Is the Real Estate Market Reaching a Tipping Point?

Mike DeHaan: [0:00] And there's several of the small areas around there where they're seeing this trend where you're having a major increase in time on market, but the inventory is still remaining really low. So basically, that's suggesting that there's no one buying, but there's also no one selling. And so, like, what exactly is that going to lead to? And he's like, that's the kind of the the key question. Right? Because that's never really happened before. What's going on, guys? Welcome to today's episode of the collecting keys real estate investing podcast. This is actually episode 150, Dan. Can you believe that? Wow. We've been doing this for a little while. If this is your first time here, my name is Mike DeHaan, and I'm here with my cohost, Dan Austin. And this is Wednesday, the Mike and Dan show, where we talk about real estate investing business and whatever else we feel like for the week. But it's funny, man. Episode one fifty, it's funny thinking back like, we've doing this for about two full years, and we did one episode a week for I think just the entire first year, and then we started doing Yeah. At least. Yeah. Then we started doing two a week, and then we started doing three a week. That's a great way to just pad those numbers really quick on episodes.

Dan Austin: [1:15] Good three. Well, we probably have like 200 if we include the Friday episodes then.

Mike DeHaan: [1:20] Oh, actually you're right. So yeah, because we have our Friday Focus episodes which Those are numbered differently. Yeah. We because we started them, so we weren't sure if we're gonna do them for like ever. So we number them differently. And so there's like we have 60 something of those. So really this is episode like 215.

Dan Austin: [1:37] Dang. And we're still around despite not having any listeners out there. I know.

Mike DeHaan: [1:40] I don't even know why we still make these. Why do we have a team that puts together YouTube videos that nobody watches? I don't know. I don't know. Apparently it's good for SEO. That's what some freaking dork in the social media sphere told me. But I haven't seen any benefit to that yet.

Dan Austin: [1:54] Yeah. I don't know.

Mike DeHaan: [1:55] Now I will say like, our YouTube stuff, actually it's really interesting because compared to like the podcast, our episodes, the listen rate, would say, is very dependent on the title that we put and the subject matter. Right? So anything anytime we ask something that's about cash flow or financial freedom, things like that, those get the most listeners, which makes sense because a bunch of you fuckers out there still trying

Dan Austin: [2:19] to figure that out. It's a broader audience. Right?

Mike DeHaan: [2:21] It's a broader audience for sure. But when it comes to YouTube, it's almost entirely dependent on the guest. So if we have like a bigger guest, their YouTube videos will crush regardless of what the topic is. Yeah. But like that isn't necessarily the same with the audio show, which I think is really interesting.

Dan Austin: [2:36] I don't know why. It's because the audio show, those are our real fans. They're here regardless of what we look like. They're here to listen to our voices, take in the information. They're on the go, they're hustling, they're moving, they're shaking.

Mike DeHaan: [2:49] Yeah. We should We have like several female guests coming up. We should start to see if our YouTube views are like significantly higher than those ones versus the ones that are just, know, three white dudes talking about having money. Yeah.

Dan Austin: [3:01] Right. Yeah. I'm pretty sure that that will hold true.

Mike DeHaan: [3:04] I hope

Dan Austin: [3:04] that I think that theory holds water. If I just look at Instagram and I search how easy it is to find an Instagram following based on how I you did.

Mike DeHaan: [3:12] And female. I mean, pretty privileged, man. It's a real thing. People that are attractive and benefit from that, they will argue with you till the end of the earth that that is not why they exploded.

Dan Austin: [3:21] It's their content. They're like, my fitness, that my fitness page is what's really at, where it's at.

Mike DeHaan: [3:28] No, no. I like, well that obviously that's a vanity sort of thing. But like even in the even in the business space, the people that explode really fast, you're like, yeah, they're good looking person. Like that obviously helps. Yeah. They get a broader audience.

Dan Austin: [3:39] Yeah. They have something you gotta have something unique about your your appearance for sure.

Mike DeHaan: [3:43] Well, that yeah. That's why like Ryan Pineda always has his colorful hair, but he's a good looking dude anyway. But Yeah. The funny thing is is I feel like there's kind of this arc with it. When people start out, you know, and they they're fortunate enough to be an attractive person, right? I don't know what that's like. That's not that's not yummy. Woah. Woah.

Dan Austin: [4:01] Let's not throw that er out there. Let's be careful.

Mike DeHaan: [4:04] That that's not me. But they will they will start to get a lot like a rise to fame from that, and they will argue that that is not why they're huge. And then all of a sudden, you start to see these people that are like really big, and they lean into that even more. So all of a sudden, have like investor girl, Britt, that's like taking pictures in her swimsuit in front of her self storage unit that she just bought. I'm like Right. Come on then. Like, you're gonna rain

Dan Austin: [4:25] The other way, a little bit backwards. But They're just testing. Just test, retest, gotta see what we just gotta see what the audience likes.

