Tax Moves That Could Be Killing Your Real Estate Profits

Mike DeHaan: [0:00] Really quick before the show starts, in case you haven't heard, we have a growing community of investors called the scale community, which is full of people learning to make massive income with their real estate businesses so they can reach financial freedom a little bit faster than building a rental portfolio solely over time, because honestly, that takes decades. And who has time for that? So if you're an investor who is serious about growing and creating a scalable business without needing to be a slave to it twenty four seven, then go to collectingkeys.com/scale and apply. And if you're a good fit, we would love to have you join the community. So, again, collectingkeys.com/scale. Go ahead and apply, and we'll see if you're a good fit. It's highly possible that you sell a property, especially if the values have come down, and you now are going to have to owe more in taxes than you're even pulling out in equity on the deal. What is going on, guys? Welcome to today's episode of the collecting keys real estate investing podcast. Today is the off market operator show, and I am your host, Mike DeHaan, here with my cohost, Dan Austin and Dylan Cook. Hey. On these particular episodes, we talk about real estate investing business and whatever else we feel like for the week. If your it's first time collecting keys, this is a show we like to try and help you learn how to make massive income, not just passive income with your real estate business. So talk a lot about, like, making real money with real estate, not just like, I don't know, saving up and buying some boring single family that you sit on for fifteen years, and hopefully, it goes up in value. But it might not, and you might get wrecked when a tenant comes in there and starts breeding copy borrows in the living room.

Mike DeHaan: [1:35] So learn about how to make enough money so you don't have to realistically stress about that because you're rich, and that's cooler than having much capacity to come anyway. Right on, guys. So we are I guess this one will be coming out. It will be the first week of December. Past couple of episodes, we've had some discussions around Bitcoin, some crypto, some different things. I've been there's been a little bit more, with that. It's not

Dan Austin: [1:58] gonna be the topic of the

Mike DeHaan: [1:58] show today, but it keeps people are just riding on that train. Dylan, I know you posted something in our little Slack that Grant Cardone is now the ultimate shill master.

Dylan Koch: [2:08] Yeah. I mean

Mike DeHaan: [2:09] Leaning into this as well.

Dylan Koch: [2:10] Stay with Grant Cardone, you know, as you wish because he'll he'll just do anything and we'll make him money. But he basically said, like, he was gonna start a a real estate slash Bitcoin fund. Like, think of something that has a 100,000,000 in real estate and 20,000,000 in in Bitcoin. And I tried to sign up or see what it was on his website, and there's really no information. But I think he's just riding the wave of the recent price appreciation. But there was another guy on CNBC from New Market Capital, and he basically what they deemed battery finance. And the whole purpose of this is kind of the same thing where they plan on combining real estate and Bitcoin as collateral, where you might now have a 50% LTV on your building or your apartment building or a house, and then you just put up the other 25% or whatever it is, 100% to get it to that with Bitcoin. The kicker here is that you have to hold it over at least the Bitcoin for four years. And the reason for that is that cycle that we've talked about on previous shows that we won't get into now. But I just think it's something that just keep an eye on. I think the next five to ten years will be interesting when you try to combine these really the combination of real estate, Bitcoin, hard assets into one product.

Mike DeHaan: [3:19] Yeah. I freaking hated that clip that you sent to that, by the way. With, like, that is, like, mainstream news with the guy, like, shouting, like, clarifying over and over again. It gave me, like, PTSD of, like, going to my grandparents' house as a kid where they always have Fox News on on max volume for some reason. And he's like,

Dan Austin: [3:37] so you're going to tell me.

Mike DeHaan: [3:39] And I just over I was like, Jesus Christ. Can we turn this off, please?

Dylan Koch: [3:42] It was very animated. Andy seemed really dumb. He's asked the same question like three times in a row.

Dan Austin: [3:47] Like three times in a row? The guy's like, yes. Yeah. Yes? Bro, it's because they're selling something, dude. It's like QVC, man. You gotta get the guy inside.

Mike DeHaan: [3:55] It's like Billy Mays. Right? He's like, you're telling me that the Sham no. ShamWow guy was different.

Dan Austin: [4:01] That's Who's the who's the Oz guy, the OxiClean guy? OxiClean was Billy Mays. You're telling me I could shit my pants and clean it with one scoop of OxiClean.

Mike DeHaan: [4:09] Yeah. And everyone's like, man, his energy is crazy. And then sure enough, he was coked up on an airplane and fucking fucking broke his neck.

Dylan Koch: [4:14] That's why. Yeah. That's why he

Dan Austin: [4:15] shit his pants. That's why he needed OxiClean, dude. He was shit his pants all the time. Coming off that crack cocaine.

Dylan Koch: [4:21] Well, I

Dan Austin: [4:21] don't know.

Dylan Koch: [4:21] I'm gonna transition that, Dan. But anyway, we're getting towards Speaking of shitting your pants, dude. We are transitioning towards the end of the year, which typically has, you know, tax implications whether you're a buyer or a seller, especially in real estate, you're a long term landlord. And Mike, you sent us an interesting Reddit article that kinda goes in several different directions, but go ahead and give us a synopsis.

Mike DeHaan: [4:40] Reddit article. Tell me you're not

Dylan Koch: [4:42] a Redditor at the home. Tell me you're

Mike DeHaan: [4:43] not a Redditor. Send me a Reddit article.

Dylan Koch: [4:45] Yeah. Thread. What are the what is the right thing?

Mike DeHaan: [4:47] What is this? The Huffington Post?

Dan Austin: [4:48] Let's just all say it. Reddit's stupid. Nobody likes stuff

Mike DeHaan: [4:52] for money. No. The Reddit's

Dan Austin: [4:53] a great platform. No. Reddit is okay. Reddit is as good as Google's AI searching for factual information.

Dylan Koch: [4:59] Which means it's not good.

