth.  The more diversified your portfolio, the more its returns mirror that of the overall economy.  A truly diverse portfolio of RE, precious metals, stocks, bonds, ect ect, will have 'average' results in relation to the economy. 

Nobody in history has ever become wealthy by being average.

For me, the biggest hurdle came from the negativity that came from friends and family.  We live in a culture of go to school, get a job, save some money, and hopefully retire one day.  Debt is bad, and savings is good.  The sheer amount of negativity from the 'lemmings' in my life who had no problems letting me know how crazy they thought I was for taking on so much debt, or how that will never work ect.  They were so convinced that the stereotypical way to wealth was the correct approach, even though it wasn't working for them. 

For the 90% of you who have read Rich Dad, Poor Dad, my family had a poor dad mentality.  Once I began ignoring their criticism and got up and off the couch and took control of my finances, things started happening.

 Hi Betty, I think the easiest way to look at it is like this.  A non-leveraged property will have roughly double the amount of cash flow (your analysis) as opposed to a leveraged property.  However, that property took 5x the amount of money to purchase than a leveraged property would have cost (assuming a 20% down payment on the leveraged properties as opposed to 100% on a paid in full home).  So instead of having one property fully paid off earning double cash flow, you could instead buy 5 leveraged properties each earning single cash flow.  5 > 2.

In addition to this you have all of the other wonderful things about real estate, such as appreciation on 5 houses instead of 1, tax benefits, equity paydown ect.

With historically low interest rates it makes fiscal sense to use as much debt as you can.  If you can borrow $1M at 4% interest rate, and invest it into something that returns 10% dividends, then you are not only able to pay off the monthly interest, but also have 6% left over earning you 60k a year in profit.

However, no amount of statistically proving 'this is the most profitable way' can make up for the stress that some people have over large amounts of debt.  If after you realize that debt is the quickest way to make a profit, and you are still scared of that high of debt, then don't do it!  Finding an amount of debt level that you are comfortable with is the important thing.

A cash flowing asset today, will still likely be a cash flowing asset tomorrow. 

I'm in my 30s, I don't plan on or even want to retire any time soon so I couldn't care less about trying to predict the short term market trends. 

"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

-Warren Buffett 2008

10% is fairly standard place to start for each category, but never trust any calculation based on a flat percentage.  I don't use percentages for anything, as there are too many variables which causes them to be wildly inaccurate.  Using the numbers quoted above, your average home in San Francisco which costs 1million, and rents for 3500+ would require 4200 in general repairs per year, and 4200 in cap ex, which is insanely high.  Likewise newer homes will generally have significantly less general maintenance than something built in the 1950's.  Investing in A/B neighborhoods tends to attract better tenants than in C areas which causes significantly less wear and tear as they tend on the whole to take better care of the property ect ect. 

Also, I tend to price my rentals slightly below the norm.  This keeps my vacancy rate virtually non existent, and my maintenance just as low.  If you estimate for 10% vacancy, that means on average your house sits empty 5 weeks out of the year, which is probably high but for the sake of argument we'll go with it.  If you're charging 1000/month, I can afford to charge as little as 900/month and we still come out even at the end of the year if I get a long term tenant.  If I charge 950, the tenants typically want to stay since it's still the cheapest place in the neighborhood and I generally speaking come out ahead financially, at the end of the year I can evaluate them and decide if I want to renew their lease or if they are a problem tenant I simply don't renew and can quickly find someone else.  This causes me to have essentially nothing but long term tenants that generally take very good care of the property.  Thus reducing not only my bills, but drastically reduces the amount of time I spend screening tenants, managing the property, and running around doing all the little things. 

I think the more important question is why do you want to invest in real estate to begin with?  Because honestly to me it sounds like this is not a good investment strategy for you.  It sounds like peace of mind is the most important thing to you, and not money.  If that's the case your not going to get any piece of mind from owning or managing property.  There WILL be stress as you search for that initial property to buy at a good price, and as you learn how to deal with tenants, get phone calls for a leaky toilet while you're having supper with the family, or that crazy cat lady with pee all over the carpet. 

