2147: Maximizing Real Estate Tax Benefits - Leveraging Real Estate for Maximum Savings

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Jason Aloha from the Big island of Hawaii. Hey, it's Andrew Freitas from Vancouver, Washington. Yesterday I met with a notary here on the island and signed for a cash out refi for my very first property I bought through your network. About 4 years and 11 months to the exact day my cashed out refi, I got all my money back out of the property and put another 6,500 in my pocket. My liability is now zero in the property. I've got some extra cash in my pocket and all while on vacation in Hawaii.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

I want to talk a little bit about real estate and sort of asset protection investment and all sorts of fun stuff. How long before you started Empowered Investor?

For the past 18 years or so, I've been in the teaching investor side of the business to kind of answer your question. Now, the real estate investment itself offers more leverage than any other investment, you know, and leverage obviously through the debt. But also, you know, think about this for a moment. Are you an iPhone or an Android person?

IPhone.

IPhone. Okay, so take Apple, right? Apple is the most successful company the human race has ever known, okay? And you know, every year they come out with a new fifteen hundred dollar phone, right? And if you look at how much money Apple is able to get, how much share of income they're able to get, I mean, you know, maybe you get a new phone every couple of years, maybe you get a new laptop every couple of years. You know, you buy some other devices, an iPad, some, you know, ear things, whatever, right? AirPods, maybe on average someone who's got, you know, a few bucks, right, they're spending 1500 $2000 a year with Apple, okay? And you know, that's the Most successful company the world has ever known. But think about as a real estate investor, how much share of income you get from your tenants? I mean, talk about leverage. The first 12 to 15 days of every month your tenants are working for you, you're getting, you know, you're getting 33 to 40% share of income. Apple can't do that. Apple's not even close to that. Right. You know, if someone makes $70,000 a year and they spend 2,000 with Apple, right. Or a thousand with Apple every year on average, you know they're going to spend way more than that on their housing. You know, you get to use the bank's money to acquire the asset, you know, about 70, 75, 80% of it. And then you get someone else to pay the debt. That's a massive amount of leverage. And then you get tax benefits, inflation induced debt destruction. I mean, there's tons of leverage in the real estate asset. So that's why I like it and I think that's why everybody likes it so much. You can't do that with stocks, bonds, mutual funds, crypto, precious metals, anything else. Nothing else has the unique multidimensional characteristics of a real estate investment in it, specifically an income property investment.

So while we're on real estate and it being a good investment tool, why single family homes? Are you stuck in that asset class? And I want to talk about a couple other things here too. Because you diversify geographically and I'm terrified of that proposition. So I am very geographically fixated on areas that I know thoroughly and ideally I'm present in. So let's start with single family home. And you can take it where you want, but why that versus others? And do you play in other spaces?

Yeah, I do. I mean, I've owned some big apartment complexes myself. We've sold some apartments to some of our clients over the years, or I should say they purchased them through our referral network. I own a mobile home park currently, you know, I'm okay with other assets. But for the vast majority of people, the humble single family home is the best asset class. It's got the best financing, it's got the best tax benefits, better than the commercial properties. Okay. And it is something that you can buy as an investor, but you have two different ways to sell it. You can sell it to another investor or you can sell it to an owner occupant. It appreciates the best. It's just the best asset class of all of them. The downfall of it is that it doesn't scale as well. If you have a lot of money to invest. Although we have clients, you know, that are purchased hundreds of homes through our networks over the years. And, you know, the big institutional investors are now buying, you know, tens of thousands of single family homes. Well, hundreds of thousands altogether, maybe millions. So it can scale. It's not quite as easy to scale as, you know, buying one apartment complex. Right. But one apartment complex, number one multifamily, is experiencing some real pain right now because it's oversupplied. Where a single family, there's a shortage. Okay. So those are at opposite ends of the spectrum. But, you know, even in the multifamily space, in a few years that'll probably work itself out. I mean, I'm over overall, I'm bullish on housing in general, whether it be multifamily or single family. But single family has the best characteristics and it's the most accessible for most people. You don't have to be a rocket scientist to figure it out. And you can scale it in a big, big way if you want to. So it's my favorite.