Mike DeHaan: [4:31] Yeah. Yeah. Exactly. And you know, just like that at episode one fifty, we just polarized half our audience and lost half of them probably.

Dan Austin: [4:37] Hell yeah. See you. But no,

Mike DeHaan: [4:40] I spent I spent the last week at a in person meetup in Austin with Aaron and Wichistecki, who is from episode one thirty five, you guys caught that one. If you didn't, you should definitely go and listen to that because he is an extremely high level operator. Very smart. In the residential real estate space and like a true entrepreneur. You know, he has like a major foreclosure business that he runs. He owns over like a thousand residential units. He has a software company. He has a bunch of different stuff that he does. He has his total staff count across everything's like over a 100 people. And this is all from somebody that kind of honestly just like figured it out. Like he's gone bankrupt three times. Three times, two times,

Dan Austin: [5:21] several times. At least twice.

Mike DeHaan: [5:23] At least Yeah. And he's on his rise up and he had this inner circle meetup. And so it's always so valuable getting around, like going to stuff like that especially because he kept it pretty small and he kinda like hand selected people that would go that came to the event.

Dan Austin: [5:41] Yeah.

Mike DeHaan: [5:41] And like some of the dudes that are there, like what are we doing wrong? I mean, we had this flipper from Chicago that was there. Know I we chatted with him this morning as well, Dan. But this guy is doing 25,000,000 a year with his flipping business. Like at any given time, he has 30 to 40 construction projects, and he has a crew of over a 100 people. You know, like that's insane. And we're we're over here trying to

Dan Austin: [6:06] trying to

Mike DeHaan: [6:06] figure out how to manage like, if you have two projects at a time, you're like, damn, this is freaking hard.

Dan Austin: [6:10] Right.

Mike DeHaan: [6:11] Maybe that goes back to like the 10 x ing is easier than keeping yourself small.

Dan Austin: [6:16] I do believe that, right? Like I think it's like owning one rental property, it's like the worst position to Owning be 10, much easier, right? So it's, you're right, it's just But you gotta be able to get to that level without going bankrupt, that's the challenge. How do you get from zero to 100? Because everybody obviously can understand that, but it's like the hard work it takes to get there is like, man, it's murky waters. It's not easy.

Mike DeHaan: [6:35] That's so true. And that's something that I've actually been thinking about a lot as I've sort of tried to surround myself with some of these higher level operators and higher level entrepreneurs. You know, we've had some on the show, like going to their meetups, like doing all these A different lot of them talk about like their org charts and like the key players and stuff that they bring in and all these things. And the one thing that never comes up is the fact that because they're already freaking rich, like they have like, you know, $10,000,000 in the bank, they can fucking bring on the $200,000 a year person.

Dan Austin: [7:09] Right. Shit's a lot easier.

Mike DeHaan: [7:11] Right? Or you know, they can they can, like, you know, build a department that isn't gonna be profitable over six months because they just have the cash to do that and they have the money coming in already that they can cover those costs.

Dan Austin: [7:23] Yep. They can absorb the Right? And something where, you know, we can't do that because we're not big enough on some of these things. For sure. It sucks. It's like they call it the messy middle in business, but it's like also the messy middle in life. Mhmm. Like middle age, like trying to figure shit out. Some people figure it out faster and sooner than others. Yeah. It's unfortunate.

Mike DeHaan: [7:40] For sure. And and there's like a you know, it's kind of hard to sort of get over that crest, right? And you either can go down like the successful side, or you can go down and completely fail. And you really are kinda just like playing that balancing act. And then, know, once you get into like the successful realm, stuff kind of really has to go sideways for you to fail at that point if you're smart about it. Absolutely. You know? And that was like Aaron's whole backstory is when he made his first several million dollars, he lost it all because he didn't buy any of the properties that he was flipping. He was just flipping everything. So he had no backstop. So in 2008, he lost all of it. But now since then, he's been buying, you know, like, it's like, he's like every, like, fifth property or tenth property or something, and he's accumulated He keeps. Yeah. He keeps. So he's accumulated this massive portfolio of 800 properties. And he showed us, like, one of his LLCs, and his cash flow for the year from one of the LLCs was, 600 k. Little bit? Yeah. Little bit. And it was it was like, you know, 70 properties or whatever was in that. And I was like, well yeah, you can kinda sustain whatever you want at that point, honestly. Totally.

Dan Austin: [8:41] It makes it a lot easier, but it's fucking hard to get there. Yeah.

Mike DeHaan: [8:45] For sure. It's super challenging, but very valuable experience. I always recommend that if there are people that you wanna be around or people that you wanna be like, know, don't be afraid to pay to go to their meetups, know, or extend yourself to go and be around them just because just like the passive effect of being around those people is huge. You know?

Dan Austin: [9:08] So do you think that Aaron did that to make some money?