The only way to get the kind of peace of mind you're looking for is to buy a turnkey property using a ridiculously high down payment, and hire a management company to do everything for you.  But if you go that route, then you are negating so much of what makes investing in real estate profitable, and at that rate, why not just invest in some high dividend energy stocks and be done with it? 

First, congratulations on the fiancé, but you're acting like she's a liability holding you back from investing the way that you want to in multi's.  She's not a liability, she's an asset.  In fact everything in life is an asset, you just need to figure out how to properly utilize it.  Remember the old adage, when life gives you lemons...?

Here is my suggestion to get your fiancée involved.  Write down a list of goals and a definitive timeline in order to get you moving towards that goal.  If your financial situation allows you to buy one rental property this year, your goal might be to put in one legitimate offer on a property by the end of the third month.  Three offers by the end of month 4, and 10 offers by month 5 ect ect.  Obviously if you get an accepted offer and close on the property then you win.

So what happens if you lose?  That's where your fiancée comes in.  Set a list of 'punishments' for each stage of the process that you don't achieve.  Maybe it's planning a trip to see the in-laws that you hate, maybe it's doing the cooking for a month, or repainting the fence in the back yard you've been telling her you would get around to for the past two years.  Get creative, and get her involved in the process.  I'm sure she can think of a million 'punishments' that will get you off the couch and out there doing deals.

Scenario: I have a friend, mid 30s who has some money he would like to invest as he 'does not want to work until he is 65'. He has approached me and from what I can gather he isn't interested in partnering in a purchase for profit splitting, but rather providing a loan with some form of decent returns. He has talked to me a few times about it, but he seems hesitant to throw out an actual offer, and I think he want's me to make the initial offer. I've never used a HML or private money before, and not exactly sure what would be considered a fair return for him given the facts. I don't NEED the money, but like all investors I could put it to good use if I had it.

On the one hand, he is a friend and I don't want to insult him with a lowball offer for terms. 

On the other hand, he approached me and not the other way around. I know traditional HML charge some insane rates, but typically you will have an exit strategy to refinance out of that loan as soon as possible mitigating the pain of the insane interest rates. In this case since he is interested in investing for the long term, there would likely be no early payback option meaning the loan would carry the duration of the term, given his age I would assume he would be willing to do a 30yr term if the numbers were right.

How would you all approach this? Would you accept the loan at all?  And if so where would you start the negotiations?  Since he approached me would you start by offering him roughly what banks get?  What the average expected return in the stock market would be?  What HMLs get?  Would you do a full 30yr term, or do something like a 10yr interest only with balloon payment type of deal? 

That is correct, your tax basis becomes whatever it's appraised value was at the time of death, and it is automatically classified as a long term investment taxed at long term capital gains rate., which is either 0% or 15% for most people. 

@Don Elias, There is no legal requirement to depreciate his newly acquired buildings, although most people do because it is highly beneficial to do so.  Other then that you are correct although the math gets slightly complicated.  You can't depreciate the value of the land that your house sits on, only the value of the actual house itself.  If his house is worth 100,000 at the time of death, and over X years he depreciates it down to 80,000 and sells it for 150,000.  Then he will pay depreciation recapture rate of 25% on the 20k that he depreciated, and long term capital gains tax rates on the 50k that the house increased in value.  That is assuming he doesn't do anything special such as a 1031 exchange. 

@Kurt K. Personally I would keep them, especially considering you have already stuck a sizable amount of money into them.  Had you not done so my answer might be different.  Although I'm not a fan of free and clear properties, so I would probably refinance and use that equity to expand your portfolio and buy something a little closer to you.  It sounds like you are close to retirement, so you can still play it highly conservatively by not pulling out all of the available equity, but pulling out at least some should increase your cash flow and appreciation so that you can leave more to your kids someday.