139: The Best Tax Benefits of Rental Property Ownership w/ CPA Ana Klein

This is Real estate rookie, episode 139er.

If you want to pay the least amount of taxes legally possible, you have to utilize rentals. That is literally the way to create this.

Toni. It feels like forever since we've been able to do a Niner episode, but for our new listeners, welcome to the Real Estate Rookie podcast, where we break down the basics as to how to get started in real estate. We don't just tell you what everybody's doing, but we help guide you to learn how to do it yourself. And every episode that ends in a nine, we say Niner. Because Tony is a huge Tommy Boy fan.

I am actually the world's biggest Tommy Boy fan. I can actually recite the entire script backwards. So just try me.

Okay. From now on, please slide into Tony's DMs with Tommy boy quotes to see if he knows the correct response.

Actually, no, I'm not a huge Tommy Boy fan. I was forced to watch Tommy Boy as part of my initiation process for becoming the host on Biggerpockets. But it's earned a soft spot in my heart now, Ashley. So I'm happy that we've. We've bonded over Tommy Boy.

Yeah.

I actually saw in my DMs today, somebody had just listened to an episode where we were talking about maybe changing up the movie quote, since I always do Tommy Boy. And they can't remember both of them, but they recommended the Princess Bride and one other movie for us to do. And the Princess Bride is a super good movie, but I'm really going to have to brush up.

I don't know.

It's on a quote. So I love. Yes. You never watch that movie.

Which one is. Is that the one with Princess Bride? Yeah. Who's. Who's like the main character in that?

I don't know their name. It's like.

Yeah, I don't know.

The Princess Bride is the main character. Her.

I keep thinking, like, that's not the movie with Anne Hathaway. Right? Where she was like the.

No, no, no, no. I know what you're. You're talking about, but, yeah, that's the.

Only one I can think of.

No, this is like an older movie, and it's like, set in almost like medieval times, and these two guys kidnap the princess, and it's almost like, I don't know, isn't the Mask of Zorro or somebody is going after her. I don't think it's the Mask of Zoro, but somebody like that is going after her to save her. There's a giant.

All right, well, I gotta add that to my list. But people did not come here to hear us talk about the Princess Bride and Tommy Boy. They came here to talk about real estate. So, Ashley, give us an update. What's new in the. In the world of Ashley care?

Well, first of all, what I need to do is I'm going to put together a list now of great real estate movies for you guys to watch. So I'm going to work on that for the new year. But here's one that you guys can watch is the Big Short and it talks about the the 2008 real estate collapse. And that is one of my all time favorite movies. Makes it really easy to understand what actually happened during the 2008 real estate market crash. And it's good, it's entertaining. So besides, what's new? It's like the end of the year, it's here. So we have an accountant on today, a cpa, Anna, and she is going to first talk about her real estate investing journey and then also give us some tax advice.

Yeah, Anna's actually my actual cpa and so it was kind of cool to have her on and it's always good, I think, to bring some of the professionals onto the show. Obviously, we're a show that's about rookie real estate investors, but having the right people on your team is an important part of kind of going through that journey of being a rookie. So Anna's, I think, a unique person to bring on because she's also an investor herself. So we get to hear both her investing story and her advice for new investors from a CPA's perspective. So she's just all around an awesome guest to have.

Yeah, I actually got to meet her last year in person at a Mastermind event in Florida and I was just like blown away by, first of all, how intelligent she is and just the advice that she was willing to give out to everybody and also how cool she is. She's super cool and just a great person overall. So definitely check her Instagram out, her Facebook, all this stuff she'll give out at the end. If you guys want to reach out to her, she gives tons of free content on her social media with tax advice. So make sure you guys give her a follow.

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With that, let's get into the show.

Anna, welcome to the Real Estate Rookie Podcast. Super excited to have you on. So in addition to you, I'm sure you're going to give a lot of value to the guests here. I also just want to share. You're also my cpa, so you've helped me a lot personally this year. So thanks for coming on with us today. Ana.

Yeah, thank you guys so much for having me. I'm a huge fan of the show, always listening, and this is how I started my career in real estate investing, by diving into podcasts. So I'm excited to be actually part of the show and sharing my values with your listeners.

Absolutely. And just think now that your story is probably going to inspire some other real estate investors or maybe CPAs to get from behind the desk and get onto the investment side of things. So, Anna, why don't you just give us your background? Give us. Who is Anna? How did you get started in real estate investing? And just give us the whole backstory.