Mike DeHaan: [9:11] No. I think he did that to make put himself around some other operators he was to expand his business even more. I mean honestly, even for us, right, we have our instant investor program, which people obviously pay to be in that. But we're putting on KeysCon, which is our big in person event for people that are coming out, that are part of the group, to come out and do some operations And raise

Dan Austin: [9:33] some cash and go to the next level.

Mike DeHaan: [9:34] Yeah. But like, know, people have paid into that cover the cost, but we're not making any money off of it. Yeah. It's literally a net zero because we want to be around the operators that we are helping them grow, and the hope is that as they grow, they will bring us future opportunity. Right?

Dan Austin: [9:50] Yeah. Bring that up because that's I think there's misconception sometimes when people have events like that, that it's for profit. And I think the only people that are trying to do it for profit are the ones that go and bring in the $200,000 speaker and they sell $5,000 ticket, five $5,000 tickets. Like, that's for profit, right? Those those are not always the best.

Mike DeHaan: [10:10] Yeah. Was gonna say honestly the ones that you should be cautious of are the people that have the $300 ticket.

Dan Austin: [10:15] Exactly.

Mike DeHaan: [10:16] And like the huge thing because they're gonna try and upsell you on their stuff.

Dan Austin: [10:19] Yep. Totally. Yeah. Then that is for profit like, but I've been seeing a few of these pop up lately where there's some awesome players, people that I respect that are doing like the the concept like the inner circle. Like, they're not even selling a mastermind or a group or they don't have anything. They're just saying, hey, I wanna put this together. Let's bring some a players together. Let's put some money in the pot so we can do some cool shit while we do it. Because experiences are also what creates memories and also creates friendships and helps network.

Mike DeHaan: [10:43] Mhmm. Totally. And and it's funny because sort of contrarian to that would be like, okay, so if it's not for profit, why are they charging for it? You wanna know the greatest way to weed out people that aren't serious? Ask for money. Ask for money. Exactly. You know, and so yeah, was $3,500 to go to this thing and we had to pay for our own hotel and stuff too. So there was, you know, he probably made a little bit on it, but at the same time, he also covered all of our meals. He had multiple staffs that were working for us like the entire sort of weekend He that we were down took us to a steakhouse in Austin. There's probably 40 people there, and this is like a $100 steak sort of place. Right? You know, paid for the entire dinner, everyone's drinks. I bet just that bill was 6 to $7,000,

Dan Austin: [11:27] if not more than that. For 40 people?

Mike DeHaan: [11:29] Yeah. Probably more, honestly. Yeah.

Dan Austin: [11:31] At least, right? Depending on how how the drinks are flowing.

Mike DeHaan: [11:33] Right? Yeah. I mean, people were throwing them back. Right?

Dan Austin: [11:35] Then $30 scotches out of steak houses on the bottom of the

Mike DeHaan: [11:38] list, Yeah.

Dan Austin: [11:39] It's cheap, you know what I mean?

Mike DeHaan: [11:40] Yeah. Then, you know, then we went out to like a rooftop bar, he covered everything there, then we went out to a club, he was getting people bottle service. Like he's like putting the money back into it.

Dan Austin: [11:48] Yeah. He's reinvesting in his community. Obviously, you're saying he's making that kind of money on just one LLC, he's not doing it for money. No. He's doing it to bring a players together and create a network and create a group of people that can go and do business together or Sharper Steel, Sharper Steel, so he might get one fresh idea. If he gets one idea out of that whole effort for him, he wins, then of course, obviously you know you got more than one idea from that whole thing.

Mike DeHaan: [12:10] For sure, right? It makes it very mutually beneficial. Yeah. The connections were great, but also too, just like he's such a high big thinker with the economy and it was really interesting to, see his perspective on the way the housing market's going, kind of like a deep dive on stuff, and kind of the main takeaway he was talking about is that there's these new sort of micro collapses that are happening within markets, as opposed to like the market as a whole. So we are looking at just like in the Austin area where he's based, and there's several of the small areas around there where they're seeing this trend where you're having a major increase in time on market, but the inventory is still remaining really low. So basically that's suggesting that there's no one buying, but there's also no one selling. And so like what exactly is that going to lead to? And he's like, that's the kind of the key question, right? Because that's never really happened before. And it's funny because you hear that and you're like, well, yeah, we can kind of, like, see that. But he, like, mathematically was looking at that. He's like, these are the trends. But the thing is that was in certain parts of it, but if you look at, like, Austin core, you're not seeing the same thing. Right? They may look at some other places within Texas, and, like Houston as a whole was kinda struggling, whereas like Dallas is like still 2021.

Mike DeHaan: [13:25] Like houses selling in like, you know, two weeks. You know, what the difference is there, I

Dan Austin: [13:30] don't know. Well, the fact that Texas state, so like Dallas could be considered for us like a whole state away, but it's in the same state, right? Yeah. And then whatever industry is booming, I would imagine. What's going on in Dallas, I don't know. Yeah. Sure. I've heard the same thing from other resources too, or other sources that Dallas is a stinking good market right now. Which is funny because last summer, it was just an okay market compared to speaking with the other Texas markets. Mhmm. It's fascinating looking at this stuff, and you have someone like Aaron, and you're sitting there going over to somebody who knows how to really look at the data, has the experience, that's the most thing is like, I file with data, is like, you can make data say whatever the hell you want it to say, but like, unless you have the experience to know what it means, like, it's kinda useless with just staring at it or trying to interpret what other people say.