Yeah, I, I think that it's also understandable. Right. So everybody lives in a residence. So everybody has some intimate connection with just the basics. When you talk about getting into mobile homes, apartments, and, you know, then you can introduce all sorts of different types of commercial, you know, retail, warehouse, hotel, etc.

You can make money in anything. Look, I mean, there's lots of ways to make money in different real estate assets. I'm just saying, for me, I think the single family is far and away the best for the vast majority of people.

Yeah. Where I was going with that was the operational overhead. So you, Jason Hartman, as a business person and an investor, how do you think about introducing a new asset class knowing that there's going to be additional operational overhead? Do you step in and run it? Do you hire a management company to run it? When you do something like a mobile home park, how do you, how do you approach introducing a new asset class? Even though it is inside of real estate, which is your wheelhouse, it's still a new thing and totally different operational structure.

For my single family homes, we certainly vet and recommend property managers. However, our biggest recommendation is what we call hybrid self management. And Brad, if people told me I could do this 15 years ago, until I was proven that I could do it really quite easily, that you could manage a single family home or a portfolio of them remotely, I would have said, you're crazy. But it's really quite easy and we provide all the tools that help people do that and all the education. So we recommend people self manage their properties. It actually takes less time than managing a manager. Okay, but that's a rabbit hole that takes a little while to go down. Another type of asset class, like for example my mobile home park, okay, so I have an on site manager that manages that. But myself and my client that I partnered with on that deal, we manage the overall park. Okay. Remotely. None of us, neither of us live near that park. Okay. But we manage it. We just have an on site person who does day to day type stuff.

When you say you manage the overarching, what elements are you managing? What are they?

Well, you know, the, the bookkeeping aspect, the decision making for bigger decisions, you know, things like that. I mean it's 120 units, so that's.

Not a small mobile home park. And they are managing tenants, but it's not the smallest. Yeah, yeah, there are a lot of tiny ones out there. So they're managing the tenant relationships. And mobile home parks are interesting because there are kind of two different models, right? You can rent the pads and people can come in and out with their mobile home parks. Even though there is a cost of that and there isn't huge transition or you can rent the actual units, you can own the mobile homes and rent the units.

Most investors don't want the park owned homes. You know, mostly they, they just like to rent the pads.

And why is that?

You know, it's just easier and you can make money renting the pad. In fact, there's a book called called Deals on Wheels by Lonnie Scruggs which made famous the idea of Lonnie deals. So if someone is listening to this and you know, doesn have much money and they want to get started in the real estate game, buying a mobile home and renting it out or turning it into a lease option or rent to own deal is a pretty good strategy for someone who's, you know, like a beginner who just doesn't have any capital. You know, because to buy a single family home through our network, you're really going to need a bare minimum of about 30, $40,000. Okay. And you know to get a better one, you're going to need more. Right. 20 to 25% down. So, you know, with very little capital, the Lonnie deals is an interesting strategy.

What's the construct of a Lonnie deal? Because I've heard of a Lonnie deal, but I don't know, I don't know what it is.

It's this Idea of, of buying a cheap mobile home for very little money and then putting a tenant buyer into that home. And there are different laws in different states, so you gotta, you know, get it, gotta know what you're doing, obviously, and basically selling it to them on a rent to own type of arrangement. Okay. I mean, look, not going to make much money with this. It's a very small deal. But I just mention it because sometimes there's someone listening who doesn't really have much money at all to get started. And it is a way to get started.

