BC BUSINESS
Saved by @SteveeRogerr

A thread on how real estate investors, developers and operators can make millions a year and pay almost nothing in TAXES by using depreciation, bonus depreciation, and 1031 exchanges.

How it works:

 Depreciation is the act of slowly, over time, deducting the initial expense of an asset against your taxable income. Generally over a 27.5 (residential) or 39 (commercial) yr time frame. So each year you can write off 2-3.6% of the purchase price against your income.
Thats a big deal. We're buying a new property, a $3MM self storage facility. Thats a $60k a year write off against about $260k in NOI and 200k in cashflow on a $3MM deal.

It makes 30% of our cashflow tax free.

Very powerful but there is much more to it...
Different parts of the asset can be depreciated on different schedules.

We'll have a cost segregation study done to split up the depreciable lifespan of different parts of the building. The raw land can't be depreciated so you have to give that a value.
But other items can be depreciated on a quicker timeline. A roof, road, sidewalk, fencing, walls, gates, doors, latches, flooring, air conditioners, pavers, curbing, landscaping, etc.

The IRS has a depreciation schedule for each type. Some parts are 5 yrs. Others 15 years...
So you can depreciate a portion of the asset costs faster. Get the study done, get dollar amounts assigned to different parts and different schedules to front-load depreciation.

Now you can get 5 or 6% of the value as a deduction in the early years...

But wait... theres more.
Bonus depreciation allows you to deduct a certain percentage of cost in the first year an asset is put into service. Anything that is on a schedule of 15 years or less...

So the doors, sidewalks, HVAC, walls, latches, curbs, security, gates, etc.

A % of this stuff goes in Yr 1
For years 2015 through 2017, first-year bonus depreciation for these items was set at 50%. It was scheduled to go down to 40% in 2018 and 30% in 2019, 0% in 2020

But then Trump got elected and he enacted the Tax Cuts and Jobs act. Moving this percentage to 100% from 2017 to 2023
Its not uncommon to allocate 30% of an asset cost to items that can be depreciated on a 15 year or faster time frame.

So now 30% of your asset cost can be DEPRECIATED IN THE FIRST YEAR.
So back to our $3MM self storage facility we're buying in a few weeks.

The cost segregation study came back. 30% of the asset cost can be depreciated on a 15 yr or faster timeframe. This is 100% deductible THIS YEAR...
Take a quick break to remind you that I send out a newsletter with stuff just like this all the time. Signup here:

https://t.co/FEt1sBoSWS
30% of $3MM is $900k.

A $900k tax deduction. In year 1.

The facility will produce about $260k in NOI and $200k in free cashflow after interest expense.

So while $200k goes into the bank account the tax LOSS is $700k.

But wait there is more...
The Cares act made it so you can carry those losses back 5 years to income made from 2015 onward. You can also use the new depreciation guidelines to CATCH UP assets purchased in the last 3 years.

You can also carry these losses forward into eternity.
The passive losses can't offset active income (W2 income, etc) but they can offset gains from other real estate properties or passive income.

On these new properties we won't have a tax liability for 4+ years because of Bonus Depreciation...
We'll also get a huge tax shield on cash we are now making from the facility we built in 2017.

INSANITY.

This is how real estate owners, operators, developers make millions a year and pay 0 taxes.
There is a downside. If you sell your asset you have something called recapture. Your basis decreases in the asset as you depreciate it so you have more profits when you sell and thus a higher tax rate.

But if you've owned it longer than 12 months its taxed at capital gains...
Which is 15% vs 30-40% for standard income in higher brackets.

And you can do whats called a "like-kind exchange" (1031 exchange) which allows you to use the proceeds to buy a new asset and shield the taxes and push them further down the line.
Me? I'll never sell this $3MM facility so I won't have recapture. Yes depreciation will run out over time but we'll use the proceeds to buy more facilities and thus getting more bonus depreciation and shielding more taxes.