Mike DeHaan: [14:13] Yeah. For sure, right. That's why like like professors and like politicians and things, like whatever their opinions are on the data are completely fricking pointless because they've never actually they've never actually

Dan Austin: [14:22] done They this know. Exactly. They've never been in business.

Mike DeHaan: [14:25] Yeah. As when they have like an analyst that tells them, but they're still just talking head.

Dan Austin: [14:29] But for sure.

Mike DeHaan: [14:29] Super cool. And he's just so well connected too. So like, we're at our at our dinner, you know, Cody Sanchez. So if you don't know who that is, you've been living under a rock if you're in the business realm. Right. But I, you know, he's she's a personal friend of his. And so she just like came and talked at the dinner that we were at, and like came and hung out with us for a while. And she's, you know, as sharp as she appears on social media, you know. Do you wanna buy a business now? I mean, I would love to buy a business. I just think that just like everyone else, that sort of like is in the influencer space, they make things sound significantly easier than it is.

Dan Austin: [15:05] And Yeah. You know, the interesting thing about that is, and this goes for real estate too, is finding the deals.

Mike DeHaan: [15:10] For sure.

Dan Austin: [15:11] Absolutely. That's the first step. For example, if I had a lead source like I do in real estate, like we have a system built out for a lead source that will let me review deals. Are they all deals I'm gonna take down that come into our CRM? No. Some are my wholesale, some are my flip, some are retail, some are my nothing. Yeah. Same thing with business. Like, if there is a business pipeline, if there is a way to do that, like, I would love to review some of it. That is the code I haven't cracked, and I don't know of joining her mastermind when you get me there. Just saying I don't know.

Mike DeHaan: [15:40] Yeah.

Dan Austin: [15:40] You know

Mike DeHaan: [15:40] what I mean? And I mean, I'm sure there's a way to build the pipeline. The thing that troublesome with me with that whole trend is just like with real estate, you know, several years ago, people start trying to like force these deals because they're oversimplifying the complexity of it. Talked about that a few episodes ago on the Mike and Dan show, but I mean, I'm seeing so many people that are like, oh, I've never managed anybody in my life, and I'm gonna try and buy this business in a industry that I've never even heard of before that employs 40 people. I was like, can't even think of a real estate comparison to that. That's like being like, I've never built anything in my life. I'm going to build a 100 unit apartment complex by myself. Do it. You know? And then that you're right. I'm gonna go swing my own hammer and they're like, oh, well, just find like the guy that works there to go and be your manager. It's like, okay, cool. I'm gonna go and find the guy that, you know, manages the apartment complex across the street and he's gonna come build mine for me. It's like, yeah. No. That's not how it works. No. That's not how

Dan Austin: [16:37] it works. Absolutely right. So but anyway, no.

Mike DeHaan: [16:40] Was just super good experience overall. And if you don't follow his stuff, I definitely recommend that you should because he Totally. He in my mind is like it's like his expertise level. Everyone geeks out around Alex Tremozi because he's very charismatic. His level, Aaron's level of knowledge and just like, you know, the way that he views the world, his operator level is the real estate equivalent of that. Like, he's very, very solid. Totally. So Cool. But anyway, you managed the ship while I was gone, so I appreciate that.

Dan Austin: [17:11] Yeah. Sure. I guess that's what you wanna call it. We got some shit done. Yeah. I think we had some closings last week even. I think we had a decent just, you know, run of the mill week where we probably closed on a couple properties, got a couple under actually, I think we did three, maybe four contracts last week. Yep. Two we almost had a guy get hat trick, which would've been like three in like two days, which meant sick. Yeah. But he didn't, but, you know, it is what it is. But, yeah, we had an overall just kinda like I said, it's great week, average week, run of the mill week. I don't know what you'd call that. Some people would call it exciting, but think I it was just average. It's kinda the worst part about being in business for a

Mike DeHaan: [17:45] while is like sucks isn't that exciting anymore. Sometimes it's average. Yeah. Pretty much you're like disappointed or you're like expectations are being met.

Dan Austin: [17:53] Right. You're like motherfucker, why does this suck? And then you or you're super pumped or it's just like, okay. Are you? Now it's average and it's gonna break, let's break it.

Mike DeHaan: [18:01] When was the last time that we did something in our business that got you super pumped?

Dan Austin: [18:05] Oh, good god. I'm hard to get excited. I'm unexcitable. Yeah. I don't know. Maybe, no, no. Nothing really recently that I can think of.

