The Road to Financial Freedom, Fulfillment, and Passion with Gino Barbaro

The Road to Financial Freedom, Fulfillment, and Passion with Gino Barbaro

Gino Barbaro spent 25 years as a chef and restaurateur before pivoting to real estate and building a multi-faceted empire, including a $100M+ multifamily portfolio, Rand Capital, Jake & Gino, and the highly-rated Wheelbarrow Profits Podcast. He’s a professional coach, teacher, and speaker.

Gino and Mark sit down for an epic discussion, touching on a range of topics including financial freedom, developing your passion, navigating partnerships, and when to check your emotions at the door. 

What You’ll Learn In Today’s Episode:

  • A partnership can accelerate your growth, but it takes time, communication, and accountability to be truly in sync. In the beginning it can be messy and chaotic, but over time as roles are defined and processes implemented, you’ll begin to complement each other’s strengths and weaknesses.

  • It’s not about retirement, it’s about developing your purpose. Significance and passion make life more fulfilling and happier. Finding that thing, whether it be coaching, writing, or real estate, that you enjoy and can commit to being the best at will breed passion. In Gino’s words, “Getting really good at something and helping people out is ultimately going to make you happier.”

  • When it comes to investing, you need to be able to check your emotions at the door. Passion is essential to success, but so is being able to shut that passion down when emotions cloud your judgment. Whether it’s analyzing deals, negotiating terms, or dealing with vendors, you can’t allow that passion to get in the way of common sense.

Ideas Worth Sharing:

“Success comes from committing, you commit to something and then you take the action.” – Gino Barbaro

“I wasn’t successful in multifamily until I started identifying as a multifamily real estate investor.” – Gino Barbaro

“I think getting really good at something and helping people out is ultimately going to make you happier.” – Gino Barbaro

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The Key to Great Financing, Growing a Portfolio to Match Your Lifestyle with John Brackett

The Key to Great Financing, Growing a Portfolio to Match Your Lifestyle with John Brackett

John Brackett is an investor and president of Fidelity Business Partners in San Diego, a private equity firm focused on multifamily investing. He has over 20 years experience, he’s the host of the We Build Apartment Communities Podcast, and has been a member of the International Economic Honor Society since 1997.

John comes on the show to discuss how he survived the 2008 recession, the key to getting the best financing for your project, and the benefits of investing in complementary markets.

What You’ll Learn In Today’s Episode:

  • Make financing work for you, and don’t be afraid to get creative. In John’s words, “the key to financing is to make sure you marry up the [debt] to whatever the terms of the opportunity are.” 

  • John uses a hybrid approach to investing that has worked very well for him. By choosing markets that complement each other, such as Houston  and San Diego, he’s able to capture both the higher cash flow of Houston and the strong, equity producing headwinds of a major coastal market like San Diego. 

  • Look at your overall business strategically. Make sure you’re building a business/portfolio that complements your lifestyle. Whether it’s partners or property management, think big picture and make sure it aligns with your long-term goals or ethos. “What’s the character behind the capital?”

Ideas Worth Sharing:

“It was a challenging time, but also a very unique time. There was definitely some pressure, but the pressure was good, it sharpened me.” – John Brackett

“I understood from banking that we’re going to need to hold some of these assets, that the market wasn’t always going to be as great.” – John Brackett

“The key to financing is you want to make sure you marry up the financing to whatever the term of the opportunity is.” – John Brackett

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How To Master Branding & Marketing to 10x Your Investor Base

How To Master Branding & Marketing to 10x Your Investor Base

Puja Talati is a former brand manager at Hershey’s, who pivoted to real estate investing and has helped build a $240M portfolio while continuing to consult with Fortune 500 companies, lending her marketing and branding expertise. 

She’s also a co-founder at JT Capital, which focuses on acquiring multifamily assets in high-growth markets. Listen in as she discussed the importance of branding, developing your unique message, and how to communicate effectively with your investors.

What You’ll Learn In Today’s Episode:

  • Marketing and branding are more important than ever as the multifamily space gets more crowded, more competitive. If you’re going to succeed you need an identity, and to identify who your investor is, and get specific!

  • Define who you are, what is your brand, and how you’re unique in this crowded field. What’s your mission/message? Know it, practice it, and be able to communicate it to others effectively.

  • When it comes to social media, you need to focus. Targeting one platform and doing it well is much more beneficial than trying to be everywhere. One high-quality weekly post is more effective than seven mediocre daily posts. Quality is better than quantity.

Ideas Worth Sharing:

“What’s your mission? What makes you unique?” – Puja Talati

“Branding is a very important thing.” – Puja Talati

“If you can do that ‘find and replace’ with another company, then you’re probably not detailed enough to really differentiate who you are as a company.” – Puja Talati

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Overcoming Paralysis by Analysis, Boom/Bust Markets, and the Power of Coaching with Joe Mendoza

Overcoming Paralysis by Analysis, Boom/Bust Markets, and the Power of Coaching with Joe Mendoza

Joe Mendoza is an investor with 30 years of real estate experience. He’s been involved in multifamily, office, development, and redevelopment projects. He’s been featured in the Wall Street Journal and is a mentor and business coach who has taught thousands.

In this episode, Joe sits down with Mark to discuss coaching, boom/bust markets, and overcoming paralysis by analysis.

What You’ll Learn In Today’s Episode:

  • When the wind is at your back and the markets are starting to recover and boom, that’s when the most money in real estate is made. Joe realized this, and when the tides started to turn he was able to pivot and return his investor’s capital, leaving only his own at risk. Instead of being greedy, or burying his head in the sand, he saw the writing on the wall, yet he still got caught in the 2007-2008 crash. He took the fundamentals he learned from that time and has successfully applied them to his investment decisions going forward.

  •  If it’s driven by one economy, one category of business, when that business goes south, it goes really, really south. When searching for a market to invest in, look for diversity in employers and business categories. Cities that are highly specialized in one industry can cause values to rise and crash dramatically. Be wary of chasing cash flow into a market that’s a “one-trick pony.”

  • Even at this stage of his investment career, Joe can still get analysis paralysis, reflecting on the pain from 2007-2009. But, he surrounds himself with coaches, mentors, and other investors who push him to the next level. Coaches and mentors have been instrumental to his success, as well as maintaining a positive mindset. In his own words, it’s about learning and taking action, not just one or the other.

Ideas Worth Sharing:

“When there’s adversity, there’s opportunity.” – Joe Mendoza

“I did two things that we’re really good. I had a mentor that was selling over 100 homes a year, and I hired a coach that taught me how to build my business.” – Joe Mendoza

“Building teams is something that I’m very good at.” – Joe Mendoza

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Transcript

Mark: Today’s guest is an investor with 30 years of real estate experience. He’s been involved in multifamily office and development and redevelopment projects, including a 60-unit condo conversion in Las Vegas and a 10-unit condo conversion in California. He’s been featured in the wall street journal and is a mentor and business coach who has taught thousands. I’d like to welcome Joe Mendoza.

Joe: Hey, thanks so much for having me on the show.

Mark: Hey, thanks for being here, Joe. I am excited to dive in and hear your story. You’re a journeyman.

Joe: Yes, sir. Yes, sir. Long bumpy road, but I’ve got to keep moving forward like everybody else, Mark.

Mark: That’s great. So, I say you’re a journeyman because I think you’ve been at this for 30 years now.

Joe: Yes, sir. Yes, sir. So, I started Mark right around high school. One of my uncles shared the idea about getting into real estate and it was this Robert Allen seminar in San Diego. Now Robert Allen was the author of Nothing Down in the 90’s, one of the, I guess of creative financing. What have you? I got really intrigued. And so that was the start of my journey. I started to taking college level courses thinking like, Hey, you know what, make me credible by taking these courses, maybe I could get my real estate license. So, I took three college level courses while going to high school.

Mark: Oh, you did. Okay. Did you get your license?

Joe: Actually, that time of the market was late 80’s, early 90’s. And what I thought was a scary time might’ve been one of the best times to invest in real estate. So no, I didn’t get my license at that time.

Mark: Oh yeah. I remember there was a recession in like ’90, ’91.

Joe: Correct. And so, I saw the writing on the wall and me being a novice at the time. It freaked me out. And so, I decided to go to San Diego State, as you mentioned, journeyman, I was almost about to join the army as well. And that’s another story in itself. But then I went through San Diego State, got a couple of jobs afterwards and they weren’t jobs that I was super excited about.

And I went back to my first love, which was real estate, as I was doing one of my day jobs, I was doing real estate at night and that’s when I started pursuing getting my broker license. And so, in 1998, I pass the broker license test. I was an agent at Prudential here in Southern California, San Diego, and I just made a run for it. And I got really, really lucky in some fashion where I caught it right as an agent and I just killed it.

Mark: Nice. You had started back in the early 90’s and then you got a little bit spooked by the market and the recession and then you were in San Diego. I was nowhere near California back then I was in Ohio, but I know a lot of real estate investors and I’m envious of everyone who started in the mid 90’s because LA was a mess and LA had a massive earthquake and then the riots and prices were beaten down. And everybody I know that started there has killed it.

Joe: That’s right. That’s one thing that I hope that the audience gets is like, hey, when there’s adversity there’s opportunity. And at the time when my first experience with real estate, I got nervous and freaked out.

Mark: Sure. So, you pressed pause, it sounded like and rode out the 90’s. And then you got your license as a broker that was around 2000?

Joe: In 1998, officially in 1998 had a day job as a bill collector, believe it or not, but it was a blessing in disguise because here I was trying to get money or collect from people that owed money. It was actually great training for a realtor because when I got on the phone as a realtor, it was a walk in the park to be quite honest.

Mark: You started as a broker and reselling single family?

Joe: I started selling single family doing a lot of the regular sales, traditional, friends, family expired for sale by owners. And I did that run for about three years or so. ‘Cause I started making a lot of money. I did two things that were very good. I had a mentor who was selling over a hundred homes a year and I hired a coach and they taught me to build my business and not just a real estate agent, but as a business.

And then when I started making a lot of money, like we’re talking mid six figures too, in 2005, I made a million dollars as an agent. And I started investing, and at the time was more a dabbler. So, I didn’t really have the fundamentals down as an investor. Knowing CAP rates, IRR, cash on cash. It was a lot of pure speculation where I just bought a property. It went up on appreciation. I got lucky and I sold it.

Mark: Okay. The properties that you were buying were those single family or multifamily?

Joe: I did a combination. So, in 2001, one of my properties, I pulled out 113,000 cash on like a line of credit or equity line. I parlayed it into multiple properties, a couple of downtown properties when they weren’t even constructed yet, fourplex.