Mike DeHaan: [5:00] Oh, totally.

Dan Austin: [5:00] So You gotta be careful. You gotta be careful.

Mike DeHaan: [5:03] One of the best analogies I've seen with Reddit is you realize how little most people on Reddit know when you are reading about a topic that you actually know a lot about. Right.

Dylan Koch: [5:14] That's so true, though. Yeah.

Mike DeHaan: [5:16] Yeah. You that's everything. Totally, dude. The same with, like, social media and everything else. But the thing that I do like about Reddit, though, is it's it is a long form discussion style of thing. So people do actually have detailed discussions in there that aren't like Facebook where it's everyone's grandma that's involved is kinda just like shouting. And it's unfiltered content.

Dan Austin: [5:34] Right? Well, allegedly. I think there's bots

Mike DeHaan: [5:36] and shit on like everywhere else.

Dan Austin: [5:37] For sure.

Mike DeHaan: [5:37] But anyways, so we wanted to go on this topic around kinda like tax implications and selling properties and a lot of different things that people are going to be exploring over the next year, especially the tax piece. Because you get into the end of the year, a lot of people try to do bonus depreciation. They're worrying about their taxes for the year even though they haven't made that much money. And for some reason, that really just, like, lacked on taxes. But from this post, when I when I shared it with these guys, this was earlier this week, mean, it'd been around post had only been around for, I don't know, a couple hours at that point. But, basically, the whole premise is this guy bought a property in 2020. His intention was to use it as a short term rental, Airbnb, and then to use it as his own personal property for fifty to seventy days per year. And the basic numbers that he had was he bought it. What'd he say? And, actually, no, he gives, like, the total numbers on it. But, basically, as it went out, with the basis, considering his tax, depreciation, everything that he got into it and his money that he put into the property, he was going to be posting a $40,000 loss over five years. Not bad. And a big part of this was because of the accelerated depreciation that he took at the advice of his accountant to sort of, like, reduce whatever his income was.

Dan Austin: [6:53] What does the accelerated depreciation look like right now? Just for the audience.

Dylan Koch: [6:56] It's 60% this year, if that's what you're asking.

Dan Austin: [6:59] So you could take up to 60% of the actual asset value and push that into one year for depreciation?

Dylan Koch: [7:05] Correct. Correct.

Dan Austin: [7:06] So if you have an asset valued at a $100,000, like, that's your basis. So typically in real estate when you buy a property, they remove the land. Correct. So you can't depreciate land. So say it's a $100,000 asset value outside of land, you could take $60,000 and write that off of your taxes as a loss, paper loss, reducing your income.

Dylan Koch: [7:27] Right. And typically for residential, if you don't do the bonus, it's over twenty seven and a half years. But because of the the tax code, how it's currently written, who knows if that'll change or not, 60 in 2024, forty percent 2025, twenty percent 2026, and

Dan Austin: [7:43] then it gets phased out. Okay. And that was part of the Trump whatever tax Yeah. Blah blah blah that phased out

Mike DeHaan: [7:48] over time. Okay. But the point of this discussion is this was something that we saw a ton of in 2021 and '22 because everyone that was in real estate was making a lot of money. Mhmm. And so in GoBundance and other groups that were in, we saw this massive wave of these accountant tax specialists, whatever, that would come out offering these services to do these cost segregation studies, etcetera, depreciation, all these different things, which was very expensive too. I inquired with one of the guys because I was curious. He wanted, like, $12.

Dan Austin: [8:18] My guess is that there was, like, a a tax accountant guru that, like, sold a course, like a like a pay Smorby esque thing, and everybody's like, yeah, dude. You can make another $20 getting these guys to do this stuff.

Mike DeHaan: [8:27] Probably a lot more than that, man. I talked to one of the guys. Literally, we wanted $12,000 to do it for our whole portfolio.

Dan Austin: [8:32] Oh, yeah. Per yeah. Yeah. Yeah.

Mike DeHaan: [8:33] Per But it was like a huge amount of money. But the thing is, a lot of these people went through, did this, and now they're getting into future years, and they're making significantly less money because real estate's harder. So now they're looking to sell some of their properties because they wanna recover the capital. They wanna reallocate their equity into other things. But when you take this accelerated depreciation, you have to do or any depreciation, actually. Have to do an a depreciation recapture when you sell these properties. And if you took all the appreciation on, like, a multimillion dollar property, and you now have to use this recapture, which is 25% of the amount that you took. Is that right? Yep. That could be an insane amount of money that you're now having to pay on taxes to the point that it's highly possible that you sell a property, especially if the values have come down, and you now are going to have to owe more in taxes than you're even pulling out in equity on the deal. Right? And there's been situations of this happening over and over and over again with people that I know that have bought, like, literally multimillion dollar apartment complex and selling it. This dude on on Reddit did it with an Airbnb, and I was posting a big loss on it. Like, it's important to when you're making especially, like, tax decisions or you're trying to do something like accelerated depreciation, you're trying to just take stuff from the future, that you have a long term mindset, and otherwise, you're kinda missing the point. Mhmm.

Mike DeHaan: [9:52] You know? And I think a lot of people feel like they're sticking it to the government or the IRS. They're not paying their taxes. They're gonna get their money regardless. You know? The old saying is there's two things that are inevitable. It's death and taxes. Mhmm. Like, they're always gonna get their money.

Dylan Koch: [10:06] It's funny, man. We were trying I was talking to a seller about a decent sized property, and he's older. I was at free and clear, and, like, one of the hang ups was he doesn't wanna pay the depreciation. This is gonna be like a 5,000,000 asset. Keep that in mind. It's a it's a hefty sum. But we I talked to my CPA for literally like an hour. Like, is there any way around this? And the only thing that we could come up with is basically, he either deeds it to you, like his will, or like, you get the first right refusal, he dies. And then when the kids go to sell it, you have that first right and they have that they don't have this type of basis. Other than that, like, there's can get fancy with seller financing over delayed periods, deferred sales trust. You can try to do this kind of stuff, but it's gonna get paid some time or the other.