Mike DeHaan: [18:16] Yeah. On our real estate business, I can't think of anything in particular. Like honestly Yeah.

Dan Austin: [18:21] Like we just sold an eight unit, we made a good profit. Yeah. Like more than most people's annual income. Double the, maybe triple the American average income on a a one year hold. Yeah. You know, but that doesn't get me excited. That would've got me really excited a couple years ago, maybe three years ago, but like, you know, in it, it's not like bragging here, it's just like, it just when it's a business, trading properties is just part of that. Mhmm. Right? You're not like, oh my god, big win, it's expected I guess at this point that we do that, and more often than not, it's disappointing if we don't do something Yeah. That would, you know, give us a a large capital infusion of the business or have a good average, you know, profit and loss numbers, you know, I don't know.

Mike DeHaan: [19:03] Yeah. Honestly, what gets me excited on the business side most time right now is when we have instant investor people that go off.

Dan Austin: [19:10] Yeah. There you go. That's a good point.

Mike DeHaan: [19:12] Like I always get super fired up with that. Like when we have, you know, Brandon that made his old annual salary in like a week. Like that's pretty sick. Yeah. You know? Yeah.

Dan Austin: [19:20] That's dope. That's the fun part of our business.

Mike DeHaan: [19:22] It is for sure. Which is funny because if you look at it on paper, it's like the lowest revenue part is our our instant investor program. But it's definitely the part that I get most excited about. Yeah.

Dan Austin: [19:32] Yeah. It pays enough to curate the group and to to have some opportunity for us to meet these people because they are badasses.

Mike DeHaan: [19:38] Yeah. I mean it goes back to people talking about their why. You know, and after a while, kinda learn how to make money. And even though we obviously wanna make more money, it's like that isn't what's exciting. What's exciting is making an impact, Right? And by, you know, having our instant investor program, helping people sort of figure out how to do this business and do it successfully, that's making an impact on other people, which I think is is very gratifying. I mean, today, we were talking to Adam in Charlotte. And Yeah. That's cool. He's been working with us for a while and he was just struggling so much. Mhmm. And now to like here today that he now what did he say? He has four deals set to close over this next quarter. He's gonna make about $20,000 in each one. Mhmm. That's $80,000 in the quarter he already has on the books.

Dan Austin: [20:23] Yeah. And he went through the whole process and stuck it out with us where I'd be, I think other people, some others like weaker people would have quit by now, but he stuck it out because he said, well, these guys told me that this is possible and he just kept doing it, and he kept doing it, and he figured his shit out, he got better, he honed his skills, and he just kept following the process. And then sometimes, it's like between the individual in this business, and also the market with timing and all that, sometimes there is that. Mhmm. Right? There is that opportunity where you might have to spend like we did several months before we actually made this enterprise profitable. It's not always a quick win. I love, you know, not to beat a, I don't know, beat a dead horse with Alex Tremozey quotes, but in one of his recent podcasts he talks about like, one of the worst things that can happen, like in cold calling, is you get a sale on the first call. Is it? Because if your average cold call, you gotta call say 5,000 people is the number he used, and you got number one on the first call, you gotta call 4,999 more people before you could potentially get another one, but what if that next one was the 5,000 called away?

Dan Austin: [21:23] So not only do you have to call 4,999 people, you gotta call another 5,000 people on top of that to get deal number two. Uh-huh. And then that's where most people are gonna quit and give up in that time, and that like suit, that holds so true in this business, where you see these months that go up and down, like you can have that, where like, hey, man, it's a law law of averages, it's a numbers game, where you just kinda hit that cycle and you're in a funk, and then if you stick it out, you're gonna get back on top. But if you quit in that little low spot, you're losing, right? You're giving in.

Mike DeHaan: [21:51] Yeah. Absolutely. And I think that's a big reason that so many people that started real estate late twenty twenty, early twenty twenty one, even if they made some money, they have now failed and lost that money or they've quit because they did not start operating their business in an average market condition. You know? Like, I think the benefit that you and I have is, you know, I started flipping houses in 2018, and you started buying stuff back in 2016. And all through that time, we were looking at stuff. So we had kind of like a bearing about how hard it was to find opportunities.

Dan Austin: [22:20] Yeah.

Mike DeHaan: [22:20] And now, even when, you know, we work with different people or we talk to other investors, they're always like so picky about deals because they have this image of 2021 and how you could kinda make money with like, where you could buy all these nice properties. Where you know, you and me were like, bro, we used to have to squeeze stuff out of these shitholes. Yeah. That's what you had to do.

Dan Austin: [22:41] Yeah. Shit wasn't doubling in price No. And you just threw it up on the market and made a shit ton of money. Yeah. Like it was a little bit struggle.

Mike DeHaan: [22:47] Yeah. A lot more struggle. For sure. But it's But I always get fired up with that, it's just so fun to see and I'm excited to keep growing that over the next little while too. For sure. Yeah. So I know you wanted to talk about a hot topic on your mind since we are approaching the end of the year and this is something that so many people are looking into.