Mark: Really?

Joe: Yes, I did some syndication. I did a lot. I did several fix and flips. I just went bananas.

Mark: And did that work out? I mean, you were obviously catching the market with the wind at your back, did all those turn out successfully?

Joe: Very Successfully. So, it helped because when I was at San Diego State, I did pay attention a little and I was studying public administration. And so, there was people from the CDC, basically the downtown development committee.

Mark: Okay.

Joe: Hey, downtown is going to boom, you should check it out. And so, I would that background of knowledge. I said, Hey, you know what? These properties, these skyscrapers are going to go, let’s drop some money into some of these potential high rises. And so, I put some down payments two years prior to several of these complexes going up. One of the properties that I bought was right there by the Bayfront. And it was on the 31st floor Mark. I bought it for 450,000. Right when I got the keys two years later, I threw it on the MLS, I sold it for $650,000, not even living in it.

Mark: Wow. So that’s a 200,000 profit.

Joe: That’s correct. And that’s one of many, like the fourplex that I bought. I bought it with creative financing. I bought it for somewhere around 400,000 as well, and then caught the market a little bit. And I sold it also for 600,000. I did several properties like that, where that 113,000 I turned into over a million dollars.

Mark: Amazing. And that was during a time that was a great for Southern California and mostly the whole nationally, the real estate market was booming. And obviously in some areas it was hitting bubble territory, maybe Florida. And then just out of curiosity, what happened when we started hitting rough waters in 2007,8?

Joe: Oh, absolutely. I don’t mind talking about that at all because it’s one of these lessons that was a very, very good lesson. At the time, I didn’t think so.

Mark: Exactly. It’s your college course.

Joe: That’s right. So, what happened was, instead of making a million dollars a year, Mark, I started getting more ambitious or some folks might even say greedy, whatever it was, it was right. And instead of making a million, I wanted to make 10 million to a hundred million a year. And so, I started getting into syndication, really started putting groups together and raising capital.

And then, I did that 10-unit condo conversion. I was involved in that 60-unit condo conversion. And on some note, I started to see the writing on the wall and I was like, you know what? I started giving people’s monies back. I said, you know what?

I don’t want to move forward. This doesn’t feel right. Tastes right. Sound right. And luckily, I did Mark because I probably would have been in some serious trouble if I were to move forward with their monies and, thank God I was the only one that got in trouble with my personal property, but not with them.

Mark: That’s pretty remarkable. You had these people give you their investment dollars and then you were just looking at the economy, the housing market and the various economic indicators and you gave it back. Had you removed contingencies at this point or, where were you?

Joe: No, no. Thankfully the money was raised in some cases, but the properties weren’t identified. So, I didn’t deploy the capital. So, it was one of these bittersweet moments where I’d like, “Hey, here’s your money back. I’m not going to move forward.” And I started canceling a lot of transactions. There was another transaction, it was a small one. It was just a single family.

I don’t know if you know the Cosmopolitan in Las Vegas, but I did a small JV2 with one of those high rises. And I was starting to see the writing on the wall. And I was like, “Hey, here’s your money back. Let’s go ahead and cancel and get out.” And I just started like just backing out lots and lots of transactions.

I was trying to buy a property in Maui million-dollar property, overlooking the water. And luckily, I got my money back there. I canceled escrow. I was buying a property in Philippines. I canceled my transaction there. They penalize me for early withdrawal, but I got my money back there too.

Mark: Wow. Okay. That’s fascinating. Yes. Las Vegas was a crazy market back then. It’s spiked so high in a year and a half or a very short period of time. And then the 2008 came and it just got pummeled.

Joe: Very, very badly, I would say, talking to anybody I’m very transparent about this. 2007 and 2009, were my toughest years, my most humbling years, but I look back on it like, hey, those fundamentals that I did not learn, I must learn. And so, I’ve learned them so well in this next cycle that I’m ready. When I start looking at deals, I’m really diving deep into like proformas and looking at these different OMs, offering memorandums. And if I’m looking at a deal I’m studying and stress testing and asking some tough, tough questions.

Mark: Yes. It completely reconfigures your understanding of risk.

Joe: Absolutely.

Mark: And for the rest of your career, you’ve got that knowledge and experience to know. Alright, there could be things coming down the pike, maybe not now, but eventually, and they could impact you and blindside you if you’re not ready for them.

Joe: Absolutely. Mark, I totally agree. It’s one of those things that you learn it the hard way. Like I did 2007, 2009, but as long as you don’t give up, you keep moving forward. You will be a much better investor, a much better person than ever.

Mark: Absolutely. You spoke about Las Vegas and it seems like that happens over and over again. And it’s a function of it being a hospitality city. It doesn’t have that diverse economy that investors should be looking for in any market. And it’s seems obvious, but it’s worth pointing out is that there are markets that their economy is dependent on one thing. And those will do very, when that one sector is doing well and then they can plummet. So, they go on a wild ride and I’m sure there’s a lot of people that understand that and can invest in those markets, but you got to know how to ride them.

Joe: I love how your strategy is Mark. Like, investing here in California, LA or San Diego, we do have a diversified economy. And when you look at like, not to knock Las Vegas, but I love Vegas. It’s driven by what they call a one trick pony, where it’s entertainment. And if it’s driven by one economy, one category of business, when that business goes South, it goes really, really South in San Diego, Los Angeles is diversified.

Mark: Yes. In another market, fast forward to the present day, a market that I got into not too long ago, not in a big way, but just participated in a couple of investments is Orlando, Orlando, Florida. I really like Orlando. Its very much entertainment driven, amusement park driven, and cruise ships and all that stuff. Everything that’s getting pummeled by coronavirus,

Joe: And some of these other cities, when you look at our marketplaces and it’s just military, that’s it? What happens when that base shuts down? It’s not just about corporate America, it’s all about the whole economy. Even like college towns or military towns or stuff like that, where investors, should be more cognizant when they’re looking at different marketplaces.

Mark: I host a meet-up. And there was a guy that came to a meet-up and he told the story that was kind of sad, but educational is he said his father was a big real estate investor. And he had invested in Los Angeles for a long time and done very well. And he saw the pricing he could get going into the inland empire and I don’t want to bash the inland empire it’s growing and expanding and doing phenomenal. But at the time I think this was probably 25 years ago that he was talking about his dad was very successful and bought like a 200 unit, in the inland empire kind of close to the mountains.

I think it was Victorville. Most of his tenants were a military base. And within like five or six months of taking ownership, the military base shutdown, and it was going into a recession at the same time. And he said within four months of owning this property, he was negative cash flow, $200,000 a month. And it wiped out his entire portfolio that he had spent 20 years building and he never bought another property again.

Mark: Wow. That is tragic. And It’s just like, “Oh my gosh, that’s devastating.” And he’s like, I’m the second generation and I am impacted by this by this. And he’s like I don’t want to invest. And the takeaway on our topic is be careful be wary of chasing cash flow into a remote market that may be propped up by one singular sector of the economy. And if that goes away, everything goes away.

Joe: That’s correct.

Mark: So, what are you doing now? What’s your sense of the market?

Joe: I love it. Actually, this is what I’ve been training for. This is what I’ve been waiting for. Me becoming a real legit investor. This is the time where I’m actually looking at properties, starting to send the mailers, getting my kids involved, to send the mailers, looking on MLS, looking on LoopNet, looking were ever. Talking to lots and lots of people I’m starting to see some of these numbers look very, very enticing. And so, what I’m doing right now is I’m getting my team together. I built a pretty good staff in the Philippines. I’ve got several VA’s there. I’m getting my marketing. I think I mentioned earlier that I’m launching a book.

Mark: Yes. What’s the name of your book?

Joe: Lex with a Plex is a title of the book and it should be coming out very, very soon. And it’s an introduction to real estate investing. And basically, I want to share, share some of the trials and tribulations I went through and share what it is like to be an investor. What is it like to be an agent? It’s pretty, I would say basic in some levels, but I did go kind of advanced in some levels also in the book.

Mark: Yes. What is flex with a plex? Is plex, like a multiplex?

Joe: That’s correct. But I gave a couple examples of, you could start very, very small on your plex and do a house hack where like, if you’re, probably the younger folks in the crowd where like, they haven’t established their careers or they don’t have a lot of money start with a house and rent out the rooms.

You could turn that into your mini-plex and then start to graduate into a duplex, a triplex, a fourplex, then a five plex on up. And the flex part is kind of like, Hey, what kind of lifestyle do you want to have? Well, you’ll have the flexibility Mark, when you start investing to work or not to work, you’ll have the flexibility to fly first class or not fly first class, once you start site visiting your property.

Mark: Right. Okay. That makes sense. I love house hacks. That’s what I did. I didn’t know it was what a house hack was when I did it, but I got a duplex when I started. And that was my intro to real estate investing and just was a daunting awakening of like, wow, this is really powerful. And it just changes my emotional state, my financial state as well.

Mark: Now if you’re enjoying the show, please do us an easy favor and hit the subscribe button. As a listener I always wondered why podcast hosts are always begging me to subscribe and rate them. Well, now that I’m on the other side, I see why it allows other listeners to find you in an era of unprecedented hype over real estate investing. My goal is to be a truth teller. Real estate is not as easy as it’s made out to be, but you can do it. If you can get past the hype and get to the truth. My aim is for this show to help with that.

And if you’d Like to learn more about who we are and what we do at Quantum Capital, please visit our website at quantumcapitalinc.com, where you can find podcast episodes, multifamily resources, and learn about opportunities to invest with us. Anyway, let’s get back to the show.

Mark: You’re obviously in Southern California, San Diego, an expensive market, a daunting market for a lot of people. Have you always done a lot in San Diego? Where do you invest? Do you stick with San Diego? I know you mentioned Las Vegas.

Joe: Great question. So, when I did that run, when I pulled out the 113,000 cash on a line of credit, I went everywhere. I had several properties in Florida. I had several properties in Texas. I had Colorado, Las Vegas. I went everywhere and that was my out of state first trial run this time. I still am open to investing out of state. However, I’d prefer it to be an hour or two hours max flight, or I could drive it, but I definitely want to stay close to home. Where I could have plenty of boots on the ground and I could really closely monitor the value- adds and what have you.

Mark: Yes, management is such a huge part of real estate investing. So, what’s your asset? Do you have a preferred asset class?

Joe: Right now. My partner and I are looking primarily at hotels motels, to convert them potentially.

Mark: Convert to multifamily?

Joe: Yes. We’re looking at that. I am starting to look at some mobile home parks.

Mark: Okay. Sure.

Joe: And then obviously multifamily is always going to be there.

