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Cost Segregation & Bonus Depreciation

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Fundamentals – Bonus Depreciation via Cost Segregation Studies with John Collins

Since Mr. Trump enacted new tax law, 100% Bonus Depreciation creates significant tax benefits in the acquisition year.

In one of my apartments $3M, 52-unit building is looking to get more than $266K in tax savings (at 37% tax rate) in his first year of ownership.

On syndications, depreciation is distributed to investors on the K-1 Form.

Basics

One of the cool things about investing in real estate is that the properties create a paper loss. For single family homes, you can take 1/27 the value of the property (minus land value because that does not devalue over time) per year for 27 years. This is what is shown below. A cost segregation juices this deduction as it puts the asset on a more aggressive depreciation schedule which front-loads as much depreciation as the tax code allows. This is one of the reasons why bigger deals are better because they can support a 5-8K cost segregation study.

Paper losses due to depreciation!

What is Cost Segregation?

Cost Segregation is the identification of building components and reclassifying the tax life on each of those components. Typical components that can be reclassified include a building’s non-structural elements, such as carpet, decorative lighting and trim, dedicated electrical and plumbing, and security systems; exterior land improvements, such as landscaping, curbs, sidewalks, fencing, and signage; and indirect construction costs, such as architect and engineering fees and construction permits.

Commercial properties establish a 39-year depreciation schedule, and residential properties establish a 27.5-year depreciation schedule. For example think of a 3 bedroom single family home in Birmingham, Alabama that is worth $100,000. Of that approximately $65,000 is determined to be the building value and $35,000 is determined to be the land value. Each year you can deduct 27.5th of the building value which is about $2,363 a year that can once again offset income gains. This can be taken for the next 27.5 years until all the value on paper is depleted. Unfortunately, you cannot deduct the land.

However, the IRS assigns a tax-life to each of the individual components.

Most components that qualify for accelerated depreciation can have their tax life reclassified to either 5, 7, or 15 years:

  • 5-year tax-life components: tangible, personal property assets (carpeting, decorative lighting and trim, dedicated electrical and plumbing, and security systems)
  • 7-year tax-life components: all telecommunication related systems (cabling, telephone, etc.)
  • 15-year tax-life components: land improvements (landscaping, curbs, sidewalks, fencing, and signage)

What is a Cost Segregation Study?

A Cost Segregation Study is a strategic, tax-saving tool that can be used by companies and investors who have constructed, purchased, expanded, or remodeled any kind of commercial real estate (including 1 to 4 unit residential rental properties). The study allows the owner to take advantage of accelerated depreciation deductions and defer federal and state income taxes on the reclassified building components mentioned above.

During a Cost Segregation Study, components of a specific property or leasehold improvement are identified and reclassified for depreciation over a shorter time (5, 7, or 15 years). For example, 30% to 90% of the total electrical costs in most buildings can qualify for 5 or 7-year depreciation. The result of a Cost Segregation Study is that a property owner’s tax obligation is reduced and his cash flow is increased.

Is Cost Segregation something new?

Cost Segregation is not new. On the contrary, it has been in existence since 1954 when the IRS allowed for certain personal assets to be accelerated into a shorter life class. However, it wasn’t until Hospital Corporation of America sued the IRS in 1997, and won, that the IRS revisited the issue of accelerated depreciation. The IRS ruled that property qualifying as tangible personal property under the former Investment Tax Credit (ITC) rules would also qualify for purposes of federal income tax depreciation under MACRS (Modified Accelerated Cost Recovery System).

The IRS Chief Attorney wrote a memo saying, “. . . Cost Segregation, for it to be properly applied, had to involve those with competencies in architecture, engineering or construction and/or construction techniques, in order for personal property assets to be accurately identified and segregated.” As a result of this memo, Cost Segregation became a viable tax-saving strategy allowed by the IRS.

What type of real estate is eligible?

Commercial real estate (including 1 to 4 unit residential rental properties) eligible for Cost Segregation includes buildings that have been purchased, constructed, expanded, or remodeled since 1987. A study is typically cost-effective for buildings purchased or remodeled at a cost greater than $100,000. A Cost Segregation Study is most efficient for new buildings under construction, but it can also uncover retroactive tax deductions for much older buildings.

What are the steps involved in the process?

