Save a Million Dollars in Taxes with Apartments

Death and taxes are the two things you can count on in life. But, there is no need to pay a penny more than you owe. And, while we talk a lot about ways you can grow wealth and do bigger deals faster, today we’re talking about how to reduce one of your biggest expenses … taxes.

With tax reform and other favorable policies for real estate investors, now is the time to look at your strategy and make some changes to reduce your liability.

This week’s guest did just that … he took a piece of advice from our Summit at Sea and turned it into a BIG win. After making a big apartment deal, he saved over $1 million in taxes across ALL his earnings.

Remember, we aren’t tax or legal professionals. We think you’ll get some great insight from this story. But, when it comes to your OWN personal tax situation, be sure to find a pro to guide you.

In this episode of The Real Estate Guys™ show you’ll hear from:

  • Your tax-wise host, Robert Helms
  • His tax-free co-host, Russell Gray
  • Guest, Brad Sumrok, apartment investor and coach

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Real estate investment returns are more than just cash

When we buy investment property, we most often look at the cash return. But, there are so many other benefits and things to consider when looking at a deal:

  • Cash flow. This is the big one. You want more income than expenses.
  • Long-term capital appreciation. The equity in the property gets bigger as the loan gets smaller.
  • Amortization. Every month you’re paying principal and interest, and your principal is decreasing.
  • Tax benefit. The government wants to incentivize real estate investment, and there’s a HUGE opportunity to reduce your liability.

Why look at your taxes now? For the first time since the ’80s, Congress has made significant changes to the tax code.

We definitely don’t suggest letting the tax tail wag the investment dog, but this year is the perfect time to dive deeper.

But, definitely don’t go at this alone. The best thing you can do is seek out an expert to guide you through these tax changes and give you the best advice for your specific situation.

Saving a million in taxes … it’s possible

Brad Sumrok is a long-time friend and a well-known player in the apartment investing space. He has thousands of doors and teaches students how to syndicate and buy into big apartment deals.

He also has an AMAZING story to tell about how he recently  saved big on his taxes.

“I had a goal in the past that I wanted to pay $1 million in taxes,” Brad said.

But, he recently realized that just because he was earning more, it didn’t mean he had to PAY more in taxes. And he learned how to look at real estate as more than just appreciation and cash flow but also as a way to reduce his liability.

But first, let’s talk more about the deal.

Brad was evaluating a deal for a 124-unit apartment building. The returns were on the lower end of what his threshold is, and he almost walked away.

But, after taking into consideration the tax savings earned from depreciation, Tom realized that a marginal deal was actually a fantastic deal.

One of the reasons this deal worked out so well was because of bonus depreciation. While apartment buildings have a depreciation period of 27.5 years, for certain improvements and components, you can take 100 percent of the depreciation in the first year you own a property.

Since the bonus depreciation wasn’t subject to passive loss limitations, Brad was able to use the depreciation loss to offset their total income … which meant he saved $1.2 million!

“It took a marginal deal and turned it pretty much into a home run,” Brad said.

Taking hold of a good idea

After you read Brad’s story, remember not to get too caught up in the numbers. Every deal and tax situation is different.

But, what Brad did was remarkable. He took a conversation he had with an expert at one of our events and put it into action.

What is the value of one great idea or one good relationship? You never know what you don’t know. Put yourself in a position to find that great idea and explore it.

Sitting in a seminar room, attending a webinar, or listening on a phone call will never be enough. Putting an idea into practice is what saved Brad thousands of dollars, earning the cost of his attendance at an event several times over!

If you want more exposure to new people and new ways of doing things, we invite you to attend Brad’s Apartment Investor Mastery National Conference on August 18.

The Guys will be there talking about apartment investing and it’s sure to be a valuable, exciting event. Register by going to the events section on our website or sending an email to bradconference [at] realestateguysradio [dot]com.

We hope to see you there!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

Real estate wins …

Real estate investing can be lonely.  Very few financial conferences or commentators even talk about real estate … much less endorse it as a wealth building vehicle.

So real estate investors huddle together in obscure corners of the financial community … quietly making money and muttering about the trials and tribulations of tenants, toilets and 1031 tax-deferred exchanges.

