CW 182: Starting a Home-Based Business with Tax and Business Attorney Barbara Weltman

Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven't thought of before. And a new slant on investing fresh, new approaches to America's best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self made multimillionaire who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to the Creating wealth show. This is episode number 182 and this is your host, Jason Hartman. Thank you so much for joining me today. Today we're going to talk about a few things. The first one is a informal little study we've done on some different appreciation rates and talk about how all real estate is local. Hopefully you know that by now. That is an old saying, but it is so, so true. And in a market as large and diverse as the United States of America, there is no such thing as a national real estate market. There are about 400 local markets. So we'll chat about that and we will also the, the major part of the show today will be about taxes, tax benefits, actually. And the tax benefits of having your own small home will delve into a little bit of the real estate taxation stuff. But it's really mostly about the home based business aspect today. And every single person listening should have some little business on the side going on, if for no other reason than tax benefits. But hopefully it's for profit benefits too, and passive income benefits as well. So we'll get to that in a moment. But first let me tell you that I have Ari here with me. You've had him on the show before. Ari, how you doing?

Hey, Jason, what's going on?

Well, let's talk about this little research you've been doing. You've been surfing the web. I tell you, Ari is quite the information guru. You're always looking for interesting stuff. You're always sending me different interesting articles and links and things like that. And you got this from forecastchart.com and this is a website that, oddly the name is Forecast, but it doesn't seem to do as much forecasting as it does historical data. And what was interesting about this big package of paper that you put together is how you really notice, don't you? Ari. That all real estate is local. Yeah, it is, yeah. So what, what's interesting here folks is that we have looked at a bunch of different markets around the country and we just thought we'd talk about a very small number of them today and we'll use sort of Orange county as our baseline for a lot of stuff since that's where we're located in Orange County, California, in the socialist Republic of California, the place where businesses love to leave. Anyway, I just have to throw that in. So what, what's interesting here is that if you just take a couple of sort of select years, I'll just pick some ch. Cherry pick years. So in 1995 in Orange county, there was actually a slight little bit of appreciation of 0.67%, less than 1%. And the market had recovered in 97, 95, you know, that was right about the time Orange county declared bankruptcy. But my 97, you're seeing a 12.27% appreciation rate. And in Austin, Texas in 97 you're only seeing about a 2. I'm just going to kind of round off here for the sake of time and less confusing about a 2% appreciation rate. So what's interesting there is that if you time these different markets a little bit, of course it's about a lot more than appreciation or depreciation for that matter, because income property is a multi dimensional asset class. And so you've got to consider income leverage, tax benefits, mortgage pay down and inflation induced debt destruction or roi, return on inflation. And we've talked about that in other shows and will again. But if you just look at the appreciation or depreciation numbers, it's pretty, pretty interesting. It tells a story. So talk to us about some of the markets you have in your hand there, Ari. And let's look at a couple of years and just kind of compare them to see how all real estate is local.

Well, first of all, hopefully we can get these up on our website somehow because the charts that are on these sheets are really, really interesting because if you look at them, it's really interesting to see how the linear markets that we recommend, how steady they are compared to markets like Orange county or Phoenix. It's just interesting to kind of see how the line goes up in down.

Yeah, you're absolutely right, Ari. And what's interesting about that is remember there are two kinds of markets and then there's one that straddles there's a linear market and a cyclical market. So the high land value areas like most of California, that's Pretty much a cyclical market. And the lower land value markets are pretty much always linear markets. And right now, what do we like, Ari? We like linear markets, right?

That's correct. Yeah, absolutely. So let's check out Phoenix, for example.

Let me say something about Phoenix, though. Phoenix straddles the line, and that's what I meant. Phoenix was always a very linear market, but in this last boom cycle, it became a cyclical market. And so we call Phoenix a hybrid of the two. So isn't that kind of interesting because you're going to tell us about one year where Phoenix just depending on what survey you're talking about. I mean, radical appreciation, right?

Yes. Well, I'll take a couple years here first. In 1990, the appreciation rate in Phoenix was 40. Negative 4.2%.

Wow.

Okay. So that's 1990. And then you look at Charlotte, North Carolina, in 1990, and it was 0.18%. So it was actually above the Phoenix rate.

Yeah. So let me share with you 1990 and a couple other markets. If you look at Orange county, negative 2%. And if you look at Indianapolis in 1990. Right. Correct. We're talking positive 3.35%. Wow. Now, 3.35 re. That doesn't sound like a big deal, does it? But if you put 10% down on the property, the gross return, they're very simplified, of course, is 33%. Right. So you amplify it with leverage.

Right?

Right. Yeah. So it's really interesting to see that in different markets. So, and then of course, everyone knows in Phoenix in 2004, 2005 had a huge run up.

Oh, crazy.

In 2005, we're looking at 40%. Is that crazy, Jason? 40% in 2005.

And you know, I've heard like, depending on which survey you're following, some say up to 50, 50, 55%. It's just crazy. I mean, Phoenix went absolutely crazy.

And then in 2005 and that same year, Charlotte did 5.18%. And then in 2005, Atlanta, Georgia did 4.8% positive. So it wasn't quite as high. But then real quick, Jason, you look at 2008 in Phoenix, negative 20%.

Giving it all back.

And in 2008 in Charlotte, it was 0.72%. So it was positive. And in Atlanta, it was slightly down 3%.

So let's look at that 2005 year again because I think that's a sort of a critical year.

It is.

It's the year that most people consider to be the top of the market. Now there's, again, all real estate is local, so there isn't really a top of the market necessarily, because looking at national statistics is something only a fool does. It doesn't really tell the story, and it doesn't even tell the story within a city either. You've got to look like neighborhood by neighborhood. But 2005, based on some different MSAs, and this isn't even cities. So you look at Orange County, 2005, 19% appreciation rate. Give me some of your numbers for 2005 again.

Again. Phoenix was 40%. 4, 0.

It beat Orange County.

Yes. And Charlotte was 5.18.

Okay, so here's, here's boring Indianapolis, which I just bought a place there, and I love Indy. I think it's a great, nice, stable market. It only did 3.46% in.05. And Austin, Texas, another one of our markets. Now that did pretty good. 9.29% in 2005.

Right, right. Well, again, Jason, the whole point of me gathering this data is just to kind of compare what was going on in the market. Of course, we don't like to gamble, we don't like to speculate on appreciation rates, but it's just good to know because there are a lot of people, a lot of listeners, a lot of clients I talk to who like to gamble. And they say, well, they say, ari, which market? If I, if I have such and such capital, what market do you recommend? Because I, I really want to try to sell it in five years when the market goes back up again. And here's some data that can help. But again, it just goes to show it's a gamble on some of these, in some of these markets, you can't time it.

Yeah, it really is. It's very hard to time. And market timers, they usually don't win. They usually get killed at some point because it's just nobody can really do it with any, any degree of total precision. It's what the Black Swan is about. Something surprises you, that famous book, the Black Swan. What's interesting too, that you noted, Ari is on the Houston market. And you look at the last 14 years in Houston, a very linear market, pretty darn boring. Of course, it suffered during the oil crisis a long time ago. And there were billboards that said, in the 80s, well, the last person to leave Houston, please turn out the lights. Now, I think those billboards are in California.

But in Houston from 1995, there has never been a down year. Every single market, and you pointed this out very succinctly, has appreciated Nicely. In fact, in 1999 in Houston, 8.41% appreciