All Forum Posts by: David C.

Not sure what investments you are in, but the stock market has been going straight up. S&P is setting new records. I'm thrilled with my 401k balances.

Bill Briscoe said:

I'm not sure if she just deducts everything under the sun and shows no profit, or if she simply doesn't claim all her income, nor do I really care if she avoids taxes.

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I think you should care. A tax cheat is a liar who does not respect the rules, why would you enter a lease agreement with a liar who does not respect the law? Isn't screening all about avoiding people who can't be trusted? An admitted tax cheat is an admitted liar, and not to be trusted.

I agree - ask for tax returns, if its not reported, guess what, it doesn't count when it comes time to get a loan. You lay in the bed you made.

I expect taxes to go up and interest rates are currently low. Those 2 things make me think of real-estate as a smart investment strategy. Leverage up with low rates and enjoy the benefits of depreciation to reduce the tax impact of the positive cash flow.

Also - I think the pool of residential renters will be 'high' for a long time due to people's credit damage from the housing bust. Also the cult of 'buy as much house as you can afford' has been damaged by the real estate bust, many young people think house buying is 'dumb'. They will make great customers for investors for a long time.

Also, the banks are still working through a backlog of short-sales, foreclosures, etc... so inventory is 'high'. Apparently this varies by market quite a bit, and large investment firms buying piles of homes are soaking up some of the excess supply.

Its one of the most infuriating things about RK.

His example of buying himself a rolex as a business expense is often held out as an example of pure B.S.

If you need motivation, and RK provides it, enjoy that. Otherwise, the guy is totally full of crap.

However, I'm shocked at how little detail you provide on a business tax return. Unless you get audited, your expenses are sent in broad, large, generic categories. If you are not audited you may get away with many things for a very long time. I choose to not live worrying about an audit, I love this country and I'm happy to pay according to the rules. RK makes me sick with that stuff. You don't need a business to lie on your taxes, but it does make it easier to lie on your taxes.

@Maria Hanson if you are a W2 employee getting paid that much, quit and become a contractor. As a self employed person, start a solo-401k - reduce your AGI by doing massive profit sharing contriubtions 25% of salary, plus deferring another 17,000 - you can knock 25,000 + 17,000 = 42,000 off a 100,000 salary that way.

I'm not an accountant, I'm pretty sure both of these reduce your MAGI, I'm more confident that the profit sharing contribution does so.

Do you do project work? contracting is very common.

@Maria Hanson

Are you a W2 employee or an independent contractor? If you run your own consulting business, a few bad business decisions can make 'extra money' go away.

Hire my IT firm as a subcontractor, pay us $20,000 to back up your PC. Poof! your problem is solved, I'll suffer the slings and arrows of higher taxes for you.

If you are W2, then the only way to avoid that 150k is to go ask for pay cut. I'm sure IBM would be thrilled to deal with higher income and the taxes that go with it.

For the most part, as long as taxes are not at 100%, you are better off making more. But I'm curious, and the tax guys can probably give examples, if you are at 155,000 and you have hit a phase out/rule that says you cannot deduct 25,000 in depreciation, isn't your effective tax rate on that last 5,000 over 100%?

In that case, as silly as it sounds, 'making less', even by giving it away somehow, leaves you 'ahead' at the end.

I love that when I get the bug for a bigger status house, my wife says: I don't want to clean more bathrooms, and, we've just gotten our current house fixed up and painted how we like it. All she sees in a bigger 'fancier' house is: more work and more pressure to 'decorate fancy'. She's happier without it.

Don't forget, money = happiness, not spending = happiness. For money to make you happy, you need to keep it.

Another thing that makes Real Estate good for many people, is not that interesting to you: availability of credit. Its much harder to get a loan to open a factory to make widgets than it is to get a loan on a property. For me to get a loan to expand my consulting business, I'd have to pledge some other collateral, other than: I hope I can find people and pimp them out to pay you back.

Properties make much better collateral than 'business ideas'. So its leverage that's available to 'anyone' willing to take the risk.

Your other businesses require a track record, business plan, etc.. before they can be levered up.

On top of the easier leverage of real estate is the tax advantages, being able to depreciate is a great phantom expense. If I had a business loan to hire additional workers to pimp out, I don't get to take my operating expenses PLUS depreciation, because there's no asset to depreciate. If I have a loan to buy a rental property, obviously I could take operating expenses PLUS the depreciation of the asset. If you business uses hard assets(plant & equipment) - then you get to depreciate, so RE is not as unique for you. Buying more widget making machines may make a lot more sense for you.

Or NNN leases :) I really think that's the right place for me, but I'm wrapped around the axle on the cost, risk and return. To get the low payment risk I want(solid tenant, very long NNN lease), I'd need to take a very large loan, and I'd have a very significant percent of my net worth 'at risk' in the case of a 'black swan' event. Example: buy a hardees in a great location backed by corporate, now I have a $2,000,000 loan. They find out that Hardees has been putting crack cocaine in their bread, hardees goes bankrupt. I own an empty fast food joint, it could take years to get it re-leased to a strong tenant, many times we've all seen commercial space sit vacant for years, right? Basically I want leverage and depreciation but I'm afraid of the risk of leverage, so I continue trading hours for dollars.

Brent, why not NNN lease? with no time to invest, why go multifamily and have to worry about maintenance and management?

If you have often turned 20,000 into hundreds of thousands in a business, I'd say you have an uncommon knack for that business(or multiple businesses).

I agree RE is a business, one with fairly low barriers to entry, but with high barriers to success.

I have only ever really invested time in my business, I don't see opportunities that would require capital, at least I don't see opportunities that I want to pursue.

I think Real Estate success is very much determined when you 'buy', and really before that, when you analyze. So, that's where your uncommon business sense and abilities could make you successful enough in RE to make it worth it. If you are able to reserve your capital for only the best deals. Now how much time will it take to find them? and how else could you profit using the same capital and time? only you can figure that out for yourself.

So, I'd say there are 5 ways:

leverage
tax advantages
'buying at the right price based on skilled, sound analysis'
rehabbing/identifying 'best use'
deal-making(wholesaling, bird dogging, note buying/selling)

Some of these can be achieved passively:
leverage + tax advantages

But even those require the work up front to at least identify, analyze and purchase - and set up management

And of course: being your own PM, rehabbing project management(or hammer swinging), and all the deal-making options take constant investment of time.

Deal-making is a non-starter for me, I can trade hours for dollars at a high rate in my regular business.

Buying at the right price is not a skill I believe I have, I could learn it, and I read here a lot, but I am consistently surprised by how many things the experienced people on here point out that I would have missed or have never thought of.

So that leaves me seeking leverage and tax advantages but frozen from buying due to my fear of becoming a 'learning example for ohters' by overpaying.

So, like you, I suspect, I focus my efforts on my 'other business' and I keep my capital in the stock market. I get my tax benefits by doing massive 401k contributions because I work for my own corporation that has very generous matching policies, and also employs my wife who is the beneficiary of those same generous profit sharing 401k contributions.