Yeah, of course. So I was actually born and raised in Mexico. I want to be 34, my gosh years old. But I moved to the United States when I was 15. My mom kind of tricked me and she said we were going to go study abroad. And I was so excited to live in LA because I was going to study abroad. And then a year after she told me that she's getting married and we're moving to Wisconsin. I'm like, this is horrible. So she kind of sprung it on us, but it was the best thing she ever did for us because now I feel like I'm living the American dream. But it was definitely very challenging, culture wise, of course, especially the language. And if I make any mistakes, you guys will know English is my second language. So sometimes I try to say things and people are like, no, what are you trying to say? So anyways, we moved here and I started, you know, a normal college student whatnot. And then I always knew I wanted to have my own business. I hated the 9 to 5 lifestyle. My parents were entrepreneurs as well. And I just hated having to drive like everybody else who's in this rat race. Right. Just waking up at 5:30 in the morning, driving an hour to work, having to report to your boss. Well, I was like, I hate this. And finally I was in public accounting. And if you know any listeners are in accounting, it's horrible. You work 90 hours and they make you feel like you're making so much money. And when you divided, like, I was better off working at McDonald's. So I remember they were so bad at, they wanted to have networking events after work. And I was like, no, I don't like you guys that much. Like, I want to go home to my family. So I quit my job after I Was there for three months. I was like, I can't do this anymore. I quit my job. I went private. I went to a private firm. And then the same thing happened. You know, like everybody else, back to the 9 to 5. It's the same thing everywhere you go. That made me realize that I didn't. So when I was 28 years old, I quit my job and I opened up my firm, my accounting firm. I had no idea anything about real estate. Like, nothing. I just started. This is what I'm going to do. I'm going to do taxes, and I'm going to work even more hours. So I quit my job, opened my firm, but I did it virtually since day one. So about six years ago, I was like, listen, I know I want to travel, and I don't want to be stuck in Wisconsin. Like, it's cold here. Like, I hate it. I want to be 100% virtual. And it took a while, and I was now focused in real estate. But then I started to see the client, my clients who were real estate investors, how much little in taxes they paid that I was like, what is happening compared to my realtors or to my, like, doctors or attorneys? So then what I do, I went to bigger podcasts like everybody else, and I just literally emerged myself into the community. Every podcast you needed to listen, I started from the number one podcast, too. I was like, okay. But I was like, I am not on Brandon's level. I need to start from zero. So I kid you not. I signed up to go to a Grant Cardone seminar, which was like $2,000. But when you're, like, broke, that's a lot of money, right? So here I go. I'm, like, dragging myself a weekend, and they're going to teach me all these, like, wholesaling and flipping, but it was like, $45,000. And I'm not afraid to say this because a lot of people do this. I literally thought about withdrawing my 401k and paying for this. I was like, these people are making it in real estate. Like, they're flipping. I see their checks. I'm going to do it. And I just remember, I'm like, let me just post on Bigger Pockets to see if anybody else has been in this situation. And what I did is I was like, hey, has anyone been to Grant Cardone? And he's great. Don't get me wrong. Like, I. He's amazing.

And.

But he's in a business. He's a business as well, right? And I just realized that I could do it by myself that I didn't need to invest that $40,000. So instead I invested in a coach. So, long story short, I started just learning more and more and more about real estate. I read every book, I did everything, found bigger podcasts, real estate investors in my community. And then I did a live and flip with my partner, my ex and, and then we had money. So I was like, we need to invest. Then I found out that my grandpa in Mexico is a real estate investor. He's huge. I didn't know he was a real estate investor, but I was was like, why can you take us on all these trips? I remember all the trips were the. My grandparents like Disney, you know, and like from Mexico to like Florida is a lot. And now he tells me, of course, he's like, I own this building. So now he's just living off the rents and living the best life. So that's how I ended up here.

That's so awesome that you can see what it has done for him and use that as motivation. And I think that our backstories are kind of similar and I think we've talked about this before that, you know, I started out as an accountant and I quit after about like six months and went and worked in a different field completely. But you're so right about that, that 9 to 5 grind. And I'm really excited for this episode because you are going to be a big inspiration to anybody that wants to take that step and take that action to start their own business and become an entrepreneur, whether that's real estate or not at first. So what was that mindset shift like for you when you decided to quit your job and start your own business?

I think you can relate it a lot to the analysis paralysis that we talk about when we buy our rental properties because even though I came from a family that supported me financially, I think I was blessed enough to have that. But unfortunately a lot of people don't have the backing financially, which is a huge deal because you're going from receiving your paycheck every single week to hoping to God that you make money that week. Right. So all I thought about was, and this is something that my mom has instilled in me so much, is that if it was easy, everybody would be doing it. And if you don't do it now, you what are you waiting for? It's just excuses. My mom is a very cold hearted, not cold hearted, but she's just very direct. Like, there's no excuses. Like she's like, listen, I moved from Mexico to here with two kids had nothing. Like that excuse is like nothing. So it's harsh. But that's now how I speak to all the people that I'm with because I'm like, it's literally excuses. And coming from Mexico, the opportunities that people have in the United States is so crazy. Like we don't know how good we have it here versus in other countries. So it's just do it. Anything you keep telling yourself is an excuse. There's absolutely no reason why you can't succeed.