Mark: Okay. And what do you look for? Are you a value-add investor?

Joe: Absolutely. So basically, we are looking for ways to improve the outside, whether it be landscaping, parking cosmetics, the monumental sign and then management, of course, we’re hoping to maybe replace them, especially if it’s like a mom and pop, small kind of operation.

Mark: Sure. I think I’ve said maybe recently this thought was in my mind is that, when you’re a real estate investor, you’re a business person, you’re buying a business and you’re like a venture capitalist. And you want to find businesses that have inefficiencies that you could improve.

With most businesses on wall street or around the country and around the world, you’re usually buying businesses off of professional business people. But in real estate, you’re often buying off of, dentists, retired doctors or mom and pop owners. And I think there’s such a greater opportunity in real estate to find significant inefficiencies and mismanagement. And so, it seems like there’s a greater opportunity in the space of value-add in the real estate space.

Joe: Massive opportunity, Mark, as an agent, I was representing a seller that we found on Craigslist. It was a mom and pop kind of operator. It was a 17-unit office building. And when I asked them for like, “Hey, give me your financials.” Mark, no joke. It was all handwritten in a shoe box. He was self-managing. There were lots of vacancies and those at the time thinking of being an agent, I should have been thinking more like an investor because that was a massive opportunity.

Mark: Sure. You spoke about your team; you had a mentor. I think you said one of the best things you did was hire a mentor and a coach and they helped you build your business. Who’s on your team, now? You mentioned also a lot of VA’s by the way, who do you use for VA’s?

Joe: Oh, I go independent. So, I went straight to Onlinejobs.pH.

Mark: Okay.

Joe: I started shopping around and interviewing. I’ve had several experiences with VA’s because I started back 10 years ago. When I originally started, I tried a couple of different companies out and decided like on this run, I really wanted to build a big staff.

And so, we’re looking at long-term and cost-wise, I decided, hey, let’s cut out the middleman. And instead of going through a company, let me figure this out. Because building teams is actually what I’m very, very good at. And I coach on building teams and building companies. And so that’s one of the things that I’m very strong at. So, I just go independent, straight to Onlinejobs. pH.

Mark: Excellent. And what does your team look like now?

Joe: So primarily They’re focused on marketing. And so right now I have somebody who does my editing of videos for the YouTube. I have another gal that does a lot of my social media. Then this other gal that I have is a blend. I wanted somebody strong at accounting. And so, what I did was thinking fast forward, like I’m going to be looking at a lot of proformas. I’m going to be looking at a lot of offering memorandums and what have you.

And so, she has over a decade of accounting experience and has that SC personality. And I tested her on different spreadsheets and also a P and L’s prior to me hiring her. And so, I have her, she’s kind of a blend where she’s my personal assistant. She could do a lot. She’s very, very talented. So, right now I have three in the Philippines.

Mark: That’s great. I’m glad you brought up the accountant. ‘Cause I’m in the same situation. I have a team and I think as you grow as a real estate investor, you have dozens and dozens of LLCs. You have so many returns, it gets so complicated so fast that having someone on your team in house, or, just a close team member, just watching all your books, doing all your bookkeeping and keeping clean books, can help keep you sane. If nothing else.

Joe: No doubt, no doubt. It’s one of those things that like, I know I could do some of these, but it would probably drive me nuts.

Mark: Yes. Focus on what you’re good at and bring someone in to do your books and keep your books clean and accurate because when they’re not accurate, you got to go back in and figure everything out.

Joe: Been there, done that too Mark.

Mark: Not a fun road to go down. You’ve dabbled in a lot. It seems like. What were your most challenging? Do you have like a challenging deal that you encountered?

Joe: It’s usually when I’m dealing with somebody who probably doesn’t have the experience formal education, what have you, whether being a realtor or being an investor. So, I’ll take both of them. So, when I have a first-time home buyer and usually it’s in the starter price ranges, that’s their first-time home. Well, they don’t understand a lot of the different definitions or different people involved in buying a home. Escrow, title, title insurance, etc.

Same thing goes when I’m raising capital. If I’m raising capital on a syndication and one of the syndications I did, I raised about $2 million and my starting point was 25,000 per unit. And I had people at the 25,000 per unit all the way up to like 150,000, multiple units. And, units for the listeners is like shares. So, the people that bought in at 25,000, my God, they were calling me every day and bugging me and just like, this was their last few dollars. So that was a challenge.

And when I started doing these syndications in the beginning, I didn’t understand that these people are more than likely less sophisticated so they didn’t understand. And so, I would say those were some of the biggest challenges in the beginning, not understanding who I was dealing with, whether they’re a first-time home buyer or a first-time investor.

Mark: Sure. And when you have a newer investor, it’s not their fault, but it just requires a lot more handholding and a lot more of your time.

Joe: That’s correct. It’s nothing bad. It’s just something like, I didn’t understand it. And I wasn’t very patient at the time when I was starting out. And so, I got frustrated because I just wasn’t patient.

Mark: Sure. Is there a trait that you possess that has served you best both in real estate and in life?

Joe: I would say being absolutely fearless is probably a really, really great trait.

Mark: It sounds like I could buy your story.

Joe: Thank you. It was one of these things that I guess my dad, my dad was a very, very fearless man and yeah, he wasn’t afraid of anything. He used to say, “As long as they don’t have a gun, Joe, I’m not afraid of no one or nothing.”

Mark: So, fearlessness. How about, is there a trait that holds you back that you feel like you need to work on?

Joe: Oh, great question. So, I think it was tarnished on my humbling experience of 2007, 2009. And so, when I get into the analytical side of Joe, sometimes I get overly cautious where like that could be a crutch. And I reflect back on 2007, 2009. I don’t want to get burnt. And so sometimes that is a killer where I get paralysis by analysis sometimes.

Mark: Somewhere in your brain, your fear center and your fearless center are battling each other.

Joe: Oh yeah. One, foot on the brake and one foot on the gas. But then, it helps as having great mentors, coaches and great people around me. Slap some sense into it when it’s like a no brainer or that obvious help me push. And so, it’s nice to align myself or anybody who’s listening with more credible people than you because sometimes when it’s that obvious, it’s not that obvious. And it’s helps when you have those people around you.

Mark: And you’ve mentioned this at the beginning, is it sounds like your experience with coaches and mentors has been instrumental in your success.

Joe: No doubt about it.

Mark: Interesting, great. How about mindset? How important is mindset to your success?

Joe: Hundred percent, no doubt. It’s one of these things that like garbage in garbage out.

Mark: Right. I had a feeling. You might say that just seeing your personality.

Joe: Yeah. I love reading books. I love, love reading books. It’s one of those things, Jim Rohn once said it like, “Your mind is like a garden. If you don’t tend to it, the weeds will take over the garden.” And so, you have to keep pulling out the weeds. And so, I’m constantly reading books and listening to audible to yank out the weeds in my brain.

Mark: Good. What advice would you give right now? You’re a veteran with journeymen at real estate and tried a lot of different things and had a lot of success, as well as you’ve encountered the challenges that have come with real estate over the last several decades. What advice would you give to anyone jumping into real estate investing now?

Joe: First study. Study enough to like, okay, I got it. And then run, but don’t study forever because learning is infinite. You will learn and learn and learn forever. And there’s so much more to learn, but learn enough and then jump in and then start figuring it out. You’re going to have to fail. Don’t be afraid of failing.

You want to fail forward fast, you got to make some mistakes, but you got to also mitigate your risk. And that’s why you want to have a coach or mentor because some of these could be a one and done. There was this one person here that I know in San Diego, he was boasting, “I’m a developer, I’m a developer.” And he never did his first deal. And then when he did his first deal, guess what, Mark.

Mark: It didn’t go, well.

Joe: It didn’t go well. And he was one and done. And so, it’s cool to fake it ’til you make it, but man, have a mentor coach or somebody on your side to help you mitigate risks.

Mark: Absolutely. And don’t underestimate the risks that are there because they’re there. And I think this point, it might be a moot point, but it may be a year ago when we had had eight years of nothing but value growth. I think there was maybe a mentality that real estate is invulnerable. Multifamily is invulnerable and will always grow. And it won’t, but it will long-term. You just got to be prepared for the risks.

Joe: And I would say in addition, Mark is like, when you’re looking at any deals, guys, ladies and gentlemen, invest for cash flow, rather than net worth. Net worth is nothing when you look at these properties net worth, really, you could have several million, but if the cashflow is not there. How are you going to use net worth to pay for groceries?

Mark: Right. Are you ready for our question round?

Joe: Let’s do it.

Mark: Alright, let’s do it. And now our question round.

Raising Money and Getting Started with Matt Faircloth

Raising Money and Getting Started with Matt Faircloth

Matt Faircloth was an engineer with a Fortune 500 company who left to become a full-time real estate investor. He’s the cofounder of the Derosa Group, along with his wife Liz, a prolific educator and contributor on Bigger Pockets and the author of Raising Private Capital – Building Your Real Estate Portfolio Using Other People’s Money.

Matt and Mark sit down in today’s episode and discuss stepping outside of your comfort zone, the current state of the market, and how to grow your investor base. Be sure to check out Matt’s YouTube channel below.

Derosa Group YouTube Channel

What You’ll Learn In Today’s Episode:

  • Matt started out with a house-hack, lived on a budget, invested in real estate, and held onto his day job for a couple of years. It’s an origin story we hear over and over again from successful real estate investors. That combo funded Matt’s early real estate investments, and those investments allowed him to go full-time into real estate. If you do those four things, house-hack, cut your expenses, invest in real estate, and keep your day job (at least for a little bit), it catapults your chances of success.

  • Matt drew some great parallels between the 2008 recession and today. Investors weren’t really sure what just happened, what the ramifications were going to be, and a lot of investors sat on the sidelines waiting to see what was going to happen next. It took a while for the real estate market to fully react back then, and the full effects of our pandemic today may have yet to be fully realized.

  • Matt has built a powerful thought leadership platform by documenting his growth as it happened and focused on content designed to serve others, not himself. If you can create content designed to serve your investors, you too will see your business grow.

Ideas Worth Sharing:

“A house hack is, far-and-away, the best way to get involved in real estate investing.” – Matt Faircloth

“Not everybody was really sure what happened, we were all just sitting and waiting.” – Matt Faircloth

“If your willing to do it, 100% education, 100% not self-serving, people see that and are willing to approach you.” – Matt Faircloth

“Getting pulled in a bunch of different directions pretty much makes you half-ass everything you’re in the middle of.” – Matt Faircloth

Resources In Today’s Episode:

Books Mentioned In Today’s Podcast

Enjoy the show? Use the Links Below to Subscribe:

 

Transcript

 

Mark: Today’s guest was an engineer with a Fortune 500 company who left to become a full-time real estate investor. He’s the co-founder of the DeRosa group, along with his wife, Liz, a prolific educator and contributor on bigger pockets and the author of Raising Private Capital, building your real estate portfolio using other people’s money. I’d like to welcome Matt Faircloth.