From start to finish, the Cost Segregation process can be broken down into the following steps:

  1. Engage a reputable Cost Segregation firm that utilizes engineers and architects trained in Cost Segregation and its application to the proper allocation of assets.
  2. The engineer determines what documents are available (e.g. planning, construction, invoices, appraisal, and current tax depreciation) for reference and referral.
  3. The engineer then sets a schedule for surveying the subject property and gathering the available documents for review prior to arrival at the subject property.
  4. For those documents that are unavailable, time is then scheduled into the Cost Segregation process for document recreation using known industry standard costing data (Marshall & Swift and/or RS Means costing publications). After all necessary documents are acquired, it takes about 4 to 6 weeks to finish the process.
  5. The site survey is executed and completed. Time varies for each survey, but it can be completed within as little as an hour. During the survey, measurements are taken and all areas are photographed for IRS verification and substantiation of asset values.
  6. The engineer returns to the office and “crunches the numbers.” This is when all documents are reviewed in detail, assets are verified and measured against known costing data, and asset reallocation is applied.
  7. A review committee then examines the results of the analysis completed by the engineer of record to verify its veracity and confirms it meets and exceeds IRS guidelines per the Cost Segregation Audit Techniques Guide.
  8. Once approved, the study results are compiled into a final report that includes: all IRS tax code to substantiate the reallocated assets, spreadsheets identifying all assets categorized according to their building codes, representative photographs of the reallocated assets, and the engineer’s credentials for IRS review.
  9. Final report is issued. Digital copies are emailed to the client and the CPA of record for application to the client’s tax return.

Why bother? I’ll eventually get the deduction.

As investors, we like paper depreciation to occur earlier because that offsets gains earlier and gets more money in our pocket earlier. Just like you give a mouse a cookie…. Give an investor a dollar early and… they will turn em and burn em.

In other words, you are not creating more depreciation but you are shifting it earlier to take advantage of the time value of money concept.

On the project level in a single asset LLC arrangement the more you can lower your tax liability the more you can significantly increase your cash flow and create more value for investors.

A Cost Segregation Study in effect gives you an interest-free loan from the government for the first 15 years, which you will then repay interest-free over the remaining 25 years. Wouldn’t you rather have your money? There are also advantages to doing a study if the building is going to be sold (via 1031 exchange) or if the owner of the building dies.

Does the Cost Seg need to get done this year (Dec 2018) or do we just need to acquire in this year (2018)?

For bonus depreciation, we just need to acquire. The Cost Seg can be completed in the next year (2019).

How much will I save on taxes?

Most Cost Segregation firms will perform a free analysis if you provide your basic property information and tax rate. From the information you provide, they can provide a conservative estimate of the accelerated benefits you can expect, as well as their fixed fee proposed for the final study.

Typically, tax savings from 5% to 10% of the building’s original tax-basis are generated, but there are instances where it can be substantially more. Each property and circumstance is unique, so it requires a case-by-case approach to give you a definitive answer.

How much-accelerated depreciation can I get?

Certain types of commercial property can be grouped together to give us an idea of the percentage of those types of buildings eligible for accelerated depreciation. Your results may be greater, or less than those quoted here, but in general, property that falls into one of the following categories is most likely to result in accelerated depreciation within the specified ranges.

Commercial Property Types:

  • Apartment Buildings 15 – 25%
  • Dental/Medical 30 – 60%
  • Health Care 25 – 65%
  • Heavy Manufacturing 30 – 80%
  • Industrial 25 – 70%
  • Light Manufacturing 20 – 45%
  • Office Buildings 15 – 25%
  • Research & Development Facilities 30 – 75%
  • Restaurant 15 – 30%
  • Retail Centers 10 – 25%
  • Senior Living Facilities 15 – 30%
  • Warehouse 5 – 15%

Does Cost Segregation have other benefits?

Yes. Cost Segregation can provide additional tax benefits. It can reveal opportunities to reduce real estate tax liabilities and identify certain sales and use tax savings opportunities. Under certain circumstances, segregated assets may qualify for a special bonus depreciation allowed by multiple tax reconciliation acts enacted by Congress. Additionally, a Cost Segregation Study can

  • Maximize tax savings by adjusting the timing of deductions. When an asset’s life is shortened, depreciation expense is accelerated and tax payments are decreased during the early stages of a property’s life. This, in turn, releases cash for investment opportunities or current operating needs.
  • Create an audit trail. Improper documentation of cost and asset classifications can lead to an unfavorable audit adjustment. A properly documented Cost Segregation Study helps resolve IRS inquiries at the earliest stages.
  • Capture retroactive savings. Since 1996, taxpayers can capture immediate retroactive savings on property added since 1987. Previous rules, which provided a four-year catch-up period for retroactive savings, have been amended to allow taxpayers to take the entire amount of the adjustment in the year the Cost Segregation is completed . . . this alone is huge. This opportunity to recapture unrecognized depreciation in one year presents an opportunity to perform retroactive Cost Segregation analyses on older properties to increase cash flow in the current year.
  • Lower property insurance premiums. Since it generally costs less to insure personal property, versus real property, building components reallocated as personal property should reduce your insurance costs as well.

How much does a Cost Segregation Study cost? 


On average, the total fee will generally fall between 5% and 20% of the estimated Net Present Value tax savings shown on your free analysis. This can be impacted by how large or small the real estate project is. In addition, the location, accessibility, and quality of the records and documents impact the ultimate cost. Minimum fees can be as low as $2,000 for small projects, and some firms GUARANTEE a minimum of 500% ROI (fee vs. tax recovery) on projects over $500,000.

How long does a Cost Segregation Study take?