Good entry point. Okay, so the other question that I asked that I, I want to hear about and want to know some of the nuts and bolts on are you mentioned earlier that you have owned properties and I think you said 11 states and 17 cities. You've mentioned a couple different asset classes. That is a mildly terrifying proposition for me. Mostly because I'm a control freak, but also because real estate is so geographically specific. You know, if you're off by a couple blocks, it can be the difference between a great asset and a very difficult to manage asset. So can you tell me your like, your mental approach and then also tactically how you do that and why it makes sense?

Yeah, sure. So basically the reason I got into this business is that 20 years ago I was in negotiations to sell my traditional real estate company in Southern California to Caldwell Banker. And that deal took about a year to negotiate. So it was like a one year deal. And I knew that, you know, I was kind of thinking as I was doing that deal, negotiating that deal, I was thinking about, you know, what's going to be my next step. I could just retire. I didn't need any more money. You know, I had made a lot of money. But retirement, as you can probably tell from listening to me, is just not in of interest. Okay. I like business too much. At some point, you know, mostly you get to the point where it's just a game, right? And it's just challenging and interesting and stimulating and you know, you're not doing it for money after a while, hopefully. So I thought, you know, I want to start buying properties nationwide because my whole life was in Southern California and I had gone through a couple of recessions and I thought, you know, I don't want to have all my eggs in one basket. I'm a little older now. I want to diversify, be a little more conservative and I want to buy inexpensive properties that have really good rent to value ratios. You couldn't get those in California. California is just overpriced okay, so nothing works in California, but there are a lot of less expensive, what we call linear markets around the country. You can get very good deals. So this idea of I've got to live near my property was really fixed pretty well for me. When I had a property that I lived near, Okay. I had this property in Irvine, California and turned it into a rental property. I had lived there for a little while, turned it into a rental property, and I had this tenant, had rented it for like three years, three and a half years, something like that. And the tenants said they were moving. I went over to inspect the house after they were out and I realized, you know, even though this, this house is 10 minutes from my office and maybe 15 minutes from my house where I live, I hadn't been there in over three years. So it didn't matter if it was here or 2,000 miles away. Like, what's the difference? And the problem with having a property near you is it pollutes your mind and makes you a bad investor. It usually turns you into a handyman where you're going to start going over and dealing with a property yourself. And that's no longer investing, it's being a property manager, it's being a handyman. It's doing things you shouldn't be doing. If you're an investor, a true investor is arm's length. Okay? And I have many properties that I've never seen, tenants I've never met that I have purchased and sold and owned for 16 years and never went to the property, never met any of the tenants. Worked out great. So there are tools nowadays that we provide for people, for our investors that make it very easy to be a remote control investor.

Okay. So these are really good points. And definitely technology's gotten better to be able to do some of that stuff. And you're right, I have properties in town. I actually just went to a property that I have in town that I haven't been to in a year. And I only went because it happens to be empty. And I was like, now I should go look at it. Which there was no reason to. I just had a friend in town and I thought we would go do it. Yeah, what I don't know, and what I'd like to get a little clarity on is how you assess these things and how you're confident in the. And we don't have to go super deep on this, but, like, what are the bullets for making sure that you don't misfire on buying a property, you know, buy in the wrong area Et cetera, et cetera.

Yeah, well, the thing is, you know, buy through our group, through our referral network, because this is what we do. You know, we've been in this business, you know, with different companies and so forth for like 20 years almost. I guess that's the origin story. I didn't tell you I was leading up to that before I tried to do this myself. And I was flying around the country, I was researching markets and you know, I just wanted to buy some of my own properties. As I was exiting my other company, I knew I was going to have a ton of money that I had to deploy. And it was so difficult, Brad. I mean, you know, it's like talking to these random one off realtors and sellers and, you know, trying to research markets. And I just couldn't do this myself. And I thought, you know, there are probably a lot of other people like me that would like to be nationwide investors. So they're diversified, so they have all the advantages of being in the better markets. And you know, if, if I need this and I find it hard to do this myself, why don't I just create a whole business and provide this service for other people? So I was basically my own first client when I, you know, got into this industry of, you know, we'll call it Real Estate Investor Referral Network industry. Okay. I was the first client. I kind of just figured out how to do this successfully. I mean, look, we're still figuring it out every single day. Of course, that's why I got into this business, because I just thought there'd be other people that needed the same problem I had solved. You know, that's the way a lot of businesses start.