That is fantastic advice, Anna, and just kudos to you for having the courage to step out onto your own and have the confidence and faith in yourself that you'll find a way to make it work. We're just recording with another guest and we talk about like the grind of that 9 to 5 and how it can just like wear down on people. But so oftentimes we feel that that's the only option that we have. Like there is no other alternative. But people that are listening to this podcast, the rookies that are following along, listening to your story, to my story, to ask you story, hopefully they have the inspiration to see that there are, there are other options out there. So just thank you for, for being that, that example for the listeners here. Before we keep moving and I want to talk a little bit about your portfolio. Let's just kind of set the table for us. So what does your portfolio look like today? How many deals or how many units? Whatever metric you want to give us to set.

So I started with a. I didn't know we were doing a live and flip, right? We purchased a property back in like 2013 when the market was a buyer's market. Then we, you know, my ex fixed it and we ended up getting about $80,000 of a gain. I had no idea anything about real estate. So what did we do? Like every, like keeping up with the Joneses. I went to build this house and like, oh my gosh, let's buy cars. Dumbest thing ever. I don't recommend that. So then I think my business, then what I started doing is in my business, I said we saved some money. But then having a side hustle is what you need in order to, you know, sometimes buy your first property. So I went and I saved money from my accounting firm and I found this triplex. You guys, this is like, I'm like been spoiled with my first one that it's going to be hard to find another one like this. So I saved, you know, my 20, 25 down. I looked, went and looked at this duplex and the ones that people live in that are like moving are the best because they take care of it. You don't have to do anything. So this lady was living there. I get there, it's a duplex. Well, the best thing is I come to find out that the attic is rented and the basement has a full on, like, living basement where two people are living. And they couldn't disclose that because it wasn't up to code. So I went in, I put an offer at 175 right away, and they took my offer, and now I rent it for. I have this written down. My total rent is $3,000 that I receive. My expenses are about $1,800. So I did definitely made it up to code for the people in the basement, because God forbid there's a fire and these people die like they were living. But now it's hard to find anything like that. So then I have another. I have two more properties. And they do not obviously, as well. But that one was like my first one that was like, yes, I got it.

Let's talk about bringing something up to code. So you put in your offer not even knowing what the cost would be for that?

Yes. So there was no egress windows. Is that how you say it?

Yep.

So when I brought my contractor and they're like, yeah, like, if something happens and there's a fire, there's no way that these people can get out. So we put that in, and it was like $1,200. I got the inspector in and that's all. Thankfully, that's how much it was just putting the egress window in because it had its own exit, but we still needed to put that. So it was only $1200, let's say $1500 with the contractor's expenses. And they're the best tenants. They live there. They're never there.

Let me ask a question. So it cost you $1200 to legally convert that duplex into a triplex? How much value do you think you added to that property by being able to say that it's actually a triplex versus it being a duplex?

I think last time I was assessed last year I bought it at like 179. It was like 210. And I didn't do literally anything to it. So that's amazing. But of course, these stories are always. Don't happen. Right. But now every new property that I get, I'm like, well, if I'm not netting twelve hundred dollars, I don't want it.

But I think there's a good lesson there, right Ann, is that you spent twelve hundred dollars and you were able to take a property that was worth 179at purchase to $210,000. So we're talking about a $30,000 increase in value for 1200 expense. Like that is a phenomenal return on investment. So I think the lesson for the rookies that are listening is that you need to look for those kinds of opportunities when you're looking at potential properties to purchase. Like, is there hidden value here that maybe the even current owner doesn't see or that maybe all the other people that are looking at this property haven't yet found out? And did you just get lucky? Like, I don't know, like, like it was.

I really. All the deals that I've gotten, besides one, I've gone through the mls. Everybody talks about off market deals, but I'm that person that wakes up and looks at the. I know my market like I know Milwaukee and where I want to invest. So I invest in the south side where my tenants speak Spanish. I can deal with them. So I know the market that I want. So I just set alerts. And every time something comes up, you have to have an amazing realtor. If you don't, then you lose. Right. And a hard money lender in case you want to just pay with cash. But you just have to look. There's a lot of off market deals, but there's still some good deals on mls you just, you can't wait three weeks and expect to get it.

So now that you've built your business, you're investing in real estate. What are your goals going forward with both of them?

It's a great question. So with my business, I definitely, it goes back to the same thing. I think everyone that's an entrepreneur, I still don't want to be doing taxes for the rest of my life. Like whenever I get a new client, I'm like, you guys, I only have me for the next 10 years because this is still a job, it's still a business, right? Like, I don't want to do this. I want to make it. I want to grow it, sell it to somebody and just live off my rents. So I'm continuing to purchase more properties, but really where I want to be is in these storage units, kind of like bread. I definitely think that's the most passive income you could ever get, but it's a little bit harder. But when I listen to your stories about that, it's like it motivates you to not be satisfied with where you are right now.

That's awesome advice. And so with the storage units, let's dive into that a little bit. You are now pivoting from your first original strategy, going into a new strategy. What does that look like and how did you decide that you were ready to make that pivot, that change?