But recently, mainstream financial headlines seem to be painting a rosier picture of real estate …

Several news outlets published articles referencing this Bankrate.com article and survey which says Americans prefer real estate over cash, stocks, gold and bonds …

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The article says …

“… for the third consecutive year real estate is the favorite way to invest money not needed for at least a decade …”

“… home prices have gone gangbusters recently, climbing back above their record pre-crisis levels … according to CoreLogic.”

Click Bait and Switch

But then the balance of the article is essentially dedicated to telling readers why the survey respondents are wrong for preferring real estate over stocks …

“Still, ‘it’s a rather poor investment,’ says [a] RBC Wealth Management financial advisor.  ‘It’s highly illiquid, and markets aren’t always rational.’”

“One study … found that housing only returned 1.3 percent per year after inflation from 1900 to 2011, while stocks tended to perform more than four times better.”

As you might guess, RBC Wealth Management deals in paper assets.

Their trite critiques of investment real estate reveal a lack of understanding at best … and a dishonest bias at worst.

Let’s break it down.  Because whether you’re raising private capital to invest in real estate …

… or just trying to convince your spouse or in-laws real estate is a viable alternative to stocks, bonds and mutual funds …

… it’s important to be able to rebut the financial fake news bias against real estate.

Liquidity – LOL

The flip side of liquidity is volatility.  When traders can move in and out of an asset quickly, it makes the asset price volatile.  So liquidity isn’t automatically a good thing.

The survey asked about money “not needed for at least a decade” … so liquidity isn’t what investors are looking for when they buy real estate.

Besides … to say housing is “illiquid” is inaccurate. 

“Illiquid” means “not easily converted into cash” and “of a market with few participants and a low volume of activity”. 

Sure, you can’t day trade houses … but we see that as a plus.  It keeps prices more stable.

And when you can usually sell a house at a fair market price in about two months, that’s hardly “illiquid”.   Drop the price, and you’ll sell it faster.

Market Rationality – ROFL

A paper asset promoter saying real estate “markets aren’t always rational” … are you KIDDING???  That seems a LOT like the pot calling the kettle black. 

Way back in the 90’s before the dot-com stock crash, Alan Greenspan famously accused stock market participants of “irrational exuberance”.

Of course, a few years later the stock market crashed … and scared investors flocked TO real estate in the early 2000’s.

With the stock market at nose-bleed levels today, we’re guessing that’s why people are preferring real estate over stocks again.

Only Returned 1.3 Percent – LMAO

The idea that “housing only returned 1.3 percent per year after inflation” is so off the mark it borders on absurd.

The argument is the PRICE of a home in 1900, adjusted for inflation to 2011, only grew on an annual basis of 1.3 percent …

… and that during that same period, stocks grew by “about four times that.”

This argument assumes the only financial benefit of real estate ownership is price appreciation, which is a false premise.

We won’t bore you with all the math, but you should grab a calculator and do it all so you can quickly blow-up this ridiculous idea that stocks beat real estate over the long haul.

Here it is in simple terms …

Leverage

When you put 25 percent down, you own property at 4:1 leverage.  So 1.3 percent appreciation is a 5.2 percent equity growth rate.

Right there, you’re even with “about four times that”.  But wait!  There’s more …

Cash Flow 

Also missing from the comparison of stocks versus real estate is the rental income.  

Even if you’re before tax positive cash flow is only two percent, with 4:1 leverage, your cash-on-cash rate is 8 percent. 

Amortization

A 30-year fully amortized loan at 5 percent reduces the loan balance (i.e., builds up equity) at a rate of over 2.6 percent per year.

Add 4:1 leverage, and you’re growing equity at over 13% per year.  Now you’re destroying stocks.

We’ll skip tax benefits, which make it even BETTER, and let you tally the total. Any ONE of the three beats “four times that” all by itself.  Together … it’s a wipe out.

People Aren’t Stupid

Main Street investors have common sense … and at this stage of the information age, they’re able to research and fact check quickly.

They know stock prices are being propped up by cheap money and corporate buybacks … and with the Fed raising interest rates, the party might be ending soon.

The Bankrate.com survey reinforced what our anecdotal conversations tell us … Main Street investors are nervous about the stock market. 

Their preference for cash over stocks for a ten year hold says a lot.  Main Street is looking for safety and surety.

And Main Street investors like real estate.  They understand real estate.  They TRUST real estate.