Matt: Thank you so much, Mark. It’s an honor to be here.

Mark: Great to have you. I’ve been watching your videos where you’re usually at a white board for a very long time, and I’ve learned a ton from those. Thanks for doing that.

Matt: That’s if you’re doing video, but that’s the white board right there.

Mark: I see it. Excellent. I know this is the path you’ve gone down before on other podcasts, but since you’re like me, you had a life prior to real estate. Just want to ask what made you decide to make that shift and then how did you do that?

Matt: Sure. We can take another twist on it too in that, because I think that what people lose on other shows when they ask that question is, you got to make it relatable. And we’re at a point now where it may be hard to relate to where we are as a company. I’ve got a YouTube channel, we’ve got 800 units under management, soon to be 1150 under management. And so, we’re growing quickly and I don’t want to lose sight of where I came from and how folks that are listening that are maybe just getting started or looking to raise their game or whatever can take wherever they are to the next level.

And I want to go to the next level for who I am. And so, for how folks can get to the next level too. What I did. I just chose to change my lifestyle up a little bit. When I first started investing and I did what they talk about on Bigger Pockets is a house hack. I was way younger. I’m 44 now. I probably wouldn’t be pulling this off today, but I was 27 at the time, I think.

And I bought a single-family home and rented out two of those bedrooms to two buddies of mine. And this is after reading Rich Dad Poor Dad and blowing my own mind. And I think for folks that are exploring real estate investing, they don’t need to be told about Rich Dad Poor Dad.

They’re probably listening to your show because they read Rich Dad Poor Dad. And exploring real estate investing because something triggered that, maybe there is another way to live life and another way to make money, but now they’re here listening. And so, the biggest question folks have is how do you get started?

I think a house hack is how I got started and I firmly believe that that’s the way that if you’re under the age of 35 and if you’re married with no kids or whatever it is, or if you can find a way to make it work, a house hack is far the best way to get involved in real estate investing tenfold.

Mark: Agreed. It’s a no brainer. I start with the house hack as well. Were you married at the time?

Matt: No. I had a girlfriend, my lovely wife Liz at the time was my girlfriend and she got me to read Rich Dad Poor Dad. I just turn my mind to this possibility, like, oh my God, this is amazing. So, I searched around and the landlord in the house I was living in put the house up for sale and I had to move because I didn’t have the money to buy that house. So, I contacted the realtor that put my landlord’s house up for sale.

And I was like, “Hey, I don’t want to buy this place, but can you help me find another one?” So, he and I got together and he helped me find this three-bedroom, two bath house. And my two roommates from a place in Manayunk didn’t have a place to go either. So, they were like, “Matt where are we going?’ And I’m like, “I don’t know, I’ll save you, I’ll go buy a house and we’ll all live together and in a house.”

And I bought a home and it just so happened. I’d love to say that it worked out this way, but it just so happened that the rent, these guys were paying at my other rental property that I rented them that their rent was just above what the mortgage was in this new property that I bought.

And it was a similar structure house with more amenities, central air, dishwasher, nice yard, that kind of thing. They were like, yeah, this is cool. We can also walk to bars here. Because in your twenties, that’s the parameter, like how close is the local pub.

Mark: Stumble home.

Matt: Yeah. Right. A home away from home. They moved in with me and they were both paying me $500 a piece per month. And my mortgage was 940 bucks.

Mark: Amazing.

Matt: I was making 60 bucks a month, living there for free, had a good day job, like pulling down nice salary. So, 26 years old, 27 years old, no living expenses with a good salary.

Mark: That’s fantastic. And that’s in Philadelphia, right?

Matt: This second house was just North of Philly in a little town. You would win the spelling bee if you could spell it. It’s called Conshohocken just North of Philadelphia. For a couple of years now that was my first rental. It opened up my mind to the possibility of real estate investing and just alternative, making a few shifts on what I was willing to do in my life.

Like, Hey, I’ll have these two roommates live with me. ‘Cause I could have afforded to buy the house by myself and just live there on my own. I could have swung that, but I didn’t. I had two buddies live with me and because of that, I was able to pay off 20 grand in student loans, $10,000 in credit cards in two years.

I paid off on my bad debt only because I read Rich Dad Poor Dad and learned about bad debt. Luckily, if I had not read Rich Dad Poor dad, that money would have simply gone to the local pub and would have just become a bar tab? All that extra money I was making

Mark: Or you’d be saving up for that shiny car.

Matt: Absolutely. I would have been like, oh, I could do a car upgrade or I can save a few bucks and I can buy myself an even bigger house and live on my own. But no, my girlfriend now wife chose to do a lot of things to live below our means, which has made all the difference for us.

Mark: Great. Yes. Similar to me Is yeah. Getting into that first house hack and just experiencing, it was the change in my mindset caused that shift to recognizing the power and value of real estate.

Matt: Here’s the biggest part about it, Mark. It’s about acting into your comfort zone, acting like beyond your comfort zone. This is a great book called The Way of the Superior Man. And the way the superior man talks about acting a little bit outside your comfort zone. Maybe not so much to where you’re really putting yourself in danger. But if you just go a little bit outside your comfort zone, it’s where you’re a little bit afraid in most circumstances.

Mark: Stretch.

Matt: You’re stretching. So, me buying a home and having two of my buddies move in with me was total stretch and totally felt really scary to me, but I did it. I made it work. And then you take a few more steps that feel a little scary or whatever. Life’s not supposed to be comfortable. It’s supposed to be a little–

Mark: –baby steps. You weren’t starting off with 150-unit property.

Matt: No.

Mark: You were buying a house?

Matt: No, I had not taken the guru class they told me to start out real estate, investing, buying 150-unit apartment building. Unfortunately, that guru is still out there preaching that, but that’s not the path that we took.

Mark: Right. And what did you do once you recognized how great this thing is, what did you do next? What was your second property?

Matt: My second property, we started shopping. We took a few, not like, run to the back of the room things. We joined a local REIA, took a couple of classes through them from other landlords. A couple hundred bucks. They we’re just teaching us how to do what they did and stuff like that.

Mark: Sure.

Matt: And one of the landlords gave us a strategy on finding deals. And this is again, early t2000’s dating myself. So, we went and got ourselves, the local newspaper, which younger folks like me were like what’s that, is that your newspaper? Is that what you use to light a campfire?

No, no. We went and found ourselves a newspaper and we looked at the classifieds and we started calling for rent ads. Saying, Hey I see you have it listed for rent. Are you interested in selling us? I see you have it listed for rent. And did a little stick and like, we’re local buyers, whatever.

And we called like 50 people and we got laughed at, hung up on, quoted ridiculous prices. And finally, we came up on this financial planner and him and his CPA buddy had some extra money, bought this duplex in downtown Philadelphia. And this little Irish lady tenant was just eating their lunch, man. I still remember her name.

I can’t say it on the air, but she was absolutely eating these two alive, every trick in the trade that she had and just screaming at them on the phone or whatever. And they were just done in this duplex. And they had one of the units up for rent. That was the one that I called them on. And the other unit, this Irish woman was just smoking these two guys.

Mark: Really.

Matt: And so, she was just deciding when she wanted to pay her rent and just ripping off to them every day and everything like that. So, they were just like, I just got to stick to my day job. This is ridiculous. So, they sold it to us for literally a small mark-up above what they paid for it a couple of years before.

Mark: Oh, nice. So, you started in the mid 2000’s. How did you fare in 2008? So, you had a little bit of a portfolio or possibly a large portfolio?

Matt: That was our duplex. So, when Liz and I were dating, we bought that property.

Mark: Okay.

Matt: And like dating with my girlfriend and buying rental properties, probably don’t you recommend that. But we did that. I went to her dad Salvador. 6 foot, 2, Salvador from Brooklyn and asked her dad if he would loan us the money to buy that rental property. And he agreed to it. So, he lent us 30 grands to buy our first duplex. My first real estate deal was the house I lived in. My second real estate deal that I didn’t live in, used private money, use my father in law.

Mark: Okay, good. That helps.

Matt: So, he put up 30 grand, and this is back in the day when you can invest with like 5% down, you can get a first mortgage, second mortgage.

Mark: Sure.

Matt: It’s well, just the name of your show, but the real estate market was Wild Wild West, it was crazy.

Mark: Yes. A lot of that stuff adjusted after the 2009 downturn. I remember being in a bar, talking to some guy probably in 2006, who was a mortgage broker. And he was just telling about how fast he was just giving people loans and how sloppy their due diligence was and bragging about it. I’m like, this is insane.

Matt: And you wonder, did you see The Big Short?

Mark: Yes.

Matt: Where he’s talking, I think it’s an exotic dancer. He’s talking to her and she’s talking about how she owns like five houses or something like that. She’s selling her five houses and then he’s like, well, “You got to sell all your real estate.” And she goes, “The condos too?” ‘Cause apparently she owns condos on top of that, on top of the houses or whatever.

Mark: The one complaint I have about The Big Short because I loved it is that they acted like this was his secret. Like he was the only guy aware that disaster was coming. I think every rational person saw this.

Matt: I remember talking about that. I remember being in rooms and in REIA rooms in like 2007, ‘6 and ‘7 just being like, when is it going to crash?

Mark: There’s no way this ends well.

Matt: When is this going to crash? That was what everybody was talking about is when. When is the carousel going to stop? And then it did, we all saw it coming. I think you’re right. It wasn’t just Steve Carell that saw it coming. It was everybody saw it coming. So anyway, we fared well because we sold that duplex. We bought it in ’04 and then we sold it in ’06 I think. We did fine on that. Sold my single family did fine on that too.

And then during the crash, by that point, Liz and I had gotten married in ’05. And we decided, again, lifestyle decisions. We decided to do this wacky thing that America has lost the idea of how to do. And that’s called living off of one income living below your means off of one family income. And by not buying the most expensive house you can afford. We bought a little row home and just hunkered down in there, no kids and lived off of her salary while I quit my job and invest in when I started up our investment company.

Mark: Okay. And what year did you start the investment company?

Matt: 2005.

Mark: 2005. Okay.

Matt: That’s when we got married.