The time that a Cost Segregation Study takes depends on the size of the project and the completeness of the documentation that you can supply. Generally, it takes about 4 to 6 weeks from the time the appropriate documentation is received and recreated.

What is required of me to have a study done?

You need to provide as much of the original documentation pertaining to planning, construction, and current tax depreciation as you can. This could include a complete set of construction plans, current tax depreciation records such as tax returns, building cost budget information, final AIA (American Institute of Architects) application and a document of certification for payment or other cost information, change orders, direct or indirect costs paid by the owner that are not included in other documents, and other information depending upon the project.

What if I lack some of the needed documents?

Even if you lack some of the necessary documentation, a study can still be performed for you. Construction, engineering, and other specialists will do an extensive site visit. They will measure and estimate using currently accepted costing techniques and pricing guides (such as the IRS-recommended costing publications Marshall & Swift and RS Means) to determine the costs that qualify for shorter recovery life periods.

Can’t my CPA do a study for me?

CPAs are not qualified according to the IRS guidelines. However, most Cost Segregation firms will gladly work with them on a consulting basis to complete the work for you. Remember, the IRS Chief Counsel issued a memo that made it clear what constitutes proper “methodology” in applying Cost Segregation, and it must be done by people who are competent in architecture, engineering or construction and/or construction techniques. See “Is Cost Segregation something new?” above.

Will a study increase the chance of an audit?

A study conducted by a reputable Cost Segregation firm should strictly adhere to the IRS Cost Segregation Audit Techniques Guide. The type of study most firms perform actually decrease your chances of an audit because the study places you in Internal Revenue Code Tax Compliance. However, be aware there are six different Cost Segregation methods allowed by the IRS, and not all are of equal merit. There is currently no standard method, and there is still some ambiguity about which method is best. If you have heard conflicting information about what is, and is not possible regarding Cost Segregation, this is probably why – it depends on which method is being used.

Will I be assisted in the event of an audit?

A reputable Cost Segregation firm can assist you in the event of an audit. They will focus on doing the Cost Segregation Study to create documentation and support for conclusions so that these are easily communicated and resolved with the IRS. In fact, you should expect a final report that is “all inclusive.” It should quote specific Internal Revenue Codes related to the reallocated assets. Additionally, it should provide photographic evidence of these same assets for complete substantiation of the assessment.

Conclusion:

The Pro’s

  • Reduction in tax liability
  • The deferral of taxes
  • Bump in up front cash flow

The Con’s

  • Costs typically range $4,000-$8,000, depending on property size/asset value
  • Accurate and complete documentation is required and requires effort to collect
  • Cost segregation is not feasible below $100,000 property value

Cost Segregation studies is one of the easiest and quickest way to squeeze a little extra profit out of an investment. If you played race video games in your youth (or still do) it’s like paying for the inexpensive computer chip upgrade, its a no brainer. If you don’t get that reference, its “low hanging fruit.”

If this is a concept new to you, you may be able to go back to previous years taxes and get back some benefits this year. Often times getting a quote is free and quick.

A recent quote I got back for a few properties.

 

52-Unit in Des, Moines Iowa Case Study:

Who do I call for more information?

For more information on Cost Segregation or a free analysis, contact John Collins, Cost Segregation Specialist at Segregation Holding LLC: (907) 227-2440 or [email protected].

Segregation Holding LLC performs Cost Segregation Studies in all 50 states and throughout the globe for US tax-paying citizens owning investment property outside the US.

Addition Resources

Dental Smile Example

Pre-Construction Example

Ranch resort Example

Video

Combine this with an Opportunity Fun Zone deal and wow!

Ep. 14 – Nate Busch of Busch Tax Company – Podcast download here

Sample K1 Form

Hacking your HSA / FSA / Flex Spending accounts

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I’m going to start out by saying please do not take this as legal/tax advice!

One rule I follow is “pigs get fat but hogs get slaughtered.”

But if there is a tax code or loophole within reason/ethical good faith you should exploit it as much as possible.

In 2017, I purchased a half acre in a turnkey Coffee farm in Panama in my Health Savings Account (HSA) for about $15,000.

HSA’s are truly awesome! You add money to an account tax-free (like a pre-tax 401k), don’t get taxed on the gains (like any retirement account), and you don’t have to pay taxes when you use it on Eligible Health Expenses (like a RothIRA).

You need a High Deductible health plan to be eligible for an HST. I’m going to get a little political here… health costs are on the rise because it bails people out for not being accountable (good diet, sleeping habits, stress, and exercise program). The company famous for the yellow Twinky bars cited rising health cost as their reason for going bankrupt… go figure.

You WILL have health expenses, MAY have retirement expense… in other words, you will likely die and have health expenses before you retire. So it makes sense to fund an HSA account before any 401K, Roth IRA, IRA, etc.