Dan Austin: [10:45] Totally. Yeah. Someone's paying it unless the kids take it over, then they don't gotta worry about it, right? Because that's the idea is is that what do they say? You, like, ten thirty one until you die because then this the cost basis for the step up or the step up cost basis is today's value. And I don't know if that goes over depreciation, but I do know for the capital gains of, like, if you bought it a 100,000 and your kids take over when it's a million dollars, like, they get all that $900,000.

Dylan Koch: [11:08] Correct. They had to get the step up basis to what it's worth today.

Dan Austin: [11:12] Yeah. I don't know about the depreciation piece. We need probably an expert accountant on that piece if they still would have to pay the recapture of that 100,000 that was initially depreciated.

Mike DeHaan: [11:19] I don't know if they do. I think that that's kind of part of it is it because the whole depreciation is based off of your off your basis. Right? And so if it all sudden, it brings it up.

Dan Austin: [11:28] Well, yeah. But your basis only it's only your initial basis. Right? If you paid a $100,000 for this and you didn't add any capital gain or you didn't add any value through capital like investments to it, you just depreciate that first 100,000. Everything else is paid capital gains. Right? At zero, fifteen, or 20% depending on your tax bracket. But the to your point though about the depreciation stuff is you have to have a long term vision with real estate, which is truly what real estate is, and that means that you're either going to hold these things forever or you're going to actively trade your properties using ten thirty one exchanges. If you're not able to do either of those, you gotta be careful with the accelerated depreciation because that's where you get yourself bit in the ass.

Dylan Koch: [12:09] Mhmm.

Dan Austin: [12:09] You have to take typical depreciation regardless. If you buy a rental property, you just do twenty seven and a half years, divide, you know, the actual value by 27.5, like, that's where you're going to be at day five year, six year, seven year, unless you ten thirty one it. But if you don't wanna ten thirty one it because there's no

Mike DeHaan: [12:25] good deals, you're paying the taxes.

Dan Austin: [12:26] And then you're like this guy, and you're upside down in a property, and you're losing money.

Dylan Koch: [12:29] Yeah. I think a lot of it comes down to two, like, there's been forty years of basically increased real estate prices because of decreasing interest rates since the eighties. Take out 2008, 2009, sure. But past performance is not indicative of future returns. Right? So I feel like people are seeing these things, and they're like, oh, like, as long as I hold it for five to ten years, I'll be fine. That actually might not be the case. Mhmm.

Mike DeHaan: [12:50] Yeah. Absolutely might not be. Right? And it's important to understand that. I think the old sort of saying of just, like, buy real estate and wait is not necessarily true. Right? And it's important to to realize that. I think historically, it's been true for people, but that's also because you've had a government that has been heavily leaning on the mortgage industry. Everything that we have gone towards has encouraged that. You just have to wait a really long time. Yeah. It's wait a super long time, but that's also was in a period when salaries were increasing, people were making more money. Right? Interest rates have been historically low for, like, the last, what, twenty five years. You know, there's been the push for the American dream to, like, buy properties and have your own home and do other things. All that stuff is kind of gone now. Right? And so does that mean over the next twenty, thirty years that real estate is gonna have the same upside potential? I don't know. Maybe not. But it's just important to kind of understand that. Yo. If you don't follow me on Instagram, which is at Mike underscore invests, by the way, then you might not know that we officially have a new mission as a brand, and that is to help 2,000 real estate investors build million dollar businesses. Obviously, to do that, we need to get in front of as many people as possible. So quick little ask to help us reach that goal.

Mike DeHaan: [14:06] First, shoot me a follow on Instagram at Mike underscore invests. Second, follow collecting keys podcast on Instagram. That's at collecting keys podcast all written out. And third, every time the algorithm is kind enough to show you a post from either of us, share it on your story or in your post and tag us. If you do that, I'll DM you, and we can have a little DM conversation about what is preventing you from having that million dollar business that everyone is seeking. And we can see if we can come up with a plan to help you make that massive income, not just passive income. So, again, if you see any of our posts, just go ahead, reshare them, tag us, and let everyone know that you enjoy the content we produce. It will help us a ton, and then I'll be happy to help you as well. You know? And this can get really funny too. Like, we've had like, when you're doing acquisitions, is we've had sellers. There's one in particular that I remember out in Idaho that basically have shot themselves in the foot where they're, like, not even really able to sell their property without needing to bring money to the table. So there was this one I remember. This was, like, a year or two ago. I talked to this guy.

Mike DeHaan: [15:09] He bought the property thirty years ago for cash. It's, like, $50, $40, whatever it was. The property was now worth, like, $400,000 all fixed up. Of course, she did fuck all to take care of it. Things in horrible condition. And so we are coming in with an offer of, like, 200 or, like, $1.80 or even lower than that. And he was really worried about the taxes because he'd been taking depreciation the entire time. And so he had a massive gain, like a $350,000 gain or whatever it was, and he had depreciated this thing, like, basically to the maximum extent. And he sent us, like, all the stuff from his account and everything else. And, basically, what we came down to is there was no way that he could actually, like, get anything out of this property without either needing to put money into it to fix it up and force that equity again or needing to, like, basically bring money to the table. Because the gap that he had there between the taxes he's gonna be paying on his gain plus all the extra depreciation he had taken, it was gonna take all of his potential proceeds. He sold the property. And there was, like, no way around it. Like, we were beating our head against the wall, and, ultimately, I was like, I don't think we can buy this property for the for the price that we need. He probably still owns it because I don't know.

Mike DeHaan: [16:17] Could he novate that deal? Maybe. And you could have walked away with, like,

Dylan Koch: [16:20] a little something. But But then you you're putting maybe money at risk in the rehab and not guaranteeing a result.

Mike DeHaan: [16:26] Yeah. Exactly. You know? It it was it was a really weird one. And the thing that he was really upset about is he was like, my accountant was telling me to, like, this is what need to do so I didn't pay taxes because he wanted to, like, keep getting his Medicare or whatever it was.

Dylan Koch: [16:41] That's another big thing that that pulling out there when talking to sellers is they can't show too much income or they'll lose Social Security and Medicare benefits.

Mike DeHaan: [16:47] Mhmm. Yeah. That's a huge thing with seller finance deals. We're talking to one of our guys in scale about that today. Right? Is he has a deal that the guys win the sell and seller finance, but that's one of the big concerns is if he collects too much on a monthly basis or annual basis, he could lose his Medicare benefits.

Dan Austin: [17:04] Right.

Mike DeHaan: [17:04] Right? Which is a very real problem. But I I would say that can work in your benefit sometimes, but it depends on whatever's the best interest.

Dylan Koch: [17:11] Yeah. Because you can negotiate it to just under that amount or whatever. And

Dan Austin: [17:15] you Well, can structure however you want. The problem is is then they need to have an accountant on their end, which they should, but most accountants are honestly not well educated so they could kill the deal. Right? Totally. They're not that because if you think about it, what is like principal payback versus what is interest versus what is capital gains, right? And so you could potentially structure this deal where if you understood his full tax position and their accountant could work with you, you could structure it so that, hey, you're gonna get principal payback basically for your principal for the first x amount of years, and then we can switch over to interest, you know, payments, and like you could definitely structure it to where it phased the money out to where they weren't actually ever going above that threshold. But the problem becomes is people listen to their accountant as if they are the gods of all information. And honestly, we've had several accountants, Mike, I don't know if any of them know very much about everything we do.

Mike DeHaan: [18:05] No way. Like, well, you're an anomaly when you're an active real estate investor.

Dan Austin: [18:08] Right.

Mike DeHaan: [18:09] Like, every accountant will understand super basic real estate. Like, you're collecting, you know, rent, and there's, like, some costs associated. But when you're actively trading deals or you're accumulating real estate at a rapid rate or you have active real estate income such as wholesaling or flipping combined with passive holdings, it's really hard to find accountants if you understand that. And there's so many of them that will tell you that they will. And then when you go in, you're like, oh, well, I do this, like, 50 to a 100 times a year. They're like, oh, shit. I work with people that do that, like, five times. I didn't realize you had a whole business around. Yeah. Right. You know?

Dylan Koch: [18:42] All they know is like, okay. The interest on your primary mortgage is deductible. That's it.

Mike DeHaan: [18:46] Exactly.

Dylan Koch: [18:47] But you can get things nitty gritty as, like, the roof replacement as a CapEx item versus just like a door replacement as a a maintenance repair item. Those are taxed differently, like on a write off too.

Dan Austin: [18:57] Yeah. And so you're having an active like accountant that understands that is helpful because there are certain rules that are your benefit, and you need to look at your complete tax liability for the year and for future years. And like actually say like, am I gonna make more money in the future or less money in the future? You know, like there's definitely like this year I would say would have been nice to take some capital gains that we had in previous years where we paid a shit ton more in tax, right, because we had way higher incomes. And then the years actively where you just don't have as much income, that's when you should be taking your gains and taking your losses in higher years. But you run into those situations all the time, and most people's accountants aren't cut into what they're doing or understand that. And like, you could potentially write some stuff off as expenses if you know that year you're gonna have a high income. Like, I can break down any of these single expenses. I don't know if the threshold's like 30 if it's still 3,500 or not, but you could get separate invoices and you could take up big projects and actually expense many pieces of it, only capitalize certain pieces of it as opposed to capitalizing it all when you could have used the expenses to write down your income that year.

Dylan Koch: [19:59] Yeah. No. Exact and that's a good example. And you need an accountant too that's like is more of a planner, not just a fill in the blank kind of a guy. Because what if you had one of those years where you did take a bunch of bonus depreciation, it looks like you make, I don't know, $40 on the whole year? Well, let's say you have a traditional IRA account with a couple $100,000 in it, and you wanna convert it to a Roth, well, you pay that on your income. Mhmm. Right? So now you're paying it on a lower tax bracket than you would have on a normal year. There's just so many levers that you can pull doing this kind of stuff, and you need someone who actually can think clearly and, like, really multi years ahead.

Mike DeHaan: [20:32] Yes. I mean, the one thing that I always have that always sticks to my mind though with a lot of these conversations is real estate people in general tend to have this fixation without wanting to pay taxes. Mhmm. Like, specifically, I think maybe it's, like, ingrained in all of us from it being one of the five benefits for owning real estate that we learned years and years ago, whatever. But in reality, this is in the Hermozzi podcast that you showed, Dylan. The amount of time that people spend trying to save on taxes, if instead they spent that time learning to make more money, they'll probably come out net better. A 100%. Right? They spend three months out of the year trying to, like, learn all this bullshit to save 30 to $50,000 on taxes. When instead if they just focus on making more money, they would probably make a $100,000. Well, just realize what is

Dan Austin: [21:15] the number one benefit of this asset class for you? For some people, it is tax benefits. If you're a doctor making $708,100,000 dollars a year, and there's some way you can use the Airbnb loophole to save on, you know, a couple $100,000 of taxes while you're still doing the most productive thing of your time, which is cutting people's knees open or whatever the hell you work on, like, then, yeah, sure. But if you're just a dude who's trying to make enough passive income to not work anymore, like taxes probably aren't going to be your issue because you're not gonna have an income high enough, generally speaking, in those first several years to worry about it.

Mike DeHaan: [21:44] Now you're talking about, dude, I just buy two properties, the cash flow $2,500 each. You're gonna be poor. They're midterm rentals.

Dylan Koch: [21:52] Yeah. Think my rents minus my mortgage, and that's my cash flow. Yeah. Fuck yeah.

Dan Austin: [21:56] I'm so rich.

Dylan Koch: [21:57] But, no, I mean, to your to your point, Mike, it's like, would you rather have like, $500,000 in taxes, or would you rather just make a million dollars? Like, more. Exactly. Right? Like, that's what Hermosy was getting in that podcast, which I really liked. It's like the efficiency versus the magnitude of, like, when do you pivot from trying to get better at something versus just doing more of what you already know works.

Dan Austin: [22:17] Yeah, exactly. Do way more of

Dylan Koch: [22:19] it. Yeah. I guess in our business that would be just doing more direct mail versus okay, now I'm gonna

Dan Austin: [22:24] More direct mail, more follow-up.

Dylan Koch: [22:26] Yeah, right. Or having my copy get better. I'm gonna try these different mailers, or hell, I mean, I I'll don't know if I shared this in the podcast before. When I first started, I made like a YouTube video, put it on a QR code, and put it on my mailers of like me talking about it, and I thought I was a genius. I was like, I haven't seen anyone do this before. And I think I sent out like 10 to 15,000 mailers, I got a one deal out of that.

Dan Austin: [22:46] Mhmm. I mean, you know, you got a radio face.

Dylan Koch: [22:50] Yeah, that's true. But you that that would be different than everybody else, right? Just turns out it didn't work.

Dan Austin: [22:56] Yeah, exactly.

Dylan Koch: [22:56] You know?

Dan Austin: [22:57] It just didn't work. There's a good silver lining though, in that is like trying and figuring things out and understanding sometimes you have to understand what doesn't work to reinforce what does work.

Dylan Koch: [23:05] That's true. That's good point.

Mike DeHaan: [23:06] Yeah. And there's lots of you can put it into. Like you said, more mailers, more follow-up, even doing another flip. Right? Like, you're trying to save your $30. You spent all this time. What if instead you did another wholesale deal and end up bringing 10% down and you went and you made 30 to $40,000 on that? Oh, no. You're gonna have to pay taxes on that money too. Yeah. That's the whole point. Like, you made more fucking money.

Dylan Koch: [23:24] There's actually

Mike DeHaan: [23:25] You're still gonna be on me out there.

Dylan Koch: [23:26] There's a decent investor here in town. He's like, he does a lot did a lot of the burn method when you could. Yeah. And he's an agent too. And he's like, don't flip houses because you get taxed too much. I'm like, that doesn't make sense to me.

Mike DeHaan: [23:36] You get taxed the same as the rest of your money, dude. It's just.

Dylan Koch: [23:39] Yeah. It's ordinary income. Like, probably just like I was like, so if you make a lot of money, regardless if you're an agent or a house flipper, it's taxed the same.

Dan Austin: [23:47] Yeah. Wow. Yeah. That's funny.

Mike DeHaan: [23:49] I've seen that too where people will be like, I'm gonna flip has already gone for ten months, so I'm gonna hold it for two more months and sell it so I get short term capital gains versus long term capital gains.

Dylan Koch: [23:59] That's not how that works.

Dan Austin: [24:00] It doesn't work that way.

Mike DeHaan: [24:01] Yeah. Exactly. Doesn't work that way. Also too, if you just look at it mathematically, what's your hard money cost, dude? It's probably gonna be the difference in your taxes. Yeah. A 100%. Like, you're holding costs alone.

Dan Austin: [24:12] And it goes back to the timing of everything and trying to do stuff. Don't get cute with things. Just do shit the right way and and don't because the two months, there's unknowns. Right? There's also get rid of it. As a business owner, you get rid of as many unknowns as you can, and then take some some big hits that have actually asymmetric upside, not like, oh, I'm gonna save

Mike DeHaan: [24:30] a couple grand.

Dylan Koch: [24:31] Yeah. I know like the past like couple weeks in the real estate's been kind of, I don't know, we would've said boring. And right now it's like confusing to me. And I say that because, I mean, November is really good for us as far as like revenue wise. At same time, I have a flip that went live, like, let's say last Friday, I've had one showing, and it's not overpriced. And then I have rent, like, two or three rentals out there right now that really aren't getting any applicants. It's like investors, like for wholesale deals are really hungry, they're like, give me my next deal, but kind of on the retail side it's been slowing down a little bit for me. So I don't know if you guys have had any experience with that. Nope.

Mike DeHaan: [25:06] Trying to think. We well, I've had a rental, probably it's been empty, it's been hard to fill.

Dylan Koch: [25:10] Mhmm.

Mike DeHaan: [25:11] But Atlanta's traditionally been hard to fill just because I heard because of its location. But nothing too crazy like that. But, I mean, I'm not surprised to hear that though, mostly because most people just can't afford anything right now, dude.

Dan Austin: [25:23] Well, I think, Dylan, you're coming off of a hot market, dude. Mike and I have been feeling this for a while. I feel like where you're at has been a better market the last twelve months than it had. We're just kinda used to like slow, grainy, making money here and there, you gotta underwrite deals a little bit better. Buyers are being kinda skittish. Mhmm. You know? But I mean, we're still we're still able to make money, it's just everything had to readjust.

Dylan Koch: [25:45] Yeah.

Dan Austin: [25:45] You know, there's you know, we don't we have longer days on markets. Like, we're looking at like, plan for sixty days. You know what I mean?

Dylan Koch: [25:51] Right. So that too, that really goes into your underwriting of longer holding costs, maybe higher rehab costs, and you're giving up more concessions on the back end. Right? Yep. Like, the thing about the flip I just listed, luckily, you know, if it's sold at the price that we had now, it'd still be a $50,000 profit. Right? So we have plenty of room to go down. But if you're trying to squeeze out those $1,520,000 dollar deals, like, that's that's where you things could go downhill for you pretty quick.