So what I heard there one answer to that question of how do you vet properties remotely where you don't really know the area is buy from somebody that's already vetted it.

Yeah, yeah. So. So we have, basically what we do is we sign bulk referral agreements with different sellers in different markets that we like. Right. And so, you know, we've helped many other clients go into those markets. That's what happens when, you know, when we get another client that wants to go into that market, we have a track record in that market. We have lots of experience with our teams on the ground, our boots on the ground. And with that market, we like to say we are area agnostic. So when a market stops working, we stop recommending it and we just go to another market, which is one of the benefits of not having a physical office in that city or in that neighborhood because we have no cost of leaving. We can just move around and do what makes sense. Now, what makes sense for a new buyer is not necessarily what makes sense for someone who bought a year ago, because the someone who bought a year ago is already got a stabilized property, it's probably performing great and they just stay put and keep running their property and we help them and support them for, you know, a lifetime, basically. But a new buyer may not have as much luck going into that market anymore because things do change. It's very dynamic.

For sure. Let's shift and talk about that business because we've got, I think, a number of interesting stories behind this. But you did a bunch of investing, you sold a brokerage, had a bunch of money to deploy, moved into investment.

And at some point, I mean, I was already investing. It was just all in Southern California.

Before that got it. And at some point that was the conduit for educating people around it. So how did the education business start? Did you start with, you know, a network is a tough thing to build. Right? That's generally to get that network effect where you have two sides for the transaction. It's not a simple thing to do and a lot of. So how did that happen?

The nice thing is I, you know, I started in this industry, the real estate investor industry in Orange county, where I was based, where I was already a pretty famous local realtor. Okay. And I already had lots of clients and they were in that Southern California market and they thought the same thing I did. It's too expensive. Nothing works. You can't make the numbers work on expensive rental properties. They've got to be entry level houses. So basically I just started hosting little seminars at my office in Newport Beach, California. That's one of the offices I had a couple of them the Coldwell Banker didn't buy because they had just purchased another company there. So I still had that lease, right, for another couple of years. So I just kept it and used it for my investor business. I started hosting these seminars. Then I started a radio show that turned into a podcast. And, you know, my podcast is now one of the oldest real estate investing podcasts out there. It's been running for what, 18, 19 years even now. Wild back since nobody knew what a podcast was. Right.

So it sounds like the launch of the information product company wasn't really a launch of information, an information product company. It was sort of a extension of investing in real estate and connecting with other investors.

It was always an information company or an information business in the sense that we were teaching people things. Right. We just weren't doing it en masse until later.

How long did you go before you leaned heavy into that? Because, you know, we know each other from a. The largest real estate investor education mastermind.

Yeah.

And it's every. I mean, it's basically every real estate educator in the country as a part of the mastermind. So it's a huge industry and there's a ton of money to be made there. When did you say, hey, you know what? I'm doubling down on the info product company and leaning in heavy there.

You know, I started podcasting in 2005. And so, yeah, I know it was very early. Nobody knew what a podcast was. Hardly anybody was listening back then. You know, it all kind of grew out of that. I'd say that one to many type of teaching.

Got it. So where I want to take us here is as you grew this, eventually you ran into a rather significant challenge with a competitor. Can you give me an idea of. And I'd love to hear the story, but can you give me an idea of size and scope of your company at the time and lead us into that?