But it’s not just Americans seeking financial safety in real estate.  Foreign buyers just purchased a record amount of U.S. houses.

Real estate is where people park money for long term wealth development and preservation.

Go with the Flow …

Even though home ownership in the U.S. remains at decade lows, it’s actually a boon for real estate investors.  Less homeowners means more renters.

For flippers and syndicators, real estate is highly regarded and in demand.  Money wants to be in real estate … so there’s a big opportunity helping it get there.

And while anything can happen, it seems the appeal of real estate isn’t abating any time soon.

Until next time … good investing!


 More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

4/4/10: The Brave New World of Finance – How to Master Your Debt with Jordan Goodman

We’ve heard estimates that every man, woman and child in the US is currently saddled with $40,000 to $170,000 in debt – just for the Federal government!  Then tack on state and local government debt, and before you even get your first credit card, debt has a dominating hold on your finances.  As we boldly go where no one has gone before, it’s more important than ever to be strategic in managing your debt.  To help us explore the galaxy of information on this topic, we beamed a best selling author into The Real Estate Guys’™ studios.

On the bridge of our radio starship:
•    Captain, Chief “Helmsman” and Host, Robert Helms
•    Pointy-eared Co-Host, Russell “Mr. Spock” Gray
•    Ship’s Financial Doctor and Godfather of Real Estate, Bob Helms
•    Best selling author, the Money Answer Man and ship’s Financial Engineer, Jordan “Don’t call me Scotty” Goodman

“Debt, the endless frontier.  These are the continuing escapades of a spendthrift society.  It’s apparent mission: to encumber itself beyond any hope of repayment; to seek out new debt ceilings and then monetize that debt; to boldly go where no one is sure we should.”  Da ta daaa, ta da ta da DAAAA!!!! Swoosh!!!!

Sorry.  We got carried away.  All this may sound like a tee up for political commentary (we are soooo tempted), but it isn’t.  Our point is that debt, both public and private is a major part of every person’s financial future.  And as we attempt to break free from the gravitational pull of the Great Recession, we find ourselves looking at a brave new world of finance – one with new rules that it behooves each of us to learn.

At its core, debt involves getting other people’s money (which we like!) and paying them interest (we like that less).  The motivation of the lender is, like a drug dealer, to get you hooked on debt and forever paying interest.  The motivation of the addict…we mean borrower, is to enjoy now and pay later (or never).  So where does an investor fit in?

As investors, we want to borrow cheap and invest high – just like the banks.  But since there are no bailout programs for us, we need to be more careful.  The first step is to understand the rules – and then to implement effective strategies.  Sound easy, but when the rules change, we need to examine our strategies.

We launch the show talking about the new realities of debt in the post meltdown economy.  For the older folks, we’re getting back to “normal”.  For younger people, free and easy credit was “normal” and the current environment is no fun at all.  We talk about where things are now and where they might be headed.

With the new Credit Card Act of 2010, the rules of credit cards have changed.  Credit cards, like light sabers (we know we’re mixing sci-fi metaphors), are powerful tools in the right hands – while they can be equally dangerous when used by the untrained.  Since the rules are changing, investors and consumers alike need a little training on the state of the art.  Our special guest and prolific author Jordan “Mr. Money Answers” Goodman, brings us up to speed on some of the need to know items.

As the US and the world is coming out of their bunkers and beginning to explore the economic wasteland, governments, industry and individuals are all making adjustments.  For many individuals with unsustainable levels of debt, professional help may be the best answer.  Jordan shares with us his insights about the important differences between Debt Settlement and Credit Counseling Services.  You’ll want to hear what he has to say.

For some people, the aftermath of the meltdown means foreclosure and perhaps even bankruptcy.  Does that mean game-over or is there life after debt?  Once again, Jordan brings in great practical information and insights to help you chart your personal course.

For the two of you who are facing the brave new world with good credit scores and equity, Jordan reveals an AWESOME strategy for accelerating your mortgage.  Long time listeners – and especially readers of Equity Happens –  know The Real Estate Guys™ have never been big fans of mortgage acceleration.  But Jordan shows us how to use the power of cash flow to accelerate the pay off of a mortgage without amortization.  We know it sounds like science fiction, but it’s real.  Check it out!

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