Mark: Oh cool. ‘Cause I think it’s interesting now because we’re now at the next down cycle in the economy and it has some correlations, it’s obviously different in a lot of ways, but a lot of just what happens economically is going to be similar. And I remember one of the things I think I had maybe eight or 10 multifamily properties is that I assumed it was going to be shorter than it was. I watched that first 0 months of slide and I’m like, okay, we should be coming out of this thing pretty soon.

Matt: We didn’t really come out. It’s slid from I think the bubble burst in like October of ’07, I think it’s been a while. I think it was like ‘7, ‘8 kind of thing is when what really hit the fan and we were in fallout mode and that feels like we are right now. Not everybody was really sure what had just happened or what the ramifications are going to be.

So, we’re all just sitting and waiting. It sounds very similar for what changes were going to come down the pipeline and then the foreclosures came on and everything like that. So, the thing is it takes a while for foreclosure to work its way through the system.

Mark: It seem like that first year, 2007 to ‘8 was all foreclosures. And then I had the privilege of buying a property, being an escrow and having just removed contingencies on a 16 unit building in LA in October of ’08 and then Lehman Brothers crashed, collapsed, followed by Bear Stearns. And like the week after we removed contingencies. But I think that was the next big shoe to drop was the collapse of major Wall Street institutions.

Matt: I got to Google when that was, but it feels like all these awful things happen in October.

Mark: Yeah. Right.

Matt: If you look, you’re old enough to remember, what was it, black Monday or something like that. Do you remember that? It was like years and years ago and like the ’80’s or whatever, but historically the Stock Markets crash.

Mark: Oh yeah.

Matt: It’s going to do it. It happens in October.

Mark: It happens in October. Right?

Matt: It does. It must be a bad luck month, I guess. I don’t know. But anyway, we just held our breath. I had some fix and flips going on at that time that I just converted into rentals. I was like, okay, I’ve got this four-bedroom, three baths with central air and granite countertops and beautiful hardwood floors that should sell for 160 grand. It’s pretty quiet out there. Nobody’s buying.

So I’ll put it on the market to lease it for 1500 bucks a month. So I did, I leased four houses that I had that were supposed to be up for sale and I just leased them out and just made a little bit cash flow on them and then systematically sold them off, in 2000 late 2016, ’17, ’18 way later than that.

So, it took a while for prices to get back up to where they were pre-crash. I remember that was a milestone, people were like prices are where they were pre-crash. And I think people started talking about the next crash when prices finally recovered but it took like eight years.

Mark: It took a long time from valley to peak.

Matt: To climb back out.

Mark: That’s great. That did take a while to play itself out. And I think we had the double dip back in ’11, but it was a great experience. You’ve obviously written a book on raising private capital, how did that evolution occur? Like what were the most effective techniques that you found for raising capital?

Matt: In the beginning, it was just personal conversations with individuals. And then I started putting it out on social media and eventually started my YouTube channel and I’m not afraid to say I got lucky. I caught bigger pockets at the right time when they were looking for authors and I was willing to hustle and work my tail off for them to help them write blogs, write articles and do video productions for them and stuff like that.

I didn’t take a nickel from them in exchange for that. They just put my name, hey, this guy wrote an article. If you want to call him. And that’s, what’s great about producing content for circles like that. If you’re willing to do it a hundred percent education, a hundred percent, not self-serving people see that and they’re willing to approach you.

And so, when we started doing that, that really opened things up to do a lot more deals from a capital standpoint. And we slowly worked our way up and did larger and larger deals and documented the whole thing as we were doing it through articles.

At one point, I bought an 18 unit. I wrote an article and did a video about how I bought this 18 unit and put it on bigger pockets and it did really well. And so, I just kept documenting my success and my growth, in some ways therapeutic for me. And in other ways, good for folks to learn from as well.

Mark: Now, if you’re enjoying the show, please do us an easy favor and hit the subscribe button. As a listener I always wonder why podcast hosts are always begging me to subscribe and rate them. Well, now that I’m on the other side, I see why. It allows other listeners to find you in an era of unprecedented hype over real estate investing. My goal is to be a truth teller. Real estate is not as easy as it’s made out to be, but you can do it. If you can get past the hype and get to the truth.

My aim is for this show to help with that. And if you’d like to learn more about who we are and what we do at Quantum Capital, please visit our website at quantumcapitalinc.com where you can find podcast episodes, multifamily resources, and learn about opportunities to invest with us. Anyway, let’s get back to the show.

Mark: Yes. I think that’s key that you put stuff out there with no strings attached. I don’t know. Maybe it’s just me, but I have this sort of skepticism of a lot of people out there in the media like what’s the sales pitch behind all of this. If you’re a practitioner and you’re good and you’ve got experience and you’re willing to just share that knowledge like yourself.

Matt: I think that comes back. Listen, the way they all know that real estate investors, aren’t doing this, for a hobby, I’m not doing this for fun. I am doing this to make money, but I’m happy to share the journey of what I’m learning and I’m not pitching anything, not selling anything. I’m just happy to just share the experience.

And I know that in me doing that, I get to help somebody else that maybe is getting going, or maybe need some inspiration, maybe needs an idea, happy to help them that way. And also, I know that at some times it does come back to me as a potential partner potential investor. So, I’m happy to do it for those reasons.

Mark: Sure. And you’re sharing your passion, something you’re excited about.

Matt: Yes. Well that’s what I do. It’s great to talk about your passions.

Mark: Exactly.

Matt: I did. I’ll be awful to talk about something I know nothing about. That would be terrible.

Mark: So, what are you doing now that we’re in the middle of this pandemic?

Matt: Well, for a while I sat around and play with my kids a lot and tried to hold the fort down and everything. But since we’re a little bit unlocked, we are looking for deals. I’ve got a new one under contract in North Carolina, which we love. We’re going to North Carolina. This is a big one, Mark. It’s a 336-unit complex under contract there.

Mark: Really.

Matt: Yes, we’re really excited about it. And we’re about halfway through the raise. We just got started with the raise. We’re about halfway through and we are just looking forward to carrying that one forward. And I think there’s going to be a lot of opportunities to buy properties at less than what they were for sale for pre- COVID. This property was for sale for about 15% more than what we have it under contract for pre-COVID.

Mark: Okay.

Matt: So, we got to post-COVID discount in that. I’m not a crash predictor, I’m a, soften it up. I think it’s going to get softer. A lot of folks are going to get on their heels. And because of this uncertainty we’re facing, I think is going to be a lot less people in the market.

So, I think it’s going to be less competition for buyers. And I think that we’re going to be, as we feel this thing out, we’re going to have to be willing to pivot and change our marketing and tenants and changed the way that we position properties and everything like that. But as long as debt holds up and you can continue to borrow money, I think the market will keep going. That’s my 2 cents on it.

Mark: And I think the Fed has learned a lot from 2008. I think, as you mentioned, when the 2008 crash happened, debt evaporated, and it was very difficult to get for a long time. And they put measures in place in the wake of that for the next one. And we’re now in that, and now debt is available, which is different.

Matt: The bank jumped on this thing. When COVID first came out, I was getting calls from lenders saying, “Are you okay? Do you need anything?” Offering me mortgage forbearance. I wasn’t asking and everything like that, but they’re like, “Hey, do you want forbearance? Do you need any help?” I’ll take it and I’ll take what you can give me depending on the terms. But yeah, I’ve found that the banks actually were very willing to cooperate because they didn’t want to see another ’08 happen.

And I think that when ’08 happened, the banks may kind of got caught and then didn’t have any outlets. Didn’t have any things to do with all this bad debt on their books. So, they had to just drop it and let it go. But I don’t think that they’re in that position today.

Mark: Agreed.

Matt: This is more of an income crisis than a debt crisis. COVID and this recession I believe it to be an income based recession. The last recession was a debt based recession.

Mark: That’s a great observation. That it’s the incomes that are plummeting and causing the problems.

Matt: You’ve got a stop in the economy, that’s why you got 20% unemployment rate we’re boosting up unemployment benefits for people and all that because we just need money to stay in the economy to keep things moving in cycling. And that’s why luckily enough, a lot of our folks are continuing to work.

They’re continuing to stay out there on the streets is because we’re at least propping up the economy that we can hopefully ride this thing out, through keeping income, coming in to get through it. If that income dries up, or if that income stops, then I am concerned about where this thing goes, because you can’t just cut the economy in half and expect everything to keep going.

Mark: I know. It’s so hard to predict. So unknowable, I think what’s it going to look like six months from now to a year from now because there’s a lot. And the other thing, just to comment on buying in today’s environment, I agree there’s fewer buyers out there, but my experience is of every 10 properties that I look at nine of them are obnoxiously overpriced, you know, going for 2019 pricing. And then there’s one that’s distressed. There are so many overpriced properties out there right now, but then there’s a few sellers who are in legitimate distress and those prices are down.

Matt: You know what the Mark, I think that, first of all, I like to joke. I think that most brokers didn’t get the word about COVID and didn’t get the word about the stresses on the economy and everything like that, because they’re still putting properties out at pre-COVID prices and talking about $50 value add projects and you can raise the rent 50 bucks. It’s a big value add.

Anyway, I do think that there are folks that were in distress or needed to sell or were thinking about selling pre-COVID and COVID is just the straw that broke that camel’s back. They just said fine, that’s it. I’ll sell it. And I’ll give you a good number. And I think they were hoping to get a better number when they were looking to sell pre-COVID. But now that COVID is here, they’re willing to be more realistic.

But as you said, I think most properties that are for sale are overpriced, but I’m starting to see more reasonable deals come across just from sellers that are looking to be reasonable, not folks that are broken upside down, because you’re just not going to see that the banks aren’t going to be putting REO’s and bank foreclosures on the market yet because they don’t have ownership of these things. The courts are closed. You can’t get something through court in most States or most States opened up their courts a month or two ago. Foreclosures aren’t even moving.

Mark: And maybe there’s been a shift that initially sellers thought, oh, this is going to be a three or four month thing that if I hold out, I can go back to my pricing. And now it’s clear that we’re in a second wave and this is going to take longer than we thought.

Matt: They’ll have a rude awakening. Eventually those sellers that are thinking, they’re just going to wait this thing out. I don’t think it’s going to bounce back up to where it was even though what’s interesting is debt is still crazy cheap. Debts cheaper than what it was pre-COVID. I just got quoted 2.75 on a deal. You believe it?

Mark: Is that an agency?

Matt: Agency. Yes. It’s Freddie Mac 2.75 on this product they have called the Freddie floater. It floats above LIBOR which LIBOR is 0.16 right now. And the Freddie floater just floats right above LIBOR, and not on a monthly basis. And you can refi out of it pretty affordably.

Mark: Great. So, you first started in Philadelphia and you just mentioned that you’re buying something in North Carolina. How have you gone about choosing your markets? Where are you? What is it that attracted you to North Carolina?

Matt: North Carolina’s business friendly. There’s still a lot of land that can be built out for expansion and growth of the economy. So, you’ve got these economic hubs, Raleigh, Charlotte, Greensboro, Winston-Salem, Fayetteville, they’re big cities. Some of those are the biggest cities in the tertiary markets or whatever, but still you’ve got a lot of room for expansion just outside those cities, those cities are little hubs surrounded by lots of green fields. Even Raleigh and those areas still have lots of green fields.

Mark: The academic triangle there.

Matt: Yes. There’s the Research Triangle. And then there’s the Piedmont. There’s a couple of triangles there. There’s the Research Triangle, there’s the Piedmont Triangles, but we liked North Carolina for that. And a lot of companies are considering or have already looked to move there and so there’s growth. And most importantly, above all the State of North Carolina is extremely friendly place to do business as a company because they really stay out of your way.

Their taxes are affordable and the regulations are very light loaded and stuff like that. So, we like North Carolina as a place to invest because we see a lot of growth coming there. And also, more and more things, a lot of migration from the Northeast is going to North Carolina for folks that don’t know where to go all the way down to Florida. They’re moving to North Carolina.

Mark: That’s interesting. That’s been happening for like a decade that everyone who lived in the Northeast seems to be drifting South. Maybe it’s the baby boomers, just looking for warmer temperatures

Matt: For a lot of reasons, it’d be like you said, warmer temperatures that the schools are favorable. The real estate taxes are favorable.

Mark: And the taxes.

Matt: A lot of things are favorable there. And unfortunately, what happens in markets like that, you have more people move in. There tends to be a shift in mindset or shift in need for essential services. And so, taxes are going to go up. It’s going to get more expensive, a place to live, but for now it’s extremely attractive. And I think it will be for the foreseeable future. So, we love North Carolina and we will be buying a lot more there.

Mark: Cool. And where else are your portfolio? Do you have other States or markets that you’re in?

Matt: We’re in Kentucky? We like Lexington, Kentucky. That’s one of my favorite markets.

Mark: Interesting.

Matt: It’s a small city. It’s not, millions of millions of people. It’s a couple of hundred thousand people, so it’s not going to just blow out and be high rises on every block, but there’s certain factors. And also, the biggest thing that we consider when we buy in a market is job diversity.

Mark: Sure.

Matt: Like for markets that have a little bit of this, a little of that, a little bit of this, a little bit of that. And Lexington has a lot of different diversity of jobs. So that’s why we love it there too.

Mark: For a long time, it’s been, one of the rules of investing is finding a diverse economic base. And now it seems like the add on to that is tech, most cities that you want to go in, it seems like tech is such a huge part of our future. You want to find those tech cities as well.

Matt: Yes.

Mark: Aside from that. So that’s interesting your strategy, what’s the profile of the deals that you try to target.

Matt: We look for properties that have been mismanaged, have a little bit of hair on them. That are in distress in some way, they just need some tweaks and twists and turns and you’ve got an owner that doesn’t care about them anymore. Hasn’t been running them very well or has gotten tired and there’s meat on the bone.

And we look for deals that we can get in and through some creativity, spike, rental income, but also get creative and drop expenses too. So, for things like water conservation programs on the expense side, on the income side, putting in like a company to do like a global cable contract with the local Cable provider.

Mark: Moving on, is there a failure or mistake that you made early on that you later have found that is key to your success?

Matt: It’s something that I have learnt. I thought I’ve made plenty of failures and mistakes. I’ll give you a failure that I made, which is trying to do everything myself. In my first couple of fixes and flips I tried to GC them myself and try to deal with the contractors on my own. It just went really poorly because I’m not a good guy to deal with contractors. I need somebody in an intermediary to deal with them and handle the details and stuff like that. That was mistake number one.

And mistake number two is probably my biggest one is that I’ve tried to go in too many different directions in one time. Then there were times where I had like buying rental, had six fix and flips going on also trying to do a wholesale deal. Also trying to write a book, also do a podcast and stuff like that.

And getting pulled in a bunch of different directions pretty much makes you half-ass everything you’re in the middle of. And so, I found that by staying focused, the folks I look up to in this business that I really admire the Joe Fairless’ of the world. Joe’s not doing six fix and flips and buying apartment buildings.

And also, he’s doing his marketing for his podcast and buying apartment complexes. That’s it, maybe a book, every here and again, but that’s it. He’s not going to wholesale a single family and you can make a lot of money doing that, he’s going to say no to most of those opportunities when they show up.

Mark: There’s that Warren buffet quote ‘The difference between the successful and the super successful is the super successful say no to almost everything’. I’m guilty of the same thing. What’s a trait that’s served you best both in real estate and in life?

Matt: Positive mental attitude all day long. And this is like in dark times, Mark. I mean, we will figure it out. I’ve said it through tears. Like we will figure this thing out. It will work. It’s okay. I’ll make it work. I will keep trying until it does. And guess what it always does if I don’t quit, I know that I’ll find a way to figure it out.

Mark: How do you Maintain that positive mental attitude?

Matt: Sometimes it’s tough. I get support from my family on that. It’s also partly in my blood. Do you ever take StrengthsFinder?

Mark: StrengthsFinder? No.

Matt: Oh man, you should. It was a book released by Gallup. And it’s an assessment you take and it just determines your strength and there’s like 70 different human strengths you can have and StrengthsFinder, you take the assessment. It tells you if you’re like your top five or eight. There are different ways you can break down what you pay for and everything like that. But my number one, strength is positivity.

And so that’s just who I am now. Other people have found that being a cynic works for them or have found that being a collaborator or whatever, but just for me, my core is positivity. So, it’s in me already and it’s hard to do sometimes, but I’ve also found Mark that it just works. And so, I know that in really, really hard times if I just stay positive. I’ll normally work my way through it because I’m 44 years old. I know that I’ve been doing this all my whole life. Things will eventually work their way out.

Mark: It feels like it’s a commitment. Like at some point you’re going to say, I am committed to being positive and tough minded and optimistic. You mentioned that, for some people it’s fashionable. The comedy world and comedians love being cynical. You see them adopt that sort of attitude and they get a lot of comedy off of it. And it is funny, but I feel like you have to make the commitment that whether things are terrible or whether things are great, you’re going to have the same mindset and you’re going to stick to it.

Matt: I think that the difference, if you look at the stand-up comics and the comics in the comedy world that have done really well, and I love comedy too, I grew up watching Comedy Central back in the day and stuff like that. And watching the show that you’re working on and stuff like that.

And I’ve found that comics that have done well, they look at the world from a cynical perspective, but they look at themselves from a positive perspective. Those that are pointing at themselves with those cynic and kind of like, man, why would I do that? You still got to believe in yourself. Or you can be a light-hearted and a little bit of like an armchair critic of the world. But I don’t think it serves to do that about yourself.

Mark: No. It feels like it’s a legitimate comic strategy. If you’re going to get into the business and everybody needs to craft their own point of view where they get their comedy from. And that’s a legitimate one. There’s a lot of people who are really funny. Larry David, I love, but in a lot of those people in real life, they’re not like that at all. This is a character that they play.

Matt: Oh, he’s in character. I don’t think Larry David or Jerry Seinfeld really are as self-depriving as they appear in real life and on their shows, they absolutely hate themselves. But in real life, I don’t think you can get to that level and feel that way about you, but you got to get the people love that. And people gravitate to that. Don’t take yourself so seriously mentality.

Mark: Are you ready for our question round?

Matt: Bring it on.

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How To Lower Your Taxes with Yonah Weiss

How To Lower Your Taxes with Yonah Weiss

Yonah Weiss is a business director with Madison Specs, a national cost segregation leader helping clients save tens of millions of dollars on taxes. 

Cost Segregation is an IRS approved process for reclassifying real estate components and improvements to accelerate depreciation deductions, defer taxes, and improve cash flow. Yonah and Mark discuss various strategies in this week’s episode, showing investors how to reap all the benefits from owning investment real estate.

What You’ll Learn In Today’s Episode:

  • The government incentivizes real estate investors. By taking advantage of these incentives, such as cost segregation, bonus depreciation, or real estate professional status, you can completely nullify your tax burden, increasing your cash flow and allowing you to buy more real estate. It is vital to have key team members, such as a cost segregation specialist like Yonah, and a real estate focused CPA, to fully understand and take advantage of these situations..

  • The cost of having a cost segregation study completed has dropped dramatically over the years. If you own any type of investment or business property, it is worth speaking with a cost segregation specialist and your CPA to see if this strategy is right for you.

  • One factor with owning investment real estate, and specifically when using strategies like cost segregation, is to consider how you will be handling the sale of the property. Cost segregation is great for accelerating your depreciation and increasing your retained earnings over the typical hold time for a property, but at the sale that depreciation must be recaptured. There are a few strategies to avoid this, the most common being the 1031 strategy. We strongly recommend you discuss this with your CPA to fully assess your individual situation.

Ideas Worth Sharing:

“You literally can make money, and the government is giving you these incentives, using tax strategies, to keep the money you make.” – Yonah Weiss

“Cost segregation and depreciation in general is applied to any type of investment or business property.” – Yonah Weiss

“$500,000 and up is where it really starts making sense to do it [cost segregation study].” – Yonah Weiss

Resources In Today’s Episode:

Books Mentioned In Today’s Podcast

Enjoy the show? Use the Links Below to Subscribe:

 

Transcript

 

Mark: Today’s guest is a business director with Madison SPECS, a national cost segregation leader, helping clients save tens of millions of dollars in taxes. He’s also a multifamily investor and the host of Weiss Advice Podcast. I’d like to welcome Yonah Weiss.

Yonah: Hello, Mark. Thanks for the introduction. How are you doing today?

Mark: I’m great. How are you?

Yonah: Wonderful. Absolutely.

Mark: Yes. So, you were on separate coasts. You’re in, the New York, greater New York area, New Jersey.

Yonah: That’s right.

Mark: I’m out here in LA and I’m excited to hear your story and to learn about your tax specialty.

Yonah: Absolutely.

Mark: Which is cost segregation.

Yonah: Let’s do it. Let’s jump right in.

Mark: How long have you been in cost segregation? Are you a CPA?

Yonah: I’m not a CPA. I work for the largest cost segregation company in the country. So, I’ve only been in this space for about three years and I’m really more on the business development side of the business.

Mark: Okay.