Yeah, I mean it's not. I mean I only have three properties, right? So it's not like I have this huge portfolio that I want to just okay, like I'm ready to do it. But for me it's the time. And that's why I quit my 9 to 5 because I want to have a family. And I went in Mexico. I bring this up a lot because it is different, the culture there. We didn't grow up with babysitters, right? Like my. Our parents, our grandparents took care of us. And when I came here, the culture here is both parents go to work, you put your kids in daycare, then you go to the gym and the kids are in daycare at the gym. That's not how we grew up. So I was like, I don't want that for my family and I'm hoping to work hard enough. So then when I look at my rentals, I say the same thing and my business too. I'm like, I'm going to be in the same situation. I'm still going to have to oversee the rentals, even have a property manager. What's the best thing that I'm 100% behind? It could be lending hard money lending or storage units where you are just so passive.

That's a great point because I learned that the hard way as to. Just because you give your rentals to a property manager does not mean that it's completely passive. You become the asset manager and you still have to go through your owner's reports, you still have to answer their questions, you still have to oversee what they're doing and stay on top of them. You can still have the greatest property manager in the world, but you still are going to have to oversee things and do a little work and make some big decisions as it goes along. So that's really exciting for you. I'm looking forward to see your self storage units. Have you gotten anything under contract or no? No. Where are you looking now?

So I think Wisconsin. So my clients, I have a couple clients who recently just purchased some in upper Wisconsin. So I'm in the early stages because I know very little. So trying. Now I'm back to where let me educate Myself in everything with storage units, figure out how I can get there and put a plan together. But I feel in my opinion, and obviously other people are more experienced with this, it's very passive. But also hard money lending is also where if you're the. I remember when Grant Cardone, when we were in his seminar, he's like, if you can be anything, be the bank, because the bank is the best thing.

I remember when we were in Florida together at that Mastermind event, you had said that was what you're going to get into too. And I don't think you had actually done your first loan yet. So tell us about that too. As being a hard money lender, how does a rookie even begin to do that?

I think I've been blessed, honestly. Where my business can provide enough cash flow. I think that's where the issue comes, where you have to find a side hustle. So if you're working a 9 to 5, you're kind of strapped with your money. So you need to find a side hustle that gives you all this cash flow. So my clients, it's really my clients who are like, hey, do you have any cash? And I'm like, well, I do, but I've never done this before. Like I'm scared. So I'm like, listen, we'll write everything down, but at the end of the day, I know your bank account and if you don't pay me, I'm taking everything.

Is this what you had to say to Tony? Is Tony who you're talking about?

I was like, I just go into your bank account, I take it? No, but I'm kidding. But you know their numbers. So you're like, okay, they're responsible adults, you'd hope, but something, right?

You see their financial information?

Yes. So they asked me for the money. I did a small loan, you know, if. And it wasn't as, as big as a normal hard money lender. I just wanted to get my feet wet. So I lend them $60,000, I charge them 2% or 2 points up front and then 8%. So it wasn't a lot of money. But at least I like know what it's like. But it's harder than that because you have to do all the due diligence with the house and become first lean. But it's a great business, like if you're doing it.

So how did you learn, like you have to become the first lien putting your contract together? Did you hire an attorney that was experienced in doing hard money loans or how did you start that Whole process.

So shout out to Diego Corzo and my mentor here in Wisconsin because they're both hard money lenders and you have to utilize the people that you surround yourself with that you make connections with. Right. So I just called them and I said, hey, how are you doing it? What do I need to know? And people surprisingly are happy to share this information with you as long as you don't abuse their time. Because time is money for them as well. Where they were happy to share this information of this is what you need to do. You need to become first lien. You need to have this in writing all the steps that I had no idea I was just about to lend them all the money and let me know when you give it back to me. They're like, no, that's not how it works.

So Anna, do you plan to continue to scale up the private money, hard money lending side of things or how does this play into your long term plans?

Yes, because again, that's very passive and I would love to do that. And again, when I look at my clients who are hard money lenders, I'm like, wow, he was right. Being the bank really does pay off. But it's obviously risky and it's not always going to be like that. So I think you have to have other revenue streams. But yeah, I mean, I'm happy to talk about it with anyone. I don't know much about it, but it's a great strategy to make more money because that money will allow me to invest and save for, you know, the storage units.

Yeah, I mean, to me, like lending money is one of the most passive ways that you can invest in real estate. Like we've leveraged private money for a few of our flips and outside of wiring in the funds to escrow, our lenders did nothing. Right. Like we did all the hard work for the, you know, the six to eight weeks that it took to rehab this property. And then we close, we sell. They get a nice return on their money plus their, their originally invested capital and then they're just able to recycle that same money. So it is quite literally some of the most passive returns that you can ever get. So I'm glad that you're, you're kind of shedding light on that option, I guess. One other question, right? Are there some things that maybe a rookie investor should maybe look out for as potential red flags before they start lending money to investors? Like how can I make sure that I don't give my money to somebody and they just run away with $100,000 I just lent to them, how can I do this in a safe way?