Dan Austin: [23:05] Taxes, baby. Taxes. Our favorite topic. Yeah. And that's why we invest in real estate, think. I don't know. That's what some people invest for. I think it is definitely a benefit, but maybe not the only benefit.

Mike DeHaan: [23:15] I would say it is one of the main benefits that people with no fucking money focus on for some reason.

Dan Austin: [23:20] This is true. Like, let's just say this public service announcement, if you're poor, pay all the fucking taxes you can because guess what? Then it's your money. It's your money, and when you're rich, you don't gotta worry about paying taxes on that money again. So pay your taxes while you can because it's a lot easier. Worry about the advanced tax strategies when you have to, and it's gonna save you money. And the one thing that I wanna talk about is depreciation and cost seg, because depreciation is one of the things that saves our bonds at the end of the year when you own properties, and this is where owning assets, you know, depreciation's a big part of the tax benefit on those assets, especially if you're flipping properties, and you're wholesaling properties, and you're doing this full time as a real estate professional, because you can then take those tax benefits and use that to write off active income. Otherwise, you are stuck just like writing off your cash flow, right, from your rental properties, because that's passive income. Depreciation's considered a passive loss. However, like I said, if you're a real estate professional designation, go talk to your CPA about it, you can write off all your other income.

Dan Austin: [24:18] And in some years, you can do really good with that because of a lot of acquisitions, a lot of capital improvements, or whatever types of improvements you're doing in your properties, or you can show a loss, but you've actually increased the value of the asset. So for example, say you spent, I don't know, there's some thresholds of what you can spend and what you can expense, all that sort of stuff. But say you improved a property by spending $10,000 on it, the value improved $30, well you get to write off $10, but you just made technically $30 or $20 net in value, right? That's just one way to think about these taxes. But cost segregation, I've been seeing a lot, like when I first started learning about real estate, cost segregation was relegated to dudes that were buying $30.40 unit apartments. Like nobody spent the money on a cost seg study because it costs so much, and if you don't know what a cost segregation study is, literally where they go in, like a cost seg engineer goes in and basically counts all the outlets you have, counts the square footage of carpet, the walls, the windows, because all of those pieces, there's actually an IRS tax code. All those pieces actually have a different lifespan than what you typically get. Like, if you go buy a single family home, it's just twenty seven and a half years. Say you paid $200,000 for this house, take out the land is $50, so you got $150,000 in improved land. Divide that by twenty seven point five years, that's how much tax benefit you're gonna get each year.

Dan Austin: [25:35] So meaning that if that number was, say, dollars 1,000, you could write off your income a thousand dollars at the end of the year, right? So you made a 100,000, and you had a thousand dollars in depreciation, now your taxable income is 99. It's not like you get a thousand dollars back, it's just reducing your taxable income. For sure, right.

Mike DeHaan: [25:52] Right.

Dan Austin: [25:52] Yep. So the idea of this cost seg engineer or cost seg study is that they're gonna go into the building and they're gonna break it apart into different segments, so then some of it is depreciated over five years instead of 27.5, so you can accelerate the depreciation. You're not getting extra depreciation, you're accelerating it to an earlier phase, and the idea being is if you're always gonna ten thirty one, kind of the mantra of like ten thirty one till you die, then you're never gonna pay taxes on it, right? Because what happens when you sell a property that you've depreciated, you have to do what's called a depreciation recapture.

Mike DeHaan: [26:22] Meaning,

Dan Austin: [26:24] basically, if you depreciate a property, say you bought a property again for $200,000 and you depreciate $100,000 of it, you have to pay taxes on that $100,000 you were able Yeah, to depreciate

Mike DeHaan: [26:36] when you sell that property, you're saying

Dan Austin: [26:37] When you when you sell the property on the exit, exactly.

Mike DeHaan: [26:40] Yeah. So basically, I guess, put that in the explain like on five version. The IRS lets you not pay those taxes for a little while. It gave you like a benefit, and now that it's, you sold the property, they say, hey, you remember how we let you avoid those taxes for the last little bit? Now you gotta pay that to us. We basically gave you like a little bit of a loan, right, from as far as the tax man's concerned, and now they want their money back with, you know, even additional cost as well.

Dan Austin: [27:07] Right. And so the yeah. So the interesting about this is like Mike and I have been looking at this just loosely. So we have a six unit. We're like, hey. Let's do a cost seg study on it. Cool. Good referral from a good friend. Like, I think the guy's legit. Like, now they're all with him. Right? I I think he's runs a good company, all that sort of stuff. But as we looked at it and dove into it, like, talked to our CPA about it, which I think everybody's gonna recommend talk to your CPA about this, he kinda broke it down into different terms for us to like, hey, here's something to think about. Like, not telling us not to do, but here's something to think about. One, the cost seg study side of things, it's like, oh, okay, well they benchmarked you at like the highest tax bracket. Because of course, from a sales standpoint, that makes total sense, right? You know, benchmark at the highest tax bracket because it's gonna show the best cost savings, and what I mean by that is tax avoidance. Mhmm. So if you're paying 35% taxes on all of your income, then basically, if you were to save a $100,000, that you would write that off. So basically, you're writing off a $100,000 from your cost seg study a year, or tax benefits, I should say, times that by 35.