Yonah: I don’t need to be a CPA because I don’t actually do any of the real work that goes into it, which I just go around teaching about it. And I’ve learned from the experts in the field and really my background is in teaching and education. So, it gives me a nice advantage to be able to, use that skill and then take the business and sometime a very complicated topic and boil it down to be very simplified so anyone can understand.

Mark: Will alright. I’m excited to try to do just that is try to simplify this somewhat confusing thing. I love cost segregation. I do it first thing after closing on a new property and just to get that going, do you want to give us an overview of cost segregation?

Yonah: It’s a really weird name, but to clear up what it is, you really have to understand what depreciation is because all cost segregation is it’s really an advanced form of depreciation, which is probably one of the best tax deductions that you get when you own a piece of property, especially if it’s commercial real estate. It does not apply to your personal residence, but if you buy any investment property whatsoever, the IRS allows you to literally write off as a tax, write off for your income tax, the entire value of that property.

That’s called depreciation. However, you have to do it over a long period of time. So, it’s for commercial properties over 39-year period, residential, including multifamily over 27 1/2-year periods So you basically take that purchase price, whatever was paid, subtract a little bit for land. Land itself, doesn’t depreciate, but whatever’s leftover. Now. You can literally take that as a tax, write off a little bit every year for 27 years.

Mark: For my own clarification.

Yonah: Sure.

Mark: Give some context to this because I was thinking about it just before we started recording. So, you just mentioned, you pay property taxes every year and the County assumes that the value of your property is increasing every year and it’s divided between land and improvements or the structure. And so, they’re assuming that your property value is going up.

However, it’s probably mostly the land in the location that are increasing in value and the building or the structures are made up of roofs, walls, foundations, refrigerators, stoves, AC units, and that stuff is at peak value the day you buy it. You don’t buy a fridge and hoping that it’s going to increase in value. There’s no refrigerator, stock exchange where people trade those things. ‘Cause they just go down in value from day one and all those components go down in value at different rates. Is that accurate? Does that sound accurate?

Yonah: Exactly. So that’s really what cost segregation is, but what really ends up happening is even though the IRS is giving it that value, but in truth, it actually is going up in value. Meaning the land for sure is going up in value, like you said, but real estate in general, you may buy a property today for a million dollars and five years from now that property, including all the improvements that are on it, including the building, including those appliances and everything in there has now gone up to $5 million.

So, it’s really everything, all-inclusive is what’s going up in value, even though intrinsically those things, those improvements, the walls and doors should be going down in value. So, there’s a big clarification when we’re talking about depreciation and that’s the concept exactly what you hit the nail on the head.

The concept of depreciation is that things go down in value as time goes on and have a useful life. And therefore, you have to replace them every certain number of years. You have to put in a new carpet every five years or 10 years. However, the IRS looks at it really from it’s a borrowed term because the day that depreciation schedule starts is the day that you purchased the building. Okay.

Mark: Right.

Yonah: Which is completely mind boggling, according to what you just laid out for us, because really this stuff should go down in value. And therefore, when I buy it five years from now, it should have a lesser value and I should only be able to continue the depreciation schedule that started when that building was built. Okay.

Mark: Yeah.

Yonah: That’s not so.

Mark: Is it fair to say that the land and the location are out-performing and over-performing in value increase and making up for the depreciation in the structure? For example, if you buy a building that’s 40 years old, that building, if you just replace that building with the exact same structure built in 2020, the 2020 property would be more valued.

Yonah: Correct.

Mark: On a purely structural basis.

Yonah: That is accurate. Correct.

Mark: Maybe I’m getting into the weeds on this one.

Yonah: You are a little bit, but it’s important to understand because that actually does come into play when we’re discussing cost segregation depreciation. So, it’s not entirely hypothetical because there is a small percentage where we’ll look at the real useful life of the building versus the practical, useful life, which is, placed in service. And that schedule that 27-year schedule starts from the day that you purchased it. So, there is that kind of calculation and the percentages are minuscule, but it still does come into effect.

Mark: And most owners don’t end up replacing everything, every aspect of the building in 27 years.

Yonah: No. However, from a real financial look at the building, when you get an appraisal, the appraiser does the exact same thing that a cost segregation engineer will do. However, they’re looking at the real value. They’re going to say that roof has a ten-year, 15-year useful life, it needs to be replaced in three years. So therefore, the value of that roof is going to be appraised less.

Mark: Got it.

Yonah: And therefore, you’re going to get a lower appraisal altogether. However, the IRS puts that into the tax code and says, yeah, all these things have different useful lives, but they start over from day one when you buy the property. So, the engineer’s going to look at the same exact things may get to the same useful lives, but then they’ll apply the tax code and say, well, the tax code says that the appliances, the furniture, all that stuff in the building, that’s new. Now part of the structure depreciates on a five-year schedule and it starts over day one when you buy it.

Mark: That’s a great distinction. I hadn’t thought of that. They’re not really accurately coming in and examining each component of your property there. You’re just buying it. And they’re giving you a set schedule of depreciation for each part of it.

Yonah: No. So, the cost segregation, what we do is we actually go in and look at the building engineer will go in and part of the process of cost segregation let’s just lay it out a little more clear because I said, it’s like an advanced form of depreciation. The IRS has laid out, every type of asset possible and every category of types of asset possible, whether it’s appliances or furnishings or, landscaping, all these things are put on a certain schedule. Okay. And the value of those assets depreciate on that schedule.

So, the process of getting cost segregation study done, entails an engineer coming to the property and actually examining everything, identifying what all of those assets are. How many cabinets are there in this multifamily building? How much square footage of carpeting or vinyl flooring there is. How much square footage of the parking lot, the asphalt and all of those individual things have different value to them and apply the square footage is going to come up with the cost. Okay.

So, there’s the name of cost segregation. And we’re going to segregate out all those different assets into the different categories and take those depreciation deductions faster at the owner’s faster life. So that’s really the crux of the whole thing. We’re taking faster depreciation deductions by identifying what those things are within the building that we can now depreciate or take those tax deductions faster.

Mark: So, if you don’t do that, you’re stuck with a much more generic, one size fits all depreciation and it’s just zeroing in drilling down and breaking everything out into separate parts.

Yonah: Exactly. And what that does is that creates larger tax deduction. Okay. So, we’re deducting more money from our income tax, which potentially, and many times with cost segregation, it literally nullifies your tax liability in many cases. So, you will actually have more deductions than you have income. And what that does, it increases your cash flow. Because you made a hundred thousand dollars from the net operating income of the property and you have no tax on that money.

Guess what? That a hundred thousand stays in your pocket. And this is really a paradigm shift for a lot of people because especially if we’re working in corporate America and we’re working a W2 job this income tax is deducted from our pay check. We never see it. We never see that money. How much in real estate can says, you own a property.

You get the income; you have all these expenses at the end of the day. At the end of the year, you have to now go and add up all those expenses including depreciation, which is just a kind of a phantom expense. It’s an imaginary expense.

Mark: Exactly.

Yonah: And now you deduct that whatever’s left over, from all those expenses, including depreciation, that amount is what you’re taxed on. And you have to, go submit a tax form, but you can literally have more deductions than you have income. And all of that income stays with you.

Mark: One of the big advantages of real estate investing is the tax, the favorable tax treatment. And it goes back to that Robert Kiyosaki quote. I think it’s, “It’s not what you make. It’s what you keep.”

Yonah: It’s something that most people don’t understand. That’s why I like to call it a paradigm shift because you literally can make money. And the government is giving you these incentives of these tax strategies and things that you should be applying in order to make sure you’re getting those tax deductions and keeping the money that you make. As simple as that.

Mark: And the tax code seems to be changing little by little and wasn’t at the overhaul in 2017, ’18, they improved it a little bit on the cost SEG front.

Yonah: Yes. They, made actually a huge improvement in the tax cuts and jobs act. The Trump, tax reform was probably the biggest tax reform in decades. And one of the big things that happened there was they introduced a law called 100% bonus depreciation. And what that law says is that if you get a cost segregation study done, okay, and you can identify all of the property that depreciates at a faster schedule.

All the five-year property, that’s the personal property, all the land improvements, that’s on a 15-year schedule. You can now, instead of just taking, more deductions over a faster period, you can literally choose.

It’s an option to take all of that accelerated depreciation in year number one in the first year as a 100% tax deduction. So simple example, I like to give, just to understand how this works is, let’s say you bought a building for a million dollars and you got 20% of that, forget the land value for a minute, just to understand the property.

This example, 20% is allocated to five-year property, which is that personal property. It’s pretty typical for multifamily properties if you earn around that amount, $200,000. That means you’ve created a $200,000 of front-loading those depreciation deductions and taking them in the first five years. So, you can either take them in the first five years and get an extra $40,000 a year. On top of your regular depreciation, which would be probably somewhere $30,000 a year, or you could opt to take the entire $200,000 as an income tax deduction in year one. So, it’s huge.

Mark: That’s amazing. And you mentioned that it doesn’t apply to your personal residence, but you want to speak to what it applies to and what it doesn’t apply to.

Yonah: Yes. Cost segregation and depreciation in general is applied to any type of investment or business property. So, business property, something that a lot of people don’t think about, you may have someone who’s a doctor that owns the building, the office clinic, where they work out of. They don’t think of themselves as a real estate investor, but the building they own, or the building, their business owns more accurately, often is eligible for depreciation and can have a cost segregation study done on it.

So too, with any type of business that owns a property or any investor, if you own single families, if you own multifamily, retail, office, industrial, self-storage, golf courses, you name it, mobile home parks, anything where you own real estate and you are an investor, it’s not your personal residence. You actually get depreciation and you can utilize cost segregation.

But really only starts making sense. In my opinion, kind of my rule of thumb is anything over half a million-dollar purchase price. So, $500,000 and up is really where it’s going to really start making a lot of sense to do it because it’s a percentage of tax deduction. Again, like finding a certain percentage and taking those deductions earlier.

Mark: And in the cost of doing a cost SEG is probably what makes it make less sense on smaller building values. Is that accurate?

Yonah: Exactly. It’s going to cost, somewhere minimally, a few thousand dollars, anywhere upwards of potentially $10,000, depending on the size and shape and whatnot of the property. So yeah, it’s going to obviously going to be a factor in the deciding factor where it’s going to start making sense, I’m going to make this investment and then, am I going to get the returns on that investment?

Mark: Now, if you’re enjoying the show, please do us an easy favor and hit the subscribe button. As a listener I always wondered why podcast hosts are always begging me to subscribe and rate them. Well, now that I’m on the other side, I see why. It allows other listeners to find you. In an era of unprecedented hype over real estate investing. My goal is to be a truth teller. Real estate is not as easy as it’s made out to be, but you can do it if you can get past the hype and get to the truth.

My aim is for this show to help with that. And if you’d like to learn more about who we are and what we do at Quantum Capital, please visit our website at quantumcapitalinc.com, where you can find podcast episodes, multifamily resources, and learn about opportunities to invest with us. Anyway, let’s get back to the show

Mark: Cost segregation for a long time. And I saw it gets super charged after the tax reform act. So, it’s really beneficial right now. There is a catch to it. However, and do you want to speak to that? And it’s the depreciation recapture and maybe explain how that works as well. And maybe a factor that you should consider.

Yonah: A hundred percent.

Mark: As part of it.

Yonah: As all tax deductions and all tax benefits. First of all, just disclaimer, we started this, I’m not a CPA. And I’m definitely not your CPA if you’re listening to this. So, you want to be able to discuss this and any tax benefit. You want to make sure that it fits with your strategy and your overall business plan, your overall tax structure. So, the first thing you have to know about depreciation is that when you sell a building, when you sell that property, you have not only capital gains tax, which is a tax you have to pay on the gain.

If you made any profit on the sale of that property, you now have to pay capital gains tax. You also have something called depreciation recapture tax, which means you have to pay a tax on the amount of depreciation that you took over the course of ownership of the property. There are many strategies to get around paying that depreciation recapture tax.

So, it’s not like just in a box you do this and then you do that. You buy a property, you take depreciation, you sell property, you pay tax on it. There are other strategies that you can actually get around that as well, or defer that, or even eliminate that. So, it is important to understand that it does exist and put it in your business plan that it’s going to come up or may come up and make sure that it still makes sense to do the cost segregation.

Mark: What about, a very common go to when people are selling a building if they want a 1031 exchange and it defers capital gains. How does depreciation recapture get treated in a 1031 exchange?

Yonah: So, 1031 exchange is the perfect example because that not only defers the capital gains tax, like you said, it also defers the depreciation recapture tax. So, a great strategy when selling your building to get around a lot of these taxes is to do a 1031 exchange. Which if you don’t know what that is very simply just a way to sell your building without, jumping through a few hoops, by filling out certain forms and doing things within parameters that tax code allows you to exchange the property for another building. Instead of selling property ‘A’ buying property ‘B’ you exchange property ‘A’ for property ‘B’, and therefore you can defer taxes.

Mark: It fits within the parameters. If you sell your building, the proceeds go to a 1031 exchange accommodator you have 45 days to identify the building that the property that you’re going to buy with those proceeds. And then you have to close within six months or 180 days. Is that accurate?

Yonah: More or less?

Mark: Well, that’s a good overview of a cost SEG. Are there other strategies that I’m not recognizing at sale other than a 1031 exchange?

Yonah: Sure. There are a couple and again, I’m not a CPA, but I work with them hand in hand and I probably know more about this subject than most CPAs do. That being said, there’s something called partial asset disposition, which is something very common as well, common strategy that most CPA’s probably should know about and are doing, but some may not.

And what that entails are, we’ve identified by doing a cost segregation study, all of the personal property that it really has a five-year life, okay. Have five-year tax life, useful life. After five years from a tax perspective, there’s literally no more value or no more book value to those assets. So, you can get a cost segregation study done.

And then when you sell the property, do this partial asset disposition, which means you file a form. It’s not just something that is inherent and gets done right away. You actually have to file a form upon sale that says these assets, they identified have no more value to them. No more value means you no longer pay or have to pay little to no depreciation recapture tax on those assets because you’ve basically disposed of them and they have no more value to them.

So that’s one thing. And you can do that as well in the course of ownership, if you were to do renovations and let’s say, get rid of all your appliances, you can also do partial asset engineer and just write that off of your depreciation schedule. So as a tax, write off, if any value that’s left on those things as well. So that’s one way to go about doing it.

Another strategy, a lot of people don’t know about another great thing to know is that if you’re a real estate professional, and this is something you probably should have prefaced with a little bit earlier because cost segregation is going to be beneficial for you. Really mostly only if you’re a real estate professional. It’s going to be more beneficial to you if you are a real estate professional.

And the reason for that is there’s a special tax treatment for real estate professional. If you qualify. And again, some more hoops to jump through some more boxes to check, they have to qualify for this tax nomenclature if you will. As a real estate professional, you have to spend, basically full time in real estate, you have to have 50% of your time spent in that.

You can’t really have another full-time job either you or your spouse can qualify and you can get that qualification and then 750 hours. But in short, what that allows you to do is to use depreciation to offset any of your income. So active income, non-passive income as well. Normally depreciation deductions would only be able to use against your passive income.

Meaning income from your properties comes real estate professional status it says, create more deductions. Cost segregation, let’s get bonus depreciation. Let’s get as many deductions as we can. And I’m not limited to how much of those deductions I can use this year to offset any of my annual income.

Mark: So typically, most people don’t have mammoth passive income and cost segregation basically creates massive passive depreciation, which in theory should best offset, massive passive income. But when you become a real estate professional, suddenly the rules adjust and you are allowed to take all of that depreciation against your income.

Yonah: Yes. Your active income and any income for that matter. So that’s probably a huge thing and that’s who it’s going to benefit. Now, once you have that status, it also allows you to do something pretty crazy, which is that when you sell a property, you have, like we said, you don’t do a 1031 exchange. You’re going to be hit with capital gains tax.

You’re going to hit with depreciation recapture tax comes real estate professional status. And if you get so much deductions, let’s say you buy another property in the year that you sell this one or two or three or whatever, and you have all these massive, mammoth, deductions, you can use those not only to off-set your income, but you can use that, potentially in certain situations, in this one particular to offset your depreciation recapture and capital gains as well.

So, there are options. If you look at real estate as a game and like a strategy and overall picture, as opposed to just looking at it in a box like, okay, I just do one property. and that’s it. So, in a box, you buy it, you get the deductions. Can I use them? Maybe yes. Maybe no. When I sell it, I have to pay tax on it later on.

No, that’s great to understand the principles, but then to understand that there’s a much bigger game. It’s like if you were to play monopoly and all you knew was when you land on something, you have to pay, whoever is doing that, but if you don’t know the strategy behind it. You’re going to be missing out.

Mark: I think that’s a great point that you just made that it’s a much bigger game because I think most real estate investors they get in and they analyze their first property and they say, okay, the income is this amount, the expenses are this amount. Therefore, I get, X amount of cashflow and that’s the game they’re playing. And that’s what they’re totally focused on.

But the longer I do this, I think the debt, the lending aspect of it is huge, enormous. And then the taxation is also huge. So, It’s a bigger game. And if you’re an investor, and if you plan to be an investor for the long term, you need to make sure that the debt strategy is a huge part of your overall strategy. And then also the tax efficiency aspect of it is huge. And they have as big of an impact on your overall wealth growth or possibly even more than just the basic, how much rent did we collect.

Yonah: Yes, absolutely. Exactly.

Mark: Well, cool. And I know you’re a little bit of an investor as well. What else do you do other than a cost SEG?

Yonah: Sure. Thanks for asking. It’s something that’s new to me, but because I’ve been in the industry for a few years, just rubbing shoulders with and talking to every day, with real estate owners and investors, I’ve come to learn a lot more and spend time studying what real estate investing is as well.

And I’ve just come to find obviously that it’s probably the best investment vehicle that exists in my opinion. So, I’ve been feeling it out and trying to find a way into that as well over the last couple years and it’s taken time and just finding the right partners and finding the right markets to invest in and researching that.

Literally just the beginning of this year, back in January, February is when I made a decision to move forward with a partnership with a couple of guys. They had more experience than me, both in the underwriting and the actual, owning properties and multifamily and investing. And they both have a much bigger background in private equity and underwriting. So, finding the right market.

They invest in Atlanta and in North Carolina and both in Raleigh and Charlotte, they own a property in Columbus, Ohio as well. So, I decided, let’s partner up, I can bring value in however I can to just kind of learn, get my feet wet. My First deal, I’ll bring capital. I will do some marketing. I’ll do other things in the asset management in order to help the whole process. And then COVID hit.

I had a deal a 90, 92 unit under contract in Atlanta that was supposed to close at the beginning of April. COVID hit and things got postponed, we pushed it. Didn’t want to see what was going to be happening with the property as time went on and we ended up seeing that. It didn’t make sense. We fell out of contract with that. So, my first opportunity to really get involved didn’t actualize yet at this moment. But, that’s my goal right now to find my way.

Mark: But again, I think the timing of that is great. I was becoming increasingly worried over the last seven or eight years. And in more and more in the last two years is that most real estate investors didn’t think there was such a thing as a recession or as a downturn and much better to get hit with it while you’re still in your contingency period. I did the exact same thing with you. I had a 90-unit building. We were in escrow, we were pre-contingency removal when all hell broke loose and the pandemic, the lockdown, I pulled the plug as well. There was just too much uncertainty.

I was seeing banks pull loans that were well down the road to funding because nobody knew what was happening. And I think, you know, now because you had to put things on hold, you get to watch all this and learn a ton about how the economy can fluctuate. You’re going to see all the risks that were buried over the last eight years in this booming market are now being exposed and you get to watch them as a potential investor, all investors do. And I think anyone who goes through this watching carefully will come away a better investor.

Well, this is great. I have something called a multifamily psychotherapy. If you’d be willing to participate, what’s a trait you possess that has served you best both in real estate and in life.

Yonah: I think the, the thirst for knowledge, like I said, I was a teacher for many years. Education has always been ingrained in me. I love to learn. I love to learn new things. So that has done me a tremendous amount, just that thirst for knowledge, wanting to learn more and more and more and not being satisfied.

Mark: That’s a good trait. Is there a trait that holds you back that you feel like you need to work on?

Yonah: I’ve been working on for a while and it’s a work in progress, but just organization in general.

Mark: Organization?

Yonah: Yes. Just having a lot of different things happening and not being able to be on top of everything.

Mark: If you could pass some advice onto your younger self, what would it be?

Yonah: The advice that I live by. And I think it really speaks volumes. I don’t think I would change it, but I would just reinforce it, which is, apprentice under those who have done experienced life and done things already that you want to do. Don’t try to figure it out yourself and don’t learn in a book because as much as I love to learn, I learn on the job and I learn next to people, following them and speaking with them and doing what they do alongside them a hundred times more than I learned in books. So that’s what I’d say.

Mark: How about, are you ready for our question round?

Yonah: Sure.

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Parker Heights

Parker Heights

East Riverside SubmarketLocated just minutes from the Austin Central Business District, Oracle's new campus, and the...

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