Yeah, this is a great question because even when I talk to, for example, my dad, who's a financial advisor who is very financially literate, he was like, no way. Like this, how does this work? Like, no way. You're just lending people money and they just give you money back. I'm like, no, dad. Literally. That's how easy it is. Like I'm trying to tell you. But I think the biggest thing that I would say is make sure that the person that you're lending the money to has some credibility. Right. Everyone nowadays watching HGTV wants to be a flipper. Flipping is. I don't, I've never done it. I don't plan to do it. But you can probably attest to it, Tony. It's not as easy as people make it seem. It's not. You just show up and your contracts show up on time. Like it's a lot of work. So having some credibility, knowing the person that you're lending to will definitely make a big difference. But I think also having someone on your side who has done hard money lending to guide you even if you have to pay them, because again, nothing is free in this world. So the advice is priceless so you don't make a mistake. And you're right, someone walks away with.

A hundred K. That's great advice. Thank you. And I'm a firm believer in that too, is that it's worth paying a little upfront so that you don't lose out big in the end.

And sorry, just really one, one other thought on that before we keep rolling. Right. Like I think people oftentimes overestimate how expensive it is to have an attorney like draft up contracts or like point you in the right direction. Like if you're going to lend several hundred thousand dollars to somebody, you better be willing to spend a few hundred bucks to make sure that there's like an ironclad contract in place to protect that investment. So if you don't have an attorney, ask some other investor that you know. But just find someone to help guide you through that process because it's the safest way to make sure you're not getting screwed in the end.

It's a no brainer.

Yeah. And just like you would analyze the deals on a property, analyze that cost for an attorney when you are calculating your return on doing that hard money.

Lo.

So maybe it doesn't end up being 8% interest plus 2 points. It's a little Bit less than that because you are shelling out for an attorney. So just add it into your numbers and fees and costs can make sense and still give you a better return than if you didn't do the deal at all?

Yeah, absolutely. I think a lot of people think hard money lending or the investors who are asking for it is expensive, but it's not. If it makes sense in your numbers, of course it's more expensive than the bank, but if you have a deal, it's not expensive because the it's faster than obviously going to the bank.

Right. You're paying for the convenience.

One other follow up for you, Anna, as someone who's lent money to an investor, say, you know, let's talk to our rookie audience right now. If someone wanted to come to you, not you specifically, but if someone wants to come to a hard money lender that they kind of have a relationship with, how should they be presenting that deal in a way that makes a private money lender feel comfortable? Like, what was the package that was presented to you to say, okay, this is something that I'm willing to actually lend on?

So numbers to me, I mean, I'm a cpa, so I'm nerdy about like Excel spreadsheets, but anyone, I mean, you're gonna guard your money with anything, right? So I have had people who just are like, hey, I have this house, here's the address. Can I have 100k? And I'm like, no, like, I want to know what your numbers look like. Because if it doesn't even make sense to go buy the property, even after, you know, the arv, if all those questions you need to ask. So I would say be a professional when you ask, if anything, whether it's hard money, whether it's asking for advice, don't just think that people are just going to do it because you're Tony Robinson. Eventually when you establish a relationship and Tony comes to you or Ashley and say, hey, I need 100k, like you trust them now, but for the first time, be a professional, like they're, you know, your boss and say, here are my numbers, this is what I'm doing, would you be interested? I think the ethics and the courtesy of asking for people has literally gone out the window because maybe social media is so easy to slide into someone's DM and just ask for money. But that is a huge turn off. I'm sure it happens to you guys all the time.

Yeah, sliding into DMS happens to Tony.

Not like that, but I'm sure it does. Or that YouTube. Someone was commenting on your arms on YouTube. Sarah was making fun of you.

She's a trooper though.

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Okay, so, Anna, we can't have you on the show without picking your brain on some CPA tax questions here. So for my first question, just general advice. If you are a rookie investor starting out and you're just about to get your first deal or just got your first deal, what are some things a rookie investor should be doing now? Day one, to prepare themselves to take advantage of all of the tax advantages out there.

So this goes exactly with the one thing I wanted to say, which is the number one issue every year I see in the rookie investors to the most, most house investments that you can think of. It's their record keeping. It is number one thing that you need to be doing since day one. You get so caught up in your life with, let me buy another property, let me do some wholesaling because you're trying to grow your business that you forget about this. And then when tax season comes around, it's a mess. And most accountants that you work with, like, we don't take messes, right? So it's up to you to figure out your mess and then let me know how it goes. But we can't do tax planning, which is the number two thing, because if you don't have good records since day one, like, how much was it purchased? How much did you spend at Home Depot? Like, there's no point. Like, it's a business. So I would say record keeping from day one is great. And I'm not gonna like, say anything but like, I see Tony.

Because we've had this conversation.

I was like.

He's like, no.

It feels like when you're in the classroom, the teacher's talking about the kids that didn't do their homework. And you know that you're one of those kids.

Tony. I was an accountant and I'm laughing too, because I used to have immaculate books. My accountant would compliment me every year, like, oh, I just love it. And like this past year, it's like, been awful. I've like, not Stayed on top of it. So I ended up just giving her everything and she's taking care of it now. And I'm like, I'm so sorry you thought so highly of me and you're.

Now letting you down.