Mike DeHaan: [26:14] Yeah? Well, I mean, I think that's always kinda been something that we've talked about. But now more than ever, it's just important that you actually have realistic underwriting on your deals, and you do account for things that can go sideways. Mhmm. Whereas, there most of the people that got bit by that, they've left. Right? I think most people that are still playing the game, they understand it at this point. But, you know, it can be easy when you're in kind of like a dry spell, like a lot of people have been over the last couple months, to try and, like, convince yourself that deals are good

Dan Austin: [26:44] Mhmm.

Mike DeHaan: [26:44] Or that they're gonna be better than they realistically are because you have this desperation that you, like, need to do a deal.

Dylan Koch: [26:50] Uh-huh.

Mike DeHaan: [26:51] But that's why it's so important to be analytical when you're looking at these and to understand the true downside risks that you have on some of these properties.

Dylan Koch: [27:01] Didn't you

Mike DeHaan: [27:02] guys just buy a flip? We did. We did.

Dylan Koch: [27:04] Yeah. How's it look on paper on the front end?

Dan Austin: [27:06] So good. I think right now. It looks like a basic flip. I think we're underwriting at 60,000 margin. We feel really good at 40 k profit, but 60 k is the upside. I'm thinking closer to 50 realistically as we look at things and and things pop up. But, you know, the way we looked at it was we can't really lose on the price point. We paid like $1.60, ARV $3.35, and we have the exact same house right across the street as a comp, like, losing the same floor plan, just flipped by a really, I would say, low below average flipping, like, quality.

Dylan Koch: [27:41] Sure.

Dan Austin: [27:41] And so if we just come in with our standard quality, we do a good job. We should be okay. And they then they both neighbors, like the neighbor like, all the houses in the neighborhood are green grass. Like, it's a good neighborhood. It's got a good neighborhood going for it. It's got all these things going for it. We have ideally, unless something pops up, our construction budget's just dialed in as of yesterday. So we feel good about it. And we have 60 k all the

Mike DeHaan: [28:03] way down to zero. Right.

Dan Austin: [28:04] Right? So you have 60 if we're off by 60 k on a $330,000 house, like, we're in trouble. Yeah.

Mike DeHaan: [28:09] Well, also here's a benefit that we have too, just to be transparent on this, is we bought it with our own cash. So we do not have lending on this deal. So that gives us more room.

Dylan Koch: [28:18] Yeah. There you go. So your holding costs are a lot lower.

Mike DeHaan: [28:20] Correct.

Dylan Koch: [28:21] And that's, I guess, what I'm I'm hitting at is like, historically, I've been probably more aggressive where I'd be either flipping or wholesaling a house because in my market, like Dan alluded to, I have more potential for upside. Right? If I was gonna make 15 or 20, I had the chance to make 30 because of how hot the market was, people giving up concessions, etcetera. Now it's almost like the opposite of that. I'm more likely to wholesale deal than wholesale it and take title versus do the flip because of this the changing market environment. And that's gonna be local no matter where you are. I mean, it's gonna be your own market.

Dan Austin: [28:51] Yeah, absolutely. And it's just time to just Mike and I feel like we've been talking about this, beating this drum for the last twelve to eighteen months. It's like, it's not time to go and pick up five to six flips if you're in a market where things are a little slower. Depending on the size of you, five to six flips might be small, but if it's like average, that's a lot to put out there and a lot of moving pieces to make sure nothing goes wrong. And I know the guys in Spokane where we're at that are doing, they've got twelve, fifteen, 20 They slips on the all are losing money on some of their deals. They're not all winners. Wow. That's just how it is, and you see that cycle. It doesn't matter who the person is, it's just really in our market, it's just a product of how big our market is and how big people can get before they start the rails kinda come off a little bit. And you have to peel back and say, you know what, maybe 10 is all I do, maybe five, maybe two, maybe one at a time is all I do, just depending on your size. And then when the market's going crazy and you can't lose, maybe you take a little risk and you bet on yourself a couple times, but you have to realize that as you do that, you know, the music stops at some

Dylan Koch: [29:52] point. Mhmm.

Dan Austin: [29:52] It always does. Yep. And so you have to be prepared to do that. And the problem people have, and I see that get in trouble, is they take all their profits, they keep reinvesting it, maybe they don't even like realize their tax bill, so then at the end of the year they have this big tax bill, and then the next year sucks, they're starting to lose, take losses on all their projects, and now they're broke and have no money, and they have a tax bill.

Dylan Koch: [30:10] Now you're a forced seller or anything that you might have, you know, has a rental or something like that. It reminds me of Mike, didn't you have someone on the show that you knew someone who was okay with like 5 to $8,000 profits on some of their stuff, and they just wanted to make it up in volume?

Mike DeHaan: [30:24] Yeah. I talked to several people like that.

Dylan Koch: [30:26] That this model doesn't work right now in my opinion. No.

Dan Austin: [30:29] No. It's too risky. There's not enough margin in a big slow moving asset that you can't liquidate super easily. I mean, $8,000, that's just a few months of hard money payment at the median home price for most people.

Mike DeHaan: [30:40] I know. Yeah. It's it's crazy. But I also think, like, what you just outlined is why it's so important to be in control of your own pipeline. Mhmm. Right? Because it gives you the opportunities to actually pick the deals that are worth your risk taking down. And this is where most, like, flippers, like, that own their gonna flip houses, are not gonna market, not gonna do any of their own sales, not gonna find their own deals, and they refuse to wholesale because they feel like it's hard or they don't wanna have hard conversations. This is why they make less money or they disappear is because they get stuck buying all the shit that the people that are finding the deals don't want.

Dylan Koch: [31:12] Mhmm. Right? Mhmm.