Dan Austin: [28:09] That's $35,000 in actual tax save. Okay. Because of your tax bracket. Yeah. Well, in reality, most real estate investors should not be hitting that 35% tax bracket because you have a lot of different assets and depreciation and tax loopholes that you're able to use anyways before you get to that point. Yeah. That's a pretty You have to have a pretty high income if you're already in a position to start doing depreciation

Mike DeHaan: [28:31] on Yeah. Your For sure. So I guess basically the end of the the key point is with this, and this is why I have the email from our accountant pulled up. As he put it, he's like, if you're not in the maximum tax bracket, okay, you're actually doing yourself a little bit of a disservice for the by like trying to like pursue this accelerated savings because you are eating eating up like the future savings. Right?

Dan Austin: [28:58] Okay.

Mike DeHaan: [28:58] And then when they go to do the tax recapture, when you go to sell the property, that's actually taxed at a higher rate than capital gains tax. 10% higher. 10% higher. So what can ultimately happen is he put in this case, he's like, let's say that you go to sell the property in three and a half years, basically the amount of money that you would be saving, you're gonna be giving the vast majority of that back, right, if you're not gonna be 10 31 on And the so the point with this whole thing is this is such like a common trend right now. That's what I would call like small time real estate investors. Small time being like, you're not in the highest tax bracket, which is very high income, or the highest tax bracket right now. Is it like 500, 600,000 plus?

Dan Austin: [29:38] It's gonna be in that, I think in that 35% tax bracket, you're probably in

Mike DeHaan: [29:42] the 4 hundreds. 400 plus? Okay.

Dan Austin: [29:43] I would I'll look it up while you talk.

Mike DeHaan: [29:45] But either way, if you are doing regular depreciation in your properties, you know, you're look at the 75% of your rental income, all those sort of stuff that people do. Most real estate investors are not going to have that in like actual bottom line income to the IRS. And so what ultimately what they're doing is they are trying to pursue this tax benefit that actually is going to be a detriment to them in the future. When really like you need to be making an extremely large income to be pursuing these this tax depreciation. See the maximum benefit of this. Yeah. Otherwise, you're just wasting a bunch of time and money or giving up like future benefit for if you do have a bigger year, it's like they kinda save not a lot. And I think that's the whole point that we've kinda went down a weird rabbit hole here, but is like it's one of those like 1% details that people, in my opinion, sort of waste time pursuing. I will say, I feel like there is an industry behind this, that they are heavily trying to sell this to real estate people because the tax depreciation folks do these studies. They charge a hell of a lot of money to

Dan Austin: [30:47] do They're it, not super cheap.

Mike DeHaan: [30:49] So they are heavily incentivized to be like, yes, you need to save all this money on taxes. When really if you're not like making $500,000 a year plus, bottom line, like after all of your expenses and everything

Dan Austin: [31:00] else Yep.

Mike DeHaan: [31:00] You're not really benefiting that much if you look at like the long term. Like you might in the immediate, it might feel good. But if you look at what you've actually done to like your potential for deductions over the next number of years, you're kinda shooting yourself in the foot, honestly.

Dan Austin: [31:13] Yep. If you're married filing jointly, the 35% is four sixty two K. And the 37% is six ninety three. Mhmm. Those are thousands of what you gotta make to be in the top tax brackets. And I think the point being is like, if you are in those tax brackets, you should absolutely be looking at any tax benefit you can't, because you're starting to pay a shit ton in cash, especially if you have a state income tax on top of that. Yeah. California, if you're at that top tax bracket, you're paying 50% taxes for sure. So definitely look at that, but to your point Mike, is like, just because other people in real estate are talking about this, and just because other people are doing it on their single family homes, and other types of strategies with the cost seg, doesn't mean it's a right fit for you, and you should definitely look at it because it made because you might be for me, I always hope I'm gonna make more money in the future, and that, thus my tax bracket's gonna go up, because a, I'll be making more money, and b, I have a strong belief that government will always increase taxes. Yeah. So, that being said, that's why I said, if you're making a lot of money, or you're making less money today than you believe you will tomorrow, pay the taxes while you can Mhmm. So that you don't have to. Think about it in a long term strategy, because like, if you're in like a 10 or 15% effective tax rate now, pay capital gains on shit, know, do whatever now. Because when you're in the 25 or 35% tax bracket, that's when paying taxes really starts to hurt. For sure.