But that's a great point, Ashley, because that's honestly what happens I think when people realize that your time is best spent elsewhere. That's when you stop doing the. I don't want. I don't even do my own books. Right. Because I don't. I don't see any money in it. So it's. When do you think your time is best spent? When you going to outsource it? I'm not saying with us, but there's vas. You know, in other countries there's things that can be done. It's just setting up your processes from day one or hiring somebody.

Yeah. Bookkeeping is an easy thing to outsource, especially with being able to scan documents and to have different. Whether It's Stessa or QuickBooks Online where you can view the bookkeeping while somebody else from, like you said, a virtual assistant from anywhere in the country is inputting the actual data for you. Tony, you work with a virtual assistant for your bookkeeping, right? Yeah, yeah. And that works out great for you. And then my CPA is now my bookkeeper.

Yeah, I mean, let's break that down. Right? Because there's like different things that need to be done and like the bookkeeping cpa, tax planning world, like it's not just one bucket. And like break down the difference between what bookkeeping is, like what a good bookkeeper does and then what a good CPA does. Because I feel like those are two different paths.

Yeah, that's a great question. So your bookkeeper, think of them as the person who works with you on a day to day basis who knows the ins and outs of your business. Right. Your CPA is not going to know how much electricity you pay to Property A because that's not our job job. Your bookkeeper knows that whenever a bill comes, they know it goes to property A, they know it goes to property B. They know you're traveling, but they have your records up to date. So it's a lot of administrative work, but it's so important, so, so important. And then your accountant should be giving you advice. But we need the records from your bookkeeper in order to give you advice. So this is where it gets so complicated and people get mad all the time. You know, they talk about, you know, our President Trump, our ex president who was only paying like $7 in taxes or like Jeff Bezos and it's like, well, they have a really badass probably bookkeeper and a really badass accountant who gets their records together. They put it all together and they pay $0 in taxes. Like the tax code is there for you to utilize. But if you come with bad records, it's impossible for us to help anybody with any tax planning. And as you guys know, real estate and taxes are amazing. You just have to have a good bookkeeper and a good cpa.

Okay, so onto our next question for this is what are some of the biggest tax advantages for a real estate investor? If somebody listening is considering getting into real estate investing and this may be their final push to take action with all the great knowledge bombs you're gonna drop right here, no pressure why they should become a real estate invest.

So as they say, 95% of the wealthy people invest in real estate and it's obviously for wealth building, but it's also for tax purposes. So the number one thing is the fact that you can create these losses through depreciation and cost segregation for your rental properties, right? So let's just say you have active income, which is like W2 income, and you have rentals. Short term rentals right now are huge. There's so many cool things that we can do for tax purposes. But let's say you have, you make $80,000 at your W2 job and you have a rental property and through depreciation and expenses you were able to have a $10,000 loss. Well now you're able to offset your W2 income that goes from 80,000 and use this loss of 10,000 to decrease your taxable income. So instead of paying taxes on 80,000, you're not paying taxes on 70,000, which means you're not paying any taxes on the rent that you received because you used depreciation, which is this fake expense that is written in the code for you to utilize. So if you want to pay the least amount of taxes legally possible, you have to utilize rentals. That is literally the way to create this.

Anna, what are your thoughts? Because I've heard other investors where they'll buy a non cash flowing asset just to get some kind of tax benefit, right? They're like, hey, it's okay if I lose a little bit of money because I know I'm going to get this big tax deduction at the end of the year. For someone who's both an investor and a cpa, what are your thoughts on buying potentially bad investments just to get the tax write off.

This is not tax advice. This is all, let's like put it out there. But I think that you get to a point where you are so wealthy that that's what you have to do. And if that's a problem, personally, I don't see that as a problem. Right. If you have so much cash flow. And I'm sure that's, if you look at, I use Trump because, not for political reasons, of the fact that he's really into real estate, that he has purchased real estate, that does bad because he's able to utilize those losses. So I think people do that very strategically. I don't think your first one should be for that. But when you get to that point in your life and you are like, shoot, my tax bill is a million dollars. I'm gonna go buy this property for 50k, at least I can write it off, you know? Know. So strategically, I think it would make sense.

That's a really interesting point and I guess I never would have thought about it that way. I'm glad you said that. There's like a certain benchmark that you got to hit first because I would, I would hate for all of our Ricky listeners to start going out there and buying, buying bad properties. But if anyone's looking for a bad investment property, I got one for sale in Shreveport, Louisiana that you might want to take a look at. I'm just saying.

That was the best transition you ever did, Tony. That was great.

So, Anna, we've talked a lot about kind of how to get yourself set up and what are some good things to do at the beginning? At what point do you think it makes sense to actually engage with the CPA and do the tax planning? Like, say that I got my bookkeeping. You know, I'm really good about keeping track of all these documents. Should I hire a CPA and do this tax strategy planning? When I, when I've got my first deal, my fifth deal, my 10th deal, at what point does it make sense to do that?