Mike DeHaan: [31:13] Because honest truth, those of us that are out there doing the hard work to find the deals, if we get a really good one, we're not gonna sell it. We're gonna buy it.

Dan Austin: [31:21] Exactly. Right? It's our deal.

Dylan Koch: [31:22] Plain true.

Mike DeHaan: [31:23] Even over the past couple of years where Dan and I have done just a handful of flips, the reason we only did a handful of flips because we didn't like any of the deals that we found that much. Mhmm. Like, honestly.

Dylan Koch: [31:33] So we

Mike DeHaan: [31:33] were happy to sell to people. They would go. They'd make their money good for them. That's great. We'd make our money faster. Mhmm.

Dan Austin: [31:38] And the ones that we love, we kept. Right? Those were the the rental properties that we kept. We're like, we love this one. We don't love it as a flip, but as a property, we love it, and then everything else gets wholesaled off to people.

Mike DeHaan: [31:48] Yeah. Yeah. Exactly. And where people get get stuck is, like I said before, when they get desperate for a deal or they feel like they need to, you know, be buying things to move things forward, or they're doing like what you said, Dan, is where they're trying to stack up a bunch all at the same time without thinking of the long term implications or make sure that they're setting their money aside. Yep. And then stuff does get weird next year. Like, I know Dylan, you you showed that podcast where people are I don't know who this lady is exactly, but she's was really involved in the financial crisis. She was saying that she was expecting to have a, like, a pretty significant drop, like, next summer?

Dylan Koch: [32:25] Middle of next year. She was around during the 2008, 2009. She was kinda like one of the middlemen for all of basically, someone who brokerages mortgages. And she can see a lot of data that, you know, the layman can't see or, you know, individual mortgage lenders. And she was kind of comparing those time periods, and her biggest, like, concern really is delinquency rates from all kinds of loans, whether it be jumbo loans, FHA, VA, or conventional loans have all started to increase, and the rate of which they're increasing is increasing, if that makes sense. And so she is very adamant and very data driven, and basically June of next year, she's like, I would be shocked if we didn't have like a nationwide reduction in median home prices. That is going to be obviously very specific to your market. And she really, really nailed on the ones that have been hot recently, the Sunbelt, Phoenixes, Texas, DFWs, anything in Florida down in that general direction. But I guess the take home is know your local market, and maybe now is a better time to be more cautious than you have been, if you haven't been already.

Mike DeHaan: [33:27] I just think the biggest indicator of everything is that the average person cannot afford stuff. You know? They can't afford general day to day, month to month living expenses, let alone to buy a house. Right? And that is always gonna be indicative of a negative economic situation. Right?

Dan Austin: [33:48] What do you think caused that? I mean, I'm trying to figure

Dylan Koch: [33:50] out It's not only it's not only the housing stuff, like, people can't afford, but if they're renting, their rent's gone up. They don't have anywhere else to go. If they're financing a car, they're doing it over sixty month leases at 12%. Groceries, this and are more expensive in general. Basically, just like your everyday, like, necessities, not even like the luxuries are getting more expensive. And you gotta realize the median income in The United States is like $60, $70.

Mike DeHaan: [34:13] Yeah. And that hasn't increased at all. And then like there's other stuff too, like freaking health insurance Mhmm. For everything. Like like so many companies have stopped providing health insurance, so they're now charging for it, which is already just another expense that people have to pay for.

Dylan Koch: [34:27] Fucking childcare. That's new to me. Yeah. Yeah. I mean, for the audience, like, we did like four or five different places interviewed. It ranged from 1,300 to $2,000 a month.

Dan Austin: [34:36] Mhmm. You know what's funny about that tone? Is that's about what it is here in Spokane.

Dylan Koch: [34:40] Yeah. What the hell? This is supposed be cheaper.

Dan Austin: [34:41] Our cost of living is probably well, that's what I was saying is like there's certain things that just don't adjust based on market, right? Childcare is kind of standard, healthcare is kind of standard, car insurance, like there's a lot of stuff that's just kind of standard, you know? And there's a lot of like, know, red tape around some of those things that cause companies to not be able to provide those products as affordable as like they could be, but childcare is one of those things you're like, what the hell? And that's people like to have kids.

Dylan Koch: [35:09] This could go on to like societal implications. Like, this is why people don't have kids, or they have them later on in life, right, is they can't fucking afford it.

Dan Austin: [35:15] Yeah. Mhmm.

Dylan Koch: [35:15] And anecdotally, you know, I track foreclosures pretty close in my market. And for the past year, year and a half, it's been anywhere from 25 to 35 a week, and that's between four different counties. Past two weeks have been 60 plus.

Dan Austin: [35:26] Do you think that I don't know the data on this, Dylan. You're smart guys. Like, is it less jobs, or is it just purely inflation?

Dylan Koch: [35:33] I don't know the actual numbers, but if I had to put a guess on just based on readings, would say it's mostly inflation.

Dan Austin: [35:38] Just people that are on a razor's edge so that any time that they got it, if their grocery bill goes up $250, they just got something has to give, and it's usually their mortgage because they still gotta eat.

Dylan Koch: [35:48] I mean, even seeing things in like local neighborhood groups of like, hey, I'm switching to Aldi or like, you know, this discount commercial grocery store so we can afford groceries for a family of four this week. Like, you're just gonna start seeing more and more of that. You know? Damn.

Mike DeHaan: [36:00] Yeah. You know what it is is, you know, we've seen this statistic for years, five, six years about, like, 40% of Americans live paycheck to paycheck. 50% of Americans live paycheck to paycheck. That's been true for a long time, and now that we've had a universal price increase across everything, that paycheck to paycheck has now come to I live in a deficit.

Dan Austin: [36:19] Yeah. Yeah. Because companies can't just turn around and all of a sudden give people more money because inflation goes up. Right? No. Because it's like a vicious cycle because people don't have the money to buy.