Here is some information for your entertainment purposes to see what you can start to use your HSA for:

USA Today article

More resources

Getting a doctor to sign off on your medical purchase as necessary will need a template:

Sample Letter of Medical Necessity for Hyperhidrosis Treatment

[Date] [Insurer name] Attn: [Name of individual] [Address]

re: [Patient name] [Policy number]

Dear [Insurer name]:

I am writing on behalf of [Patient name] to document the medical necessity of [insert treatment option here] for the treatment of hyperhidrosis. This letter provides information about the patient’s medical history and diagnosis and a statement summarizing my treatment rationale.

Hyperhidrosis, or excessive sweating, is a medical condition that can have a devastating effect on a patient’s quality of life, causing physical discomfort, secondary skin problems, social/emotional  sequelae such as anxiety and depression, and disruption of occupational and daily activities. This has certainly been true for [Patient name], who has been impacted by hyperhidrosis for [insert duration of symptoms here].  Specifically, [he or she] has had difficulties with [insert quality-of-life, social/emotional and/or career/daily living problems here].

[Discuss patient’s diagnosis, treatment history, and degree of illness] [Insert patient’s name] has tried the aforementioned therapies thus far without success and I, therefore,  recommend [insert treatment option here] as the next logical choice for treating [his or her]   hyperhidrosis.

In light of this clinical information, and this patient’s condition, [insert treatment option here] is medically necessary and warrants coverage. Please contact me at [(000) 000-  0000] if you require additional information.

Sincerely,
[Physician’s name]

Here is what I put together to get massages for stress from dealing with SPC listeners who don’t listen to the podcasts before booking a call or people who don’t take action:

[2018.11.8] [Insurer name] Attn: [Lane Kawaoka’s HSA servicer] [Address]

re: [Lane Kawaoka] [Policy number]

Dear [Insurer name]:

I am writing on behalf of Lane Kawaoka to document the medical necessity of massage for the treatment of mental stress and muscular discomfort. This letter provides information about the patient’s medical history and diagnosis and a statement summarizing my treatment rationale.

“Mental stress and muscular discomfort”, is a medical condition that can have an effect on a patient’s quality of life, causing physical discomfort, secondary skin problems, social/ emotional sequelae such as anxiety and depression, and disruption of occupational and daily activities.  Specifically, he has had difficulties with discomfort performing his duties at work and exercise routine [insert quality-of-life, social/emotional and/or career/daily living problems here].

[Discuss the patient’s diagnosis, treatment history, and degree of illness]

Lane Kawaoka came into the office in early 2018 where we ran a cardiovascular and blood assessment.

Lane Kawaoka has tried the aforementioned therapies thus far without success and I, therefore, recommend massage as the next logical choice for treating him.

In light of this clinical information, and this patient’s condition, massage is medically necessary and warrants coverage. Please contact me at [(000) 000-0000] if you require additional information.

Sincerely,
[Physician’s name]

Sample Inspection report

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I would say this is a bad report because it’s not Prescriptive. It is very important to have a chat with your inspector so they know it’s not going to be a warm and fuzzy home to live in but a rental property. They will need to avoid citing nitpicky things because the seller is likely another investor and more sophisticated than a regular homeowner and will call BS at your repair requests.

This is where an hour of coaching will go a long way to maximize what you get at the negotiation table.

Now back to SimplePassiveCashflow.com/turnkey

 

   

Ultimate Living List of Self Directed IRA Custodians

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List of SDIRA Custodians in no particular order based off feedback from other Hui Deal Pipeline club members.
Accuplan
Advanta IRA
American Estate & Trust
American IRA
Asset Exchange Strategies
Broad Financial
CamaPlan
Capital IRA
Central Bank
Checkbook IRA
Community National Bank
Crowdfund IRA
The Entrust Group
Equity Trust Company
First Trust Company of Onaga
GoldStar Trust Company
Guidant Financial Group, LLC
Horizon Trust Company
iPlanGroup
IRAvest
IRA Advantage
IRA Club
IRA Express, Inc.
IRA Innovations
IRA Resources
IRA Services Trust Company
Kingdom Trust Company
Lincoln Trust Company
Madison Trust Company
Midland IRA
Millennium Trust Company
Mountain West IRA
Nevada Trust Company
New Direction IRA
New Standard IRA
Next Generation Trust Services
Nexus Direct IRA
NuView IRA
PENSCO Trust Company
PGI Agency
PolyComp Trust Company
Preferred Trust Company
Premier Trust
Provident Trust Group
Quest IRA
RealTrust IRA Alternatives
Safeguard Advisors
Self Directed
Self Directed IRA Services, Inc.
Sense Financial
Sovereign International Pension Services
Specialized IRA Services
Summit Trust Company
SunWest Trust Company
Trust Company of America
uDirect IRA
Vantage IRA
401kCheckbook
The Self-Directed IRA Graveyard
American Pension Services
I don’t personally like these accounts for my own investing even though the future gains and withdrawals are tax-free because you can’t use the best Fannie Mae or Freddie Mac loan products when investing in your IRA.
Unless you are using a QRP (Qualified Retirement Plan).
With syndications using leverage (as most good deals do) you will be likely opening yourself up to UDFI etc taxes.
In the end, I want the freedom to enjoy the money now and not have to wait till I am 60 something.