Yeah, that's a great question. So I always say that accountants are like doctors, right? When you have a W2 job and you're just going to school, whatever the case may be, and when you're sick, you go to the generalist doctor, right? You're like, hey, I don't feel good. There's something wrong with me. And they give you the most basic advice, and they're definitely going to be the cheapest, most cost effective person you go to. But when you realize that there's something wrong with you know, your eyes or it's more specific, you're going to go to certain a specialist. So as soon as I personally think, I always say as soon as you get one property you should hire an accountant who is specialized in real estate because the goal for all the rookies here, at least it was for me, is to not just get one but continue to scale. So I can leave my nine to five. So unless you are a real estate CPA from the beginning and you know what you're doing, I feel like always go to a CPA and I think we don't see it. I think accountants have made it really bad for people. They see us as an expense. They're like, oh, I have to pay John CPA like $1,000. Like so much money. But you have to see it as value. Kind of like Ashley did. She was just like I'm done doing this. So here's my mess. I don't care how much you charge me, figure it out, but don't call me until it's done. But it makes sense, right? So I think as soon as you have one property you should talk to an accountant about doing your taxes. Tax planning is a completely different thing that if you're not doing or you don't know what it is, you should definitely be speaking to a CPA about because that's where we play the game and that's how we get to decrease our tax liability as much as possible.

Yeah, wonderful advice Anna. And I'm excited this episode is airing when it is because it's coming out right before the end of the year. So let's look into into the next year. Right. 2022. What are some of the changes that we're going to see from like a tax code perspective that investors might want to know about as we get into the new year?

Yeah, that's a great. Everything just happened recently. So good things only actually for real estate investors so far. The only bad thing we'll start with the bad thing is that they are going to raise the capital gains rate from 25 to 30 or I can't remember exactly like this is. I have it all written down. But you know they were talking about getting rid of 1031 exchanges and getting rid of the step up the self directed Iraq. Everything went out the window and we're still good to go. We can still 1031 as much as we can. So we just never pay taxes on that. So good things for real estate investors really nothing besides capital gains which is can be huge though if you choose not to do a 1031 exchange. Nothing has changed there, so that's good. But things evolve. You know, next week I can come back and tell you that, hey, scratch that entire podcast because things are different because that's how life works in Congress. But I think right now what I would tell everyone is nothing's really changing. Besides obviously that there is more in depth that we can talk about. But I think this is beyond this podcast. But just have your good records and do tax plan with your. You still have time. It's November, you have two months. So if you're surprised by your tax bill next year, it's your fault because you didn't do any tax planning, plain and simple.

And let's talk about that. That cost right there too. It is going to be worth it to pay your CPA for an hour of their time to do that tax planning if it saves you several thousand dollars in taxes.

Absolutely.

And that's like another thing too is that people think in their mind that it's probably going to be a lot more expensive than it actually is. Just like hiring an attorney to do a contract. They think it's more expensive than it actually is. But in reality, you're going to end up saving in the long run.

Right? I tell clients when they come to me and they're like, well, I was, you know, I was paying Bob Smith a hundred dollars. I'm like, yeah, but you overpaid like $50,000 in taxes. So you're paying him $50,100 going to the IRS. So think about it that way. But it's an investment. But we as CPAs have to make sure that we just like any other service, educate the people of what, how it's not an expense, but it's an investment. And that makes it a little bit maybe easier for people to invest in their CPA versus just thinking they're going to pay so much money.

Well, Anna, I want to take us to our rookie request line. But first, Tony, did you have any CPA question follow ups where before you don't have to pay for this. It's free this session.

Let me try and get everything on air.

Did you want to dig into, you know, your own personal tax right here.

We can break down Tony sacks return for 20, 21? No, I think we hit all the big things, Anna. I guess just I'm glad that we're having this discussion. I'm glad we're having it when we are. And you, you made a very important point that I want to make sure the Rookies don't gloss over. But you said most of us are in this game not because we want to get one property, not because we want to get two properties. We want to get enough properties to support whatever lifestyle, financial, family goals that we have. And for most people, it's going to be more than one, it's going to be more than two. Might be more than five at some larger number than that. And if you think with that end goal in mind, I think it becomes easier to invest in the right people on your team to have a good cpa, to have a good bookkeeper, to have a good attorney, to have a good whoever. Right. Because all those people kind of come together and help you build out a business like an actual business and not just having a bunch of rental properties because you can have a ton of rentals, but not really have a business. So I'm just glad we're having this discussion. I'm glad you were able to share those thoughts.

Okay, Anna, are you ready for our rookie request line?

Yes. Let's go.

Okay, so this is where we have listeners of the show call in and leave us a voicemail and we play it on the show for our guests to answer.

Hey, this is Caleb from Kansas City. I have a house that's rented right now. I moved out of it a year or two ago. I want to know, should I sell the house before three years after moving out? That way I've lived in it two of the past five years and I can capture the profits without tax or because I knocked in 10:31 out of it later. But is it better to capture that profit now and roll it into a different investment so I don't have to worry about that? Thanks.