Powerful stuff.
A disclaimer - I'm not a CPA, this isn't advice, and I'm not a master at this stuff. I look forward to getting corrected wherever possible!
To get a quote on a cost seg study reach out to @1245consulting! He did all the cost segs on the 9 buildings we purchased over the past 2 yrs.

You can even cost seg your vacation homes or small rental properties and its often very cost-effective.

Thanks for following along!
Sorry this is a repeat thread. I’ve been releasing a lot of them so I’m going to re-post them from time to time so folks can get reminders or see them if they missed them!

Thoughts?

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Don’t have much cash but want to invest in real estate?

Want to get SBA loans and special loan programs so you can buy real estate investments with only 5-10% down?

One word for you:

Don’t.

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Values drop 5 or 10% and you’re underwater. You have zero equity or negative equity.

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Probably.

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Rates will likely stay low. Gov will probably keep subsidizing these loans. You’ll probably be okay.
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Long periods of time are spent blocking and tackling and going through the motions.

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Don't get me wrong, successful folks are consistent. They show up. They stay focused for years.

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Ask them to point to a time period where they made most of their money and they'll direct you to a time span between 6 months and 2 years.

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I've been serious about personal development for 10+ years.

But not just reading...

I've put the concepts to work - we sold our business for 7 figures and built a real estate portfolio worth $100 million +.

Here are a few of my top takeaways:

20% of your customers will produce 80% of your profit.

20% of your customers will also produce 80% of your headache.

The sooner you learn THESE AREN'T THE SAME CUSTOMERS the sooner you can grow, scale AND experience less stress.

99% of people network all wrong.

With their hand out.

Help me. Do this for me. Introduce me. Me me me me!

It’s not about you!

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The 4 quadrants of time management concept changed my life.

Urgent + important is where stressed out owners spend their time.

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#1 Raise your prices (so you can afford them)

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If you're new to real estate twitter this is a must-read.

A thread on how most real estate folks structure deals with outside investors.

Most GPs utilize the "preferred equity" structure when they raise money from outside investors. They "syndicate" deals.

Here's the basics:

The person (or team of people) putting the deal together is the "sponsor". Also called general parter. Referred to on twitter as the GP.

They find the property, do all the work, hire the management company and take fees. They often co-sign debt and always secure the financing.

The investor is generally passive, doing no work and putting in cash. This is the "limited partner". Referred to on twitter as the LP.

They don't co-sign debt. They simply read reports and ask the sponsors questions and cash checks every month (if the deal is going well).

There are two equity classes.

"Preferred equity" belongs to the LPs. Cash talks, so this is a higher class of shares. They are first in the "capital stack" behind the debt (bank loan).

"Common equity" belongs to the sponsor. They are generally last in the capital stack.

Sponsors generally co-invest. That means they hold both equity classes. A 10% co-invest is standard.

That means the GP has skin in the game. His 10% co-invest makes him both an LP and a GP.
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@sweatystartup
THREAD:

I've been very serious about personal development for 10+ years.

But not just reading...

I've been putting the principles to work as I've grown and sold my business (7 figure exit) and built a real estate portfolio worth $20MM+.

Here are a few of my top takeaways:

20% of your customers will produce 80% of your profit.

20% of your customers will also produce 80% of your headache.

The sooner you learn THESE AREN'T THE SAME CUSTOMERS the sooner you can grow, scale AND experience less stress.

The 4 quadrants of time management concept changed my life.

Urgent + important is where stressed out owners spend their time.

Not urgent + important is where you add long term value to your company and your life. Its also the easiest area to push to the back-burner and ignore.

3 keys to hiring and managing great employees:

#1 Raise your prices (so you can afford them)

#2 Simplify the job so average employees can thrive (and killer employees can crush it)

#3 Give them praise in public (it means just as much as money)

Execution > Idea

Ideas are a dime a dozen.

Folks who are willing to do the work are a bit more rare.

Folks with the chops to execute well are extremely rare. And they are the true winners when it comes to entrepreneurship.
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2018 was almost the year we won the #RightToRepair.

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1/


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