Dylan Koch: [36:27] It's a feedback loop on itself.

Dan Austin: [36:28] Yeah. They don't have the money to buy their products, you know, once that and then once the credit runs out, because they're buying those products on credit, but once the credit runs out, they can't buy them, then companies can't give them pay increases, companies lay people off, they do whatever they do.

Dylan Koch: [36:38] That's another actually good data point is dollar amount is at the all time high, but also the delinquency on that dollar amount.

Mike DeHaan: [36:44] Yeah. And there's a lot of things too. Like, it's hard for people to find new jobs for whatever reason. I will say that as a employer, it's extremely hard to hire people because there's so many freaking applicants that come in, most of whom are completely unqualified, right, or don't wanna work. So there probably are great people that we don't even see just because they never get a chance to, like, get in front of us. And then this is something that I've I've beat on this drum for a little while. A lot of people talk about AI. I don't give a shit about AI. I mean, I do, but I I don't think it's as big of a risk as people should be concerned about. The bigger risk for most people in The United States is the rise of the overseas worker that is better and cheaper and more excited to work than you. Right? You can find people from The Philippines, from India, from Eastern Europe, from South America, from The Caribbean, from fucking Nigeria, from everywhere that have their own versions of qualifications for specialized things or just to be admins or to be salespeople that will show up for work every single day regardless of, you know, if there's a typhoon, if there's a civil war. Right? We've had people live where for us that have had these things go on.

Dan Austin: [37:53] They gotta eat.

Mike DeHaan: [37:53] They gotta eat. They show up, and they will work for 5 to $10 an hour, and they do a good job. And they're excited.

Dan Austin: [38:00] I guess I'll make I'll preface this with one point. I do think American companies would rather hire Americans every single day of the week if they could.

Dylan Koch: [38:06] If they could.

Dan Austin: [38:07] If they could. Absolutely. Right? I think people would rather do that, like, because it's just easier, it's better, people like that. Right? But do you think it's because most of these third world country people are just in such distress, like, have no choice where Americans aren't as in distress, so they're just like, man, I got choice. Because they do. They show up regardless.

Mike DeHaan: [38:25] I think maybe part of it's that. I think also too for them it's an opportunity. Right? Like to work especially if you're a good company to come work for you and like Sure. Make what's really good money for them. It's an opportunity. Right? Because people in The US, they will get excited for jobs if they see it as, like, an actual opportunity. Right? Of course. Yep. If they have an opportunity to go and make $200,000 a year working for some company, those people are generally gonna stick with that more because they make so much money. And it's like they understand it will be hard to repeat that. I think it's the same thing from these foreign workers, but just relatively, it is significantly less for us than

Dan Austin: [38:58] it is for them.

Dylan Koch: [38:59] I mean, job jumping is encouraged in The United States for higher salaries. That's not something that Yeah. The VAs do. That's like, you know, a big Oh, my red flag if you're a v a virtual assistant.

Dan Austin: [39:08] They'll just work three jobs instead of telling you no. Right?

Mike DeHaan: [39:11] Right. That's actually a good question. I'm trying to think of I don't think we've ever had a VA quit.

Dan Austin: [39:16] I don't think we've ever had anybody quit, leave for another opportunity. We've definitely had probably people work two or three jobs, but, you know, that happens.

Mike DeHaan: [39:21] Totally. Yeah. Mean, people in The States though too is they work their office job, then they gotta work as a bartender in the evening because they need to make more money.

Dylan Koch: [39:28] Or you're a software engineer and have three jobs from Google at $200,000 a year each. Which is

Mike DeHaan: [39:32] a whole other problem.

Dan Austin: [39:33] Yeah. $3.50 a year.

Mike DeHaan: [39:34] I'm so glad that those fucking dorks are finally getting what's due. I was so sick of that trend. Oh my god.

Dan Austin: [39:39] So are those are are those the guys that we're hiring now? Because they don't have jobs? The web. The software developers and engineers that cause they all got laid off from all the big tech companies.

Dylan Koch: [39:47] No, man. Because the pricing expectations, like the guy in my, scale pod, he pays his VA, like outside of a VA placing agency, like $400 a month. She's like a great employee. Like Gen Z apparently wants like they think to live, they need like $400,000 a year in income. That's not a joke. That's actually not

Dan Austin: [40:04] a statistic.

Mike DeHaan: [40:05] Wow. Saw that statistic. Their definition of what was considered successful was $580,000 a year.

Dan Austin: [40:11] In their defense in their defense though, that is a nice number to have.

Dylan Koch: [40:15] Totally. But

Mike DeHaan: [40:17] it's so such an unrealistic thing.

Dan Austin: [40:19] Well, especially when you're 24.

Mike DeHaan: [40:20] Yeah. Melanos was like $1.60 or something, and then Gen X was like $1.30, and then Boomers was like 90,000.

Dylan Koch: [40:27] Yeah.

Dan Austin: [40:27] Boomers was like $13.

Dylan Koch: [40:28] Boomers have their house paid off. They're like, I need my $2,000 on Social Security. I don't need anything

Dan Austin: [40:32] else. Yeah. Exactly.

Mike DeHaan: [40:34] Anyway, thanks for listening. Please share this show with anyone else who might be interested in real estate business or just listening to three white guys in their thirties fucking have a podcast because that's what we all do. Every white guy does this. 100%. Yeah. Side note, I went to this, stand up comedian on Friday, and she was talking about basically dudes that have podcasts and the, like, little imitation that she did. The little imitation that she did, I was like, damn. We suck. Like, the the joke is so accurate, and we are a bunch of losers.

Dan Austin: [41:08] Yeah. But People listen to us.

Mike DeHaan: [41:10] Alright, guys. Well, thanks for listening, everybody. We'll talk to you guys next week.

Dan Austin: [41:13] See you. See you.