Thanks, Caleb. So you have to live in the property two out of the last five years in order for you to be able to take that exemption, which is the exemption of if you live two out of the five years in your personal residence, you don't have to pay and you can sell it up to. If you're married, up to $500,000 of the gain will be excluded. Now, this is a great strategy because let's say he would have to go back and live in it one more year. He has to live two out of the last five years, and then he can rent it and then he can sell it, and whatever gain he makes, he will be able to not include it in his tax return. So that's a really good strategy. So I would say live in it two out of the last five years, rent it and Then sell it. If it's a personal residence, then he can't 10:30 want it.

That is a great answer. Thank you, Anna. And can you just explain for everyone what a 1031 exchanges and why he can't do one because it's a primary residence.

Yeah. So a 1031 exchange is essentially whenever you have a rental property, it cannot be done to your personal residence. Let's say you are ready to move from a duplex to a four plex. What you do is you find a property that is in the same alike kind exchange, which is another property. And whatever gain you were going to have, you don't pay taxes on that. Instead you just continue to shelter that gain over and over. But there are limits and you have to work with a third party. But it's a great way to rinse and repeat and continue doing it over and over and over to go from, you know, maybe I'll sell my entire portfolio and get my storage units and then pay no taxes on the gain on that.

Thank you for that excellent Description of a 1031. 1031s can also be kind of stressful. I did my first one this past summer and there's a, there's a time limit on how much time you got to find that replacement property. So it can get stressful. So Anand, thanks for that great breakdown. Before we keep moving, I just want to give a quick shout out to today's Ricky Rockstar. Today's Ricky Rockstar comes from the Facebook group. So for those of you that are listening, if you're not in the real estate rookie Facebook group, it is quite literally the most active, the most engaged Facebook group for new investors out there. So just search up real estate rookie, you can join the 30,000 plus people that have already been active in that group. Also get active on the BiggerPockets forums. That is quite literally the biggest repository of real estate investing information anywhere on the Internet. Any question that you ask has probably already been asked and answered a few times over. But today's rookie Rockstar is Lashawn. And Lashawn is actually from Wisconsin and Lashawn just secured flip number one. So the purchase price was $35,000. They offered $25,000, closed at 28, spent another $40,000 in repairs and they were able to sell it for $140,000. So they're looking to clear a pretty handsome profit on that first flip. So Lashawn, congratulations.

That's awesome.

That's really good.

Yeah. One other question for you. So like, just so you Know, people in California, most of us are geographically challenged. And Lashawn said that this lip is between Milwaukee and Chicago. So I literally have to open up a map because I had no idea how close Milwaukee and Chicago were. I'm thinking like, that's a wide range to put like that a property is between. So I learned something new today. So thank you, LaShawn.

California people love to pay a lot in taxes and don't know their geographical.

Don't know my states. I know there's California, there's, there's Nevada. A little bit of a blur. Then Florida's down there somewhere.

And I wish everybody could have seen your eye roll when he started talking about California.

Because I have a lot of clients from California and they're always like, oh, I have to pay all these taxes. I'm like, I don't know why you live there, dude. Like, don't be mad at me. Like, it must be really nice. And they don't even teach really good geography, so I don't understand.

Geography's not a subject in California.

Just kidding.

Because they're so like, it's only California.

They're just like, west coast, best coast, you know, that's all they care.

You got, you got to sound like some haters right now. That's what I'm here with, your snow.

Actually, I, I have to say I have become bitter against the west coast because all my real estate friends live on the west coast except for me, Ashley and Brian. So there's just the three of us on the east coast, really. Oh, and Darren and everybody else is on the west coast and every single event or get together is always on the west coast. So gotta always try and get everyone to come to the east coast, but never happens.

It's too cold.

Yeah. Well, Anna, thank you so much for joining us today. Can you tell everyone where they can find out some more information about you and reach out to you?

Yes. Thank you so much for having me, you guys. They can find me on my Instagram @Anna KCPA just1n anakcpa. I like to just educate people as much as I can on my Instagram. It's really just. Just figuring out how to live the American dream just like I am. And I'm happy to just share that information with others.

Thank you so much for joining us. I'm Ashley at Wealthform Rentals and he's Tony at TonyJ. Robinson. And don't forget everybody, if you want a deal that is going to break down the taxes that you owe at the end of the year. Reach out to Tony and you can own a lovely home in Louisiana for the tax benefits. And we will see you guys back here on Saturday.

Hey, rookies, if you're watching this, we want you to apply to be a guest on the Real Estate Rookie Podcast. That's right. Ashley and I are looking for amazing stories just like yours to be a part of our Real Estate Rookie Podcast. Now look, you don't need to be an expert. You don't need to have done thousands of deals. Even if you've done one deal, your story could help inspire the next listener.

As a rookie investor, especially if you just got your first deal. It is all fresh in your minds and you are the best, best person to tell your story. Give your experience on how you got it done to help someone else get their first deal.

So head over to biggerpockets.com guest if you want to be a part of our show. Again. That's biggerpockets.com guest and we'd love to have you on.