Dan Talks About Taxes and Why He Loves Real Estate

Dan Austin: [0:02] Welcome to the collecting keys Friday focus. Hey there. Welcome back to another episode of the collecting keys Friday focus. And if you're new here, these are the episodes where Mike or I break down a specific topic or just talk about something that's top of mind for us in our business throughout the week. Today, I will be your host, Dan Austin, also known on all social platforms as Investor Man Dan. So if you're not following me already, go and hit me up. I'm primarily focused on Instagram, but I'm on all the other platforms, including Reddit surprisingly. Anyhow, today, I actually wanted to answer a listener question. I got a DM on Instagram from a listener that asked me, what would I invest in if it wasn't real estate? Like, if I couldn't or wasn't investing in real estate, what would I invest in? And my short answer is, I wouldn't invest in anything outside of real estate, because I truly do believe it's one of the best, if not the best investments you can make out there. And I'll caveat that with I do invest outside of real estate. I have some brokerage accounts and some retirement accounts that I had before I started investing in real estate, and I continue to trickle money in there. It is a minority share of my resources that go towards there. The lion's share of my resources do go to real estate investing.

Dan Austin: [1:12] I would also invest in growing a business, which I do, which is the business, my real estate business. However, I would look at other opportunities if they were presented to me. So yes, I would look at other things. But given limited funds, I would focus my efforts on real estate. I'm gonna spend today's episode telling you why, but one of them is probably the most timely reason, because we are in early February, and hopefully, if you made some money last year, you are getting all your paperwork to your accountant, and getting your taxes filed on time before you have to file an extension. And if you're like me, you've got just a mess of everything, and you're trying to get it all bundled up nicely and shipped off, so you can hopefully forget about it until your accountant tells you how much tax to pay. Anyhow, it is truly a great benefit, and you've probably heard about tax benefits. If you're a newer investor, you may not have fully grasped that. But the tax benefit that comes with real estate typically, is the depreciation. The depreciation from real estate is basically, if you go and buy a property, say it's a $100,000, without including the value of the land, you gotta include just the value of the actual property sitting, the the assets sitting on the land, you divide that by twenty seven point five years, and that gives you how much depreciation you can write off per for that property.

Dan Austin: [2:31] Why is it twenty seven point five years? I don't know, but that's what the government says your house should last, and you should be depreciated over twenty seven point five years on average, And so that's what you get. So you get that value to write off towards your passive income. Now let me stop here for a second and just let you guys all know, I am not a tax professional. I am not an accountant. I'm not a tax adviser. I actually don't know what I'm talking about, and you probably shouldn't listen to me. I'm just gonna regurgitate everything that I've learned over the years of investing that I use for myself. Anyhow, back on topic here. That depreciation can be used to write off your passive income. So say you get $10,000 a year in depreciation from your property, and you cash flow $10,000. Well, you can take that 10,000 in depreciation, write off that passive cash flow. You literally made $10,000 and don't have to pay taxes on that. Now scale that up. Say you get 10 houses that cash flow $10,000 a year, and you get $10,000 a year in depreciation per house, or you're in passive income, that depreciation wipes that off, zero tax liability, whatsoever. That to me is really cool, because not that I don't believe that we should be paying taxes, however, I do believe you should try to limit to your best of your abilities to pay taxes, so that you can grow your net worth, so that you can grow your assets over time. It just makes more sense to not have to have this little tax leak going on, if legally you don't have to. So the the next the next big thing about taxes, which is like the level two point o, is the real estate professional, and I've talked about this on the podcast before. Unfortunately, for most people that work at w two, this is going to be challenging for you to qualify as a real estate professional, but it is possible. I'm gonna go over a couple high level things about the real estate professional, and then we'll just kinda pivot away from this because it can get complicated quickly.

Dan Austin: [4:27] Let's say, to qualify, 50% of your working hours have to be towards real estate. That means that if you work a full time w two, which I would consider, I'm not saying the IRS does, but I do consider that two thousand eighty hours. You need to work two thousand eighty one hours in real estate, and you need to be able to prove that through documentation, and she should probably be able to prove that you worked two thousand eighty hours in your day job as well. You should probably have like very specific written documentation on that. You need to have performed at least seven hundred and fifty hours in real estate. So if you don't work a full time job, at least seven hundred fifty your hours have to be dedicated to real estate, and you have to be able to prove that. And then you need to be proving that you're materially participating in rental activities, and there are seven criteria for what that means, and I'm not going to list them all, because that gets really deep and it's boring. So go and look this up, and I promise you, you'll you'll understand it it it is somewhat simple. And there is a hack within that material participation. There's a little nugget for you get for you short term rental owners out there, if you do have full time w two jobs, and otherwise wouldn't qualify for a real estate professional, you can within the confines of those short term rentals, if you meet the material participation requirements.