How to invest proactively in a Sellers market

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Since I feel we are in the 9th inning of an 11 inning ball game, I decided to pass on a recent Class-A apartment deal in a secondary market.

Here is my thought process…

First off, Robert Kiyosaki has a saying: “There are three sides to a coin.”
People like to argue that it is either a good time to buy or a bad time to buy. For example, they say that “MFH” is overheated or commercial is getting killed by Amazon and e-commerce. I think these are mental justifications by tire-kickers who are scared to act. I mean really how many of these people are under the accredited status (not sophisticated) or not obtained their “Simple Passive Cashflow number.”
Sophisticated investors still trying to grow live on the edge of the “coin.” They buy deals out of the reach of amateurs due to the amateurs’ lack of network/knowledge. These opportunities are undervalued, with undermarket rents, with value-add opportunity. Sophisticated investors are patient; they don’t stray from standards that force them to get crushed in a market correction. (Cashflow from other investments makes this possible.) They invest following the macro- and micro- trends and don’t gamble on gimmicks such as guessing where Amazon’s next HQ is going or where the hurricanes just drowned a market.
The trouble is that an unsophisticated investor or an outsider (in terms of having a poor network) is figuring out which of these deals transcends the two sides of coin and is on the edge. Stating the obvious (though often ignored by many)… starting out as an investor is going to be slim-pickin’s due to the lack of network. But you have to push through this rough part. You are not able to decode the noise until after a few deals or having someone mentor you.
With that out of the way let’s continue…

Real estate is one of the best risk-adjusted investments out there. In private placements or syndications, we are able to crowd-invest in larger & more stable assets while maintaining control with operators who are aligned in our best interests. By going into a project properly capitalized with adequate capital expenditure, budget, and cash reserves, you are able to remain steadfast through softness in the market where rents stagnate and vacancy decreases.

Pause there. In troubled times what happens?

People lose their jobs and there is a bit of shuffling.

Yea, people need housing, but there will be some vacancy as some people will lose their jobs and be displaced elsewhere.

Following this train of thought…

In a recession, the high end or class A will be hurt the most. It is Class A workers who fulfill much of he discretionary services.  We are already seeing softness in rent by rent decreases in class A of the high-end markets such as Seattle and San Francisco.

For example a once $1,700 one bedroom is now $1,625.

Most deals model for 1-5% in annual rent increases or escalators. Other than the Cap Rate to Reversion Cap Rate truck, this is the second most manipulated assumption in investment modeling.

In this unfortunate but natural event, the A-Class renters will fall to class B housing. Some homeowners will even lose their jobs creating foreclosed investments for smaller investors in the single-family home scale.

What’s happens to the B and C class renters?

It is likely that they will also lose their jobs at higher or lower rates, but that is up to debate. In the same fashion as the A-Class renters, the Class B/C renters will downgrade to make ends meet.

I imagine this similar to a game of musical chairs (where the chairs are getting crappier and crappier). Or it looks a lot like the natural housing shuffle in the summer near colleges with people moving in and out. The landlord/investor is likely to see increased vacancy.

Multifamily occupancy varies from 85-95% in stabilized buildings. Some markets are hotter and some are colder. It is important to use the correct assumptions depending on the markets. For example, Dallas typically sees 92% occupancy while Oklahoma City sees 89%.

One of the reasons we love multifamily is because of the decline of the middle class and the need for more scalable workforce housing. [And those millennials can’t save] The population is increasing too.

 

[I like to use this image cause I make fun of millennials… this is the millennial version… cause they can’t seem to afford (or want) to own anything]

When I travel to Asia (which I see as a more mature society, for better or worse) there is a much larger wealth gap than in the USA.  People are living in cramped apartments or very rare single-family homes. And they are driving a Mercedes on barely enough money to share a family moped. This is the trend that the USA is following.

As with many things, you need to look past the headlines and the general data. Instead of analyzing a whole asset class, as the media likes to do, let’s break down vacancy in terms of classes.

Here are some typical vacancy rates (notice the spread).

Class C 4.5%

Class B 5.0%

Class A 5.5%

Why? Because there is just more demand for the lower class properties cause there is more demand than supply.

Many times the business plan is the be the “best in class.” For example, businesses want to be the best mobile home park or best high end remodel because you attract the richest customers in that niche.

I like to monitor the number of new units coming online because that is your downward pressure. It is rare that new builds are for Class C or Class B.

The micro-unit trend is an attempt to build for Class C and B tenants due to the need. But often the numbers don’t make sense when you have purchased the same building materials and mobilized the same crews to build a Class B asset as opposed to a class A asset.

Let’s go through that Armageddon example again.

Class A will have to drop rents severely and see great vacancy.

Class B and C will see vacancy come up too as people are losing their jobs but should see some absorption from ex-A Class tenants.

Mom and dad will also see some absorption as deadbeat son or daughter move back home.

Shows like Friends and How I Met Your Mother will go on for another decade.

Note: one can argue that class A+ will not be affected at all which I believe is true. That’s why we are trying to invest right to enter that untouchable status.

I remember when I sat through the same economic presentation at work from 2010-2014. The sentiment at the time was that it was going to be an extremely slow recovery. It makes sense that the length between the 2008 recession and now is very long which is why I mentioned an 11-inning ball game.

This is why I took a set back from some pretty Class A deals because I asked myself the following questions:

1) What will happen to the rents if IT should happen?

2) Is the modeled 90% vacancy rate going to get blown up?

Class B and C apartments in strong submarkets will perform best over the long term. If you ensure the loan term is long enough so you don’t get hurt then you should Outlast the bumpy ride ahead.

Beware of the self-destructive behavior of not investing. You know what I mean… are you someone who self-sabotages?

Understand the micro and proceed if the numbers make sense.

I have to admit Class C and B assets are boring but work especially in a seller’s market because 1) they cashflow and 2) have a forced appreciation value-add component to give you levers to pull in tough times.

Again going back to Mr. Kiyosaki’s three-sided coin quote, investors go through three stages.

Stage 1: Go into MFH… Duh (I did well at single-family rentals let me try apartments)
Stage 2: Be a contrarian investor so go into other asset classes most decent investors are afraid or don’t even know about
Stage 3: Do special projects such as Affordable house taking advantage of tax credits or specialized operators (ie take abandoned big-box space like movie theaters and convert to the latest consumer needs)
Experienced investors who were in the downturn in 2008 say its interesting that the sentiment in 2006 was exuberance that it was going to keep going up. Now in 2018 the sentiment is fear… This is a good thing.
Remember that in this market we still have:
  1. Historically low-interest rates
  2. Historically high rent increases (not 8% anymore but still 2-4%)
  3. Historically low vacancies
Things to monitor if you really need to geek out on numbers:
  • 2 and 10 yield t curve. When that crosses you have just-a matter do time. Because its a measure of fear.
  • Automation and AI – huge shifts in jobs. People need to work but technology has been increasing since the beginning of time.
  • Wage growth
  • Bankers prospective: how deals are getting funded and by who (institutional or dumb capital)
There is a saying out there that real estate is location specific. However, when I invest in more stable asset classes its a National market based on the economy both USA and international. When you invest in a micro-economic fix and flips then its location specific. When you invest in commercial assets it’s with more stable tenants and based on the aforementioned larger economy.
A lot of people point to the Yield-Curve as a big indicator. In the end, I do believe that real estate will go down because of consumer instability. But if you have stocks you should sell those before even thinking of lumping it into cashflow type rental real estate.
“The guy not investing right now and hoarding cash (with net worth of under $1M… because if you can live off your cashflow then cool you can do what you want) is just afraid and lacks deal flow. Its like the person who complains that there is nothing to do during the weekend in LA (insert city with a vibrant scene) when in actuality they don’t have any friends (lack dealflow)… and by the no one likes (has a bad attitude and that person who makes excuses”
Doomsday theory: Everyone talks about national debt but we are far far behind debt to GDP ratio that of Japan. When Japan hits the wall lookout. Her is my theory… watch out post-Japan Olympics when they have to let loose the belt (after a holiday period of excess calories). Leading up to a period where Japan has to save face while they are in the Olympic spotlight (and I’m not being racist cause I am Japanese and it is a thing). I don’t have the latest data but Japan is at around 250% where the USA is at 100%.
Household debt KPIs: student debt, car loans, housing debt. Which is why I like these assets that are used by the poor and middle class! #RenterForever

To join our Hui Deal Pipeline Club and stick with the group join below:

Hui Deal Pipeline Club Shareholders & Investors Mastermind

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Everyone was encouraged to mingle and specifically sit with a different person on each bus trip and venue switch.

Your network is your net worth… and this will be a “high-target” environment.

We will learn from each other and connect with other high-level investors that you will climb the ladder together.

Some questions that might come to mind is why are we traveling offsite, for so long, and in a bus like little children?

As much as the private bus concept sounds like “captivity” to adults… relationships formed on the bus will be invaluable.

One of the goals of the Hui Deal Pipeline Club was to create a group of investors crowdfunding due-dilligence to find the best means and methods.

Topics covered:

  1. Asset protection
  2. Scaling your portfolio
  3. Roundtable mastermind format

Schedule:

10am meet at HopMonk in Novato
10:00-11 Drive to Buena Vista

11-12:30 Buena Vista Winery – tour, tasting, lunch https://yelp.to/qTKq/9jF7zlz1AQ
12:30-1 Drive to valley of the moon
1-2:15 Valley of the Moon https://yelp.to/qTKq/AezMXT20AQ
2:15-2:30 Drive to highwayman
2:30-3:45 Highwayman Tasting Room https://yelp.to/qTKq/LIPoTCcZAQ

3:45-4:15 Back to HopMonk

4:30-6:30 Dinner and mingle

127 – Estate Planning and Asset Protection with Lawyer Andrew Howell

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YouTube Link: https://youtu.be/zaHW3_OEU8Y? sub_confirmation 1

Article Link: Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

Estate planning
Guests I have are giving insights but always hire your own person because these things require personalization
I try to bring guests on and ask the questions that I think you folks would ask.
I believe you need to have a basic level of knowledge before engaging with a professional
For those of you who are in the Mastermind and my current investors you will hear about my Fort Knox strategy which makes LLC enitites creation look like childs play
Email me any questions to feature on the next ask Lane podcast or monthly email newsletter
Andrew L. Howell is the Co-Founder of the law firm, York Howell, with a focus on asset protection.

Many useful tools out there, but where do you as an investor fall on the asset protection spectrum?

Two fundamental risks: 1) Asset-based risks 2) Direct-based risks

Real estate considered as “hot” assets because liability risks are greater – more than equity.

Liabilities both inside and outside the asset.

Typically form a holding company to hold limited liability companies to abate asset- and direct-based risks.

Holding properties in one LLC basket is good, but still risks if something happens in one property.

Concentrate on family protection first (trust, wills, etc.). Then move to next level of asset protection planning.

If own property out-of-state, advise on setting up a parent LLC in states with charging-order protection.

Tough LLC rules and taxes for poor California residents!

Need to do your due diligence on reviewing PPM’s – especially who you are doing business with.

Asset does not create liability risk for LP’s; only GP’s.

If you get personally sued, can go after your MFH syndications and other assets even as LP.

6% of current generation feels obligated to give back to kids. Instead of giving, create a bank.

Create purpose when setting up your trust.

Please reach out to [email protected] and visit www.yorkhowell.com.

Info on using retirement funds for deals

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Question: I am considering investing in a 506c investment on a multifamily property. They are raising a 1 million from investors, then getting a loan and making improvements to the property and repositioning it over 5-7 years.

I wanted to use my funds from my SEP IRA which is currently in a qualified intermediary trust. What is the UBIT tax? Will I be subject to that on this deal? Also, should I set up an LLC that then loans the money to their LLC? How can I structure this for tax and liability benefits?

Answer [Note: From my CPA and not this is NOT legal or professional advice – in other words do your own research]: When you invest in a business (syndicate = business) with your IRA, the IRA will be subject to UBIT (unrelated business income tax) and UDFI (unrelated debt-financed income).

For our purposes, UDFI is produced when an IRA uses debt to purchase real estate. Essentially, the portion of the property’s income considered UDFI is based on the percentage of rental income derived from debt.

For example, Property A is purchased for $100,000. You put down 25% of the purchase price as a down payment and finance the remaining 75% with a traditional mortgage from the bank. The property produces $10,000 in net income for the year. $7,500 (75%) of the net income is considered UDFI and is subject to UBIT.

There is a deduction for the first $1,000 of income subject to UBIT. Income subject to UBIT over $1,000 is taxed at trust rates. For 2017, trust tax rates start at 15% and max out at 39.6% after just $12,400 of income subject to UBIT.

UBIT is paid by the IRA account. If for whatever reason UBIT is paid directly by the taxpayer, the amount paid is considered a contribution to the IRA.

Follow up question: Is there any difference in how the UDFI will apply for these:
1) SD IRA
2) SEP-IRA
3) Solo 401K
4) SD IRA (operated as an LLC) so this one is confusing… My LLC owns an LLC (syndication) which owns a property

I’m trying to decide if one is better than another for tax purposes.

Answer: The solo 401(k) is not subject to UDFI but it subject to UBIT. The IRAs are all subject to UBIT and UDFI. Note that generally the passive income flowing back to you is very low and the as a result we don’t see a huge UBIT tax.

Another idea would be to take a debt position (lending) rather than equity. The interest you would receive is free of UBIT and UDFI tax.

(This suggestion of a “debt” position or note investment with the SEP IRA to avoid UBIT and UDFI tax is a creative one… but it’s a very low chance of happening because it’s just too complicated and honestly not worth the effort from the syndicators side. It’s a very similar case of to a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It’s possible but from the syndicator’s perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor)

Ask you can tell this is a really grey area. One CPA mentioned, the answer depends on how you structured the syndication, UBIT may or may not apply for the real estate holding for solo 401k. I would really try to toss the Operation Agreement to your individual CPAs to examine and determine ahead of time.

Networking tips (Just being a decent person)

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1) Giver or Taker part 2

Ex-NBA All-Star gives advice on how to handle the financial and social pressures of celebrity and wealth.

He explains on his voicemail how he wanted people to identify themselves as 1) Addition 2) Subtractor 3) Divider 4) Multiplier. Some of us are unconsciously subtractors and dividers.