Mike DeHaan: [32:27] I think it just kinda goes back to, I have this really strong belief that when you're trying to get rich, you should not be listening to what rich people do and copying them exclusively. Right? Like, and this is somewhere where I think people get lost. I think like, oh, because Brandon Turner or you know, Aaron Mouche Staggi or whatever needs to do this depreciation. That's what I had to do as well. Really, it's like a 1% issue. It's like I remember there was this whole thing for a while back when BiggerPockets was like topped out and Brandon would be like, I, you know, I need a 15% cash on cash return on my properties for it to be worthwhile. And all of a sudden you have all these people who have no money.

Dan Austin: [33:05] Who?

Mike DeHaan: [33:06] Right? And they are going and buying these single family homes for a 15% cash on cash return. And then it's like, that's a great way to just lock up your capital and never get anywhere. When, you know Right. If he can do that, because he already has millions of dollars. So he is parking that money and looking to get a 15% return. When you were trying to turn your $100,000 savings into millions of dollars, you cannot be satisfied for a 15% return. Right? You need to go and and look for a 100% return. So, like, you know, three x, four extra money. Otherwise, you're never gonna get anywhere. And this is kind of like a similar sort of thing. It's like, is it worth giving up all of your future tax benefits to try and save, you know, the 40 k in taxes you're gonna pay this year? Or should you save that so that when you make a million dollars in a couple years, you can save 300,000? Right? Right. You know, it's just interesting to sort of like dive into that because again, it's against the conventional wisdom that I think people are throwing out there right now.

Dan Austin: [34:01] Yeah, absolutely. You gotta make decisions based on what's good and right for you. You know? I always talk about, you kinda to add to your point is like, when you're growing your wealth, need better returns because you don't have as much money. Like that's just the bottom line. And to get better returns, you usually have to hustle, and you just have to work harder. And that, there's no way of getting around the work hard thing. Like, that just has to exist, especially in this business, as you're finding your deals, as you're getting your lead flow, as you're building your portfolio, as you're learning to flip houses, like, you just naturally are gonna take a bigger risk, and you should take bigger risks, because the distance you have to fall, like the loss of a $100,000 is a lot less than a loss of $10,000,000, right? Yeah. Lose it now before you get big.

Mike DeHaan: [34:41] Yeah. That's definitely true. I think just the biggest sort of takeaway is like, just because everyone else is doing something doesn't mean that it's the right thing to do. Nope. You know? So always make sure that you're analyzing your own situation. Whenever there is something that's very popular, be a skeptic of it. Like, you know, question it, see if it's actually true, or if everyone else is just trying to keep up with the Joneses because that's probably true. Whereas, like, everyone right now who is obsessed with fucking sub two, which is only, you know, 1% of deals out there, but is everyone that thinks that that's only way to move forward? And you know what? You should be a little bit skeptical of that at this point because Yeah, dude. That doesn't make any sense. Anyways, alright. Anything else you wanna say before we wrap up here, Dan?

Dan Austin: [35:26] Nope. I'll get off the soapbox. I mean, sorry sorry listeners. Hopefully that wasn't too hopefully that was informative.

Mike DeHaan: [35:31] Hopefully that wasn't the most dry, horrible thing that you've ever heard.

Dan Austin: [35:35] Well, it's taxes. Right? I I'm actually literally getting ready to write a check to the for quarterly taxes, so I should be able to bitch a little bit. You have to pay quarterly taxes? You should. I do. But

Mike DeHaan: [35:46] I don't make any money.

Dan Austin: [35:48] There you go.

Mike DeHaan: [35:48] I'm a real estate professional.

Dan Austin: [35:50] So There

Mike DeHaan: [35:51] you go.

Dan Austin: [35:51] Mike has been doing cost seg this whole time while we're talking shit about it.

Mike DeHaan: [35:55] Yeah. Right. Yeah. I'm over here emailing my guy back. It's like cancel that cost seg.

Dan Austin: [36:00] Yeah. No shit. Yeah. Fuck.

Mike DeHaan: [36:03] So anyways, guys, well, thanks for listening to this show. We appreciate you all. And if you really wanna do us a favor, you should share this with anybody who might find it interesting. Or as you know, interested in real estate or wealth or whatever, that's just a great way for us to help grow anything. The one thing that I've come to find is that the best marketing is referrals. And, you know, we don't really like pay to market this thing anywhere. So if you can refer this to other people, that'll help set a ton. We really appreciate it.

Dan Austin: [36:29] For sure.

Mike DeHaan: [36:30] But besides that, you guys want to ask us any questions or you wanna tell Dan that he's a fucking idiot with his Please. Accelerated depreciation thought, you should, hit him up on Instagram at investor man Dan. And then if you want to message me and let me know that you think Dan's an idiot, you can do that at Mike underscore Invest, and I would also appreciate that. And I will let him know and pass on

Dan Austin: [36:48] the message. Just publicly put me on blast.

Mike DeHaan: [36:51] And it's a it's a questionable topic. But, anyways, guys, thanks so much for listening, and we'll talk to you all next week.

Dan Austin: [36:56] See you.