Yeah. So myself, personally and two of my companies were attacked by a competitor who was trying to gain market share by stealing our market share, basically. They were posting all sorts of falsities online and telling lies about me and emailing my vendors and interfering in those relationships. So we took them to court, and unfortunately, it was so delayed because of COVID You know, the trial kept getting postponed and it kept costing us more and more money to wait and, you know, just do nothing. Well, you know, before we could actually get to court. So we finally got to court and we went to federal court in Fort Lauderdale, Florida. I live in Palm Beach, Florida now. And after an eight day jury trial, the jurors deliberated for about a day over this case, and they awarded me and two of my companies a $56 million jury award against six different defendants that were basically trying to destroy my business and destroy my life. Brad, it was so incredible. They actually hired a marketing agency, a digital marketing agency, to ruin my reputation.

Wow.

You got to give these people credit. They scaled up and it was very tough for. Was very depressing because, you know, I had never had any client complaints, never been sued by a client in, you know, almost 10,000 deals. That's, like unheard of. I mean, in real estate, it's very litigious industry. People get sued all the time. I've never been sued by a client. We just really take care of our people, you know, and we provide them with service and answers and assistance forever. And so they were trying to say we were just bad apples and, you know, we're doing all kinds of bad things. And so they were telling all these lies, and we didn't know who they were. They were doing it anonymously. And so we had to hire cyber investigators. And, you know, let me just say something to people. You know, if you think you can go online and be anonymous, think again. It's really not that easy to do that, you know, because there are little breadcrumbs that are always left behind. So these people left breadcrumbs behind. We finally found out who they are, and we named them in the lawsuit, and, you know, they denied it. Denied it. But then we proved it, and so we finally got them to be accountable.

How was it six different parties doing this?

Well, there was the digital marketing agency and the digital marketing agency's owner. There was the company that was trying to gain market share, which was a man, his wife, and the company. So that's three parties. And then the digital marketing agency and the owner is two more parties. And then there was an employee that also was found liable in the lawsuit, and she was helping them do this, all of this stuff. We actually, during the case, as we were litigating it, we actually offered her a way out. We said, look, if you just cooperate with us and give us information, it'll reduce our expense and we'll release you from the case. And she wouldn't do it. She was. I mean, that was just. It was such a good offer. We were just going to let her off the hook if she would just, you know, tell us what happened behind the scenes. But she didn't. So now she has part of this $56 million judgment that, by the way, it was later reduced because the court found some of the items in the judgment from the jury what they call duplicative. And so they later reduced the award to just over $30 million, which, you know, still isn't bad, obviously, but she's now liable for part of that 30, I think, $32 million judgment.

Wild. So I want to ask a lot of questions around this, but the first is, would you have done anything differently earlier on to help protect against this, preempt it, tackle it faster? What are. What are the lessons you got from the onset?

Oh, God, there's a million lessons, and we don't have time to go into all of them. But I'll tell you, one of the things people need to do is have an online presence, okay? Because if you don't have an online presence, you know, and I know probably everybody listening has one to some degree, but you want to have a big one, right? Because when you don't have one, it's a vacuum and all the negative stuff is going to show up, right. If you know right away at the top of the list. But if you have an online presence, you know, your older online presence will help knock down the lies and the stories and the negativity. That's one thing I would definitely learn. Also, keep your vendor relationships to yourself on the down low, because that's what this competitor attacked. They knew who a lot of our vendors were and they would send them these false emails with these lies. And it did ruin some of our relationships. So this definitely cost us money. I mean, you know, now we got a big judgment, we're going to collect at least some of it. So hopefully we'll get some of that back.

And for context, a vendor for your business is what kind of company?

Well, all kinds of vendors. I mean, any company has lots of different vendors, but you know, our referral partners, whatever. There's many vendors.

Yeah, but I think that those are relevant considerations because some things, you know, in different businesses, some of those vendors are more public than others. Some would be considered ip, right. Stuff that nobody would know otherwise. And some are going to be public and you can track down. So, like what, what ones do you think when you say keep your vendors close and don't disclose them?