The very end of the video, Jalen talks about how to not connect good people with bad people in your network in the “Female Assistant” role.

Additional readings – (Video) Adam Grant’s Givers and Takers – Summary

2) Don’t go to general networking events

I went to a general meetup of professionals. I don’t really know what I was looking for since I was not really looking to sell anything but I was curious because it seemed like a nice downtown venue and with over 100 participants. Unfortunately, the crowd was a bit tough to break into (I’m not the natural extrovert) because I was talking about real estate investing. The group median age was in its early 30s with a vast array of professions and industries. The majority of the people there were very career focused (trading time for money) or technical in trade. I also found that the level of participants were mostly entry level in terms of career stage and thus the reason they are hustling for leads, networking, and even jobs. Needless to say, these people did not have much money to collaborate in a real estate deals and even if they did they were not drinking the Real Estate Kool-Aide and were into their JOBs (just over broke) and “401k 4-Life”. Suffice to say I am going to be more selective in my networking events as I try to find other like-minded investors but here are some fun observations.

I realize that one can call BS and say that I had a negative mindset and that I was not networking for quality or building a long-term relationships. However, I got the feeling that a lot of the people in the room were just interested in passing out cards and with the “what can I get mindset” which is typical for the scarcity mindset population. Here are a couple fun examples:

1. One broker for a large bank was hopping around the room (rudely/awkwardly) interrupting conversations, asking to collect cards, saying that they have 1% money market accounts but you have to have over $100,000 in your account. I don’t know what was worse, her tactics or those interest terms. Just to give her the benefit of the doubt I attempted to find some way she could sell her services to me and since I have gotten portfolio from small banks, I inquired about similar options with Balls Fargo.  Her response was that she “was just collecting cards tonight”… ok I get it… BTW I ran out of cards at that point.

2. I had one Realtor give me a card after we exchanged our backgrounds and he did not even look me in the eye as he checked out the woman’s backside who walked by. (wtf) The other funny thing was that I told him I don’t purchase in Washington State (due to cashflow) especially MLS retail, so why would he try to jam a card down my throat. The dude was in his mid-50s which I saw as really sad that this guy still did not get it – the whole holistic networking philosophy. I believe there is always a way two people can help each other to gain synergy – other than one person selling the other person with their product or services.

3. There were a few guys there just hitting on women. I felt like I was in a meat market especially in the second half of the evening.

4.  And no night could be without a few bearded 22-year-olds who are referring to the “secret” and sell knives and other yummy supplements (MLM).

The saying “you pay for what you get” applies here. The cost for this event was $15 and it included a free drink… which I needed.  In hindsight, the low price tag barrier to entry was the red flag. Not saying that the entrance fee is everything but the people who pay 10 dollars to attend a Meetup are a lot different than attendees that attend a free one. Take that a step forward and think of the abundance of opportunities with these heavy hitters at events that are charging $500-$15,000. The paradigm shift should be instead of attending all these events, take your money and go to the most expensive one you can and concentrate there.

The second red flag was that this was a ‘Networking’ event. Typically networking evening are just plain bad because everyone is out for something. If someone had truly made it and able to move mountains they ain’t going to no ‘Networking’ event.

Good lord… this introvert needs go home and recharge his batteries.

Link to the event if you are that curious

SPC GIT ‘ER DONE PLAN:

1) Always help people first… there is no social contract for Quid Pro Quo in networking but be sure to be able to define what you are looking for
2) Be selective and go to events where attendees are curated – I believe that it’s better to go to the higher end networking events because of the caliber of participants are so much higher and these people have the abundance mindset and ability to put make things happen.

122 – Apartment Investing with Michael Blank

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YouTube Link: https://youtu.be/1N3wBAwPrfw? sub_confirmation 1

Article Link: Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

Partner with Multi-family Home (MFH) students to close first MFH deals.

Passive Income became attractive after reading Rich Dad, Poor Dad.

Opened pizza restaurants without mentor and lost 95% of net worth after 5 years.

Realize can raise money for Real Estate. Flipped 30 houses in 2 1/2 year but still active work.

Received passive mailbox money for first apartment in 2011 and never turned back.

Combination of doing MFH deals and teaching/helping others is fulfilling.

Stop being a drifter. Drifting keeps us from living an intentional life.

Ongoing experiment to scale business while not lacking quality of deal.

Transition from being focused on generating money to helping people become financial-free.

Do first MFH deal and reduce living expenses to quit W-2 job.

Momentum will build in subsequent deals. But first deal is always hardest.

At peace with things out of your control.

Be sensitive to where your business is to make right investments, such as virtual assistants, salary employees, etc.

Smaller apartment deals (duplex) will kick off law of first deal.

Don’t need $30K to do first deal. Spend on education and raise capital and/or find deals in this seller’s market.

Controlling time is most important resource. Don’t put ladder on wrong building.

Visit www.themichaelblank.com to download free ebook about raising money for MFH apartments.