Dan Austin: [5:37] Anyhow, the cool thing about this, is if you do qualify as a real estate professional, you can now take that depreciation and other losses, such as things that you would be considered a write off, whether you're paying, you know, maintenance and taxes and interest and all these things that add up as leaks outside of your system that are good in a way. Basically, can show that if you had a loss against the property, so say, for example, your one rental that had $10,000 in depreciation, and you had $2,000 of typical maintenance, that's $12,000 of losses, and you only made 10,000 passively. There's this additional $2,000, which would normally have to carry forward in the next tax year, if you couldn't use that as a write off on your passive income, but that extra $2,000 would now can go to an active income. So say you're flipping houses as well, you can reduce your income by $2,000. And so you start seeing the scale of that, where you can not only write off all of your passive income, so you just made a $100,000 last year and you didn't pay taxes, and then you flipped houses and made another 100,000 and maybe only had to pay taxes on 75,000 of that. That's pretty incredible, and that's pretty powerful, and that's why people talk about tax strategies as being one of the best reasons for real estate investing. But, if you're like new, and you're like, dude, I don't have 10 houses, and yeah, maybe I'll write off a little bit of this, I can't be a real estate professional, like, why else is this the best investment? Why are you telling me this, you would not invest in anything else? The next asset, which I mean by that is you can buy a rental property with a down payment, which is much smaller than the amount that you're going to use to get a loan for buying that asset. So say you have $25,000, and you go and buy a $100,000 house, that $25,000 goes to the bank, the bank gives you a $100,000 to buy the house, you have $75,000 loan with the bank, 25,000 equity, you literally were able to acquire a asset that was four times the amount of money you had in your pocket, which is awesome.

Dan Austin: [7:40] Nobody else is going to let you do that. Can't go to a stockbroker and say, hey, here's $25, give me a $100,000 in stocks. You can't go to a bank and say, hey, can you loan me a $100 to go invest in stocks, I'll give you 25 back. It doesn't work that way, that's why real estate is so cool, because of leverage. And one of the cool things about this leverage is that the interest that you pay is actually, you can write that off. So say you have a $1,300 a month mortgage payment to your bank, and a thousand of that is interest, that's $12,000 in interest expense, that is just a write off. So when you rent that thing for, you know, $2,000 a month, half of that is already tax free. Right? And and you're not getting in your pocket, it is going to the bank, but it's like free. Somebody else is paying that interest and that $300 a month every month that you don't see anyways, that doesn't feel like cash flow, that's paying down your debt service, that is real money that you're basically getting for free because your tenants are paying the interest required for you to have that money. The other cool thing about leverage, and I'll and I'll get off of this topic here, is that when somebody is paying down your note, paying down your loan for you every month, your asset is also on average every year increasing in value. Lately, it doesn't feel like that, but I promise you, in five years, you're gonna look back and say, real estate real estate over that period of time grew in value. As that leverage gets paid down by your tenants, and as your asset grows in value, it's kinda like thinking about the top is growing and the bottom is shrinking, and in between those two those two bars is a bandwidth that is called equity. And as you grow that equity large enough, Haas, which your bank requires you to have as equities, usually 25%, as it grows above that, you can go and do a cash out refinance, and hopefully, you do it and get more favorable rates, so your cash flow for the property stays the same. But if not, either way, you still wanna make sure cash flows really well and and in a way that you feel comfortable with.

Dan Austin: [9:34] But you can take that cash out, that money from a cash out refinance and put it in your pocket and spend it as you will. You can go buy a Ferrari if you want to and that's fine. It's not like you're getting it free. You still have to pay the debt back to the bank, but your tenants are paying that for you. You could also do that cash out refinance and do what I do and go and buy more cash flowing producing assets, like real estate. And so that's generally what I'll do, and it helps me monitor my return on equity, as well as my return on investment on all these properties. Anyways, I'll stop talking about leverage, and I'll close this out with just a couple other topics about why I think real estate is great. So we talked about the tax benefits. Hopefully, you can become a real estate professional at at some point in your career, and start really reaping the best rewards of the tax benefits. If not, they're still pretty good, just as writing off your passive income. The leverage is amazing. We just mentioned appreciation, and as that value grows of that asset, like, you are reaping the rewards of being an invested investor in real estate, that is super cool. And then the last one that I always like to talk about is cash flow, that is revenue that you can put in your pocket or you can reinvest. And I I like to look at cash flow as a defensive metric, and I tend, lately, I tend to invest in more appreciating assets, and worry a little bit less about cash flow, and that's because I do have a portfolio that cash flows well enough that I can absorb some months where I'm breaking even on cash flow for properties because of maintenance issues or something, because I'm risking it within my profile as an investor. I'm risking it for the large appreciation at the back end of real estate in some markets.

Dan Austin: [11:09] Not all markets provide that. Typically, your Midwestern markets don't provide that same appreciation as you would see in some of your coastal markets. So, anyway, that's my explanation for why I would not invest outside of real estate given limited funds. So to the listener to ask that question, I hope this helped you. For all the other listeners out there, I hope this wasn't too too into detail. And if you enjoyed it, please hit me up on Instagram, investor man dan, and give me some insights into this and what you thought. If you like what Mike and I are doing, please go and share these episodes. That's how we grow the podcast. That's how we continue to be able to produce these episodes for you. And give us a five star review, we will send you a t shirt, if you give us a five star review and screenshot your review, and send it to me in the DMs at investor mandan or mike at mike underscore invest, We will send you a free Collecting Keys t shirt, ship it out to you wherever your address is, so no worries there. If you wanna learn more about what Mike and I do on finding off market deals, go to the collectingkeyspodcast.com, Click in the upper right corner. There's a blue button there that says become an instant investor. Look at our instant investor group there. That's where we coach and teach people how to find and source their own off market deals. Other than that, I will catch you all next week.

Dan Austin: [12:21] See you. Thanks for listening to this collecting keys Friday focus. Be sure to subscribe wherever you listen to your podcasts.