Any of them. I mean, you know, it depends what kind of business you're in. I mean, you know, you can share them with your friends and refer people around, but, you know, don't paste them on your website, for example. And we didn't do that, by the way. I'm just making a general comment for the benefit of the listeners and viewers.

Yeah, I think that's relevant. So you mentioned you're going to collect some of it. So once you have a judgment like this, what is the path to collection? You've got two companies and a bunch of individuals.

Litigation is a very high burden and it's a very expensive thing. And I think these folks thought I wouldn't follow through. But if there's one thing I am, it's persistent. I'm also idealistic. So I'll keep going, I'll keep devoting resources and, you know, whether they be money or time to something, I believe is a just cause. You know, I did follow through. It cost about a million dollars to do all of this. And it took a ton of time, probably a couple thousand hours of my own time. So, yeah, you've got to do that. You know, part of being in business, once you get successful, if you don't hold bad players accountable, they're just going to take advantage of the next guy. And, you know, I think that's part of our duty is to keep our industry clean. Right. And to help the next person. You know, I love it when people say maybe someone rips them off, for example. Right. Which, you know, happens all the time. Right. Of course you got to pick your battles. Right. But they're like, ah, I don't care. I just let it go, you know. Well, you know, that may be great for you, but that's kind of selfish if you think about it. It's like that person now that they've never been held accountable, they're just going to go screw over the next person. I mean, help the next person. That's kind of the point of doing this, you know, that's an act of contribution to the community. It's charity work. I mean, it's a giving thing. You know, imagine if law enforcement just let every bad guy go because it was, you know, they didn't want to deal with it. You know, it's too much hassle to go catch the bad guys. I mean, what kind of world would we live in? It's be a disaster. So in a civil sense, you know, since you don't have criminal law behind you helping you with this stuff, you've got to hold bad players accountable. It's our burden. It's incumbent upon us to do that, to just make the world a better place.

I know you're pressed for time here. Before we wrap up, when we were talking earlier, we were talking about tax strategy, and I am a active real estate professional and by commercial, which gives me cost segregation benefits. And that's.

We've. I've done residential properties.

Oh, okay. So I'll talk about this. So. So this is something that's been a heavy part of my, my investment strategy and tax strategy over, over the years. In 2023, the benefit of that has been reduced from 100% to 80% and will continue to get reduced until. Yep. Presidential change. Probably. But tell me, you know, today what good tax strategies are. If you want to talk about, you know, residential cost or whatever else. What's it. What's a good strategy for somebody that's making, let's say, several hundred grand a year or a million plus a year?

Yeah.

What are the advanced tax Strategies.

So there are many. Income property is the most tax favored asset class in America. But one of them, and it's really the best of all, and it is depreciation. Because depreciation is a phantom write off or a non cash write off. You've got to qualify for this depreciation. Now, of course, I'm not a tax expert, I'm not an attorney, I'm not a cpa. So check with the appropriate professional. Of course, that's my disclaimer. But one of the great things is, is that if you can qualify for all of these benefits, when you look at purchasing a property, most people think of that as a singular thing. It's really two things. It's the land and it's the improvement. The house or the apartments sitting on the land. So when you buy a property, you're buying these two components, okay? And the IRS treats the two components differently. The land, the IRS just does not allow you to depreciate it because it'll always be there. But the structure sitting on land, the IRS allows you to depreciate it. If it's residential over 27.5 years, if it's commercial over 39 years, so the residential property has a 25% better tax benefit. I alluded to that earlier. Okay? And essentially you can make money on the property. You could have positive cash flow. It could be going up in value. But the irs, because of all the lobbyists that have lobbied Congress over the years, they'll let you treat it as though you're losing money. It's a beautiful thing because most tax benefits, if you want a tax write off, you've got to write a check or spend some money. This one, you don't have to spend any money. You could be making money and you get the write off. It's a phantom write off or a non cash write off. So it's an incredible thing. And there are many other tax benefits as well. But depreciation is the holy grail and you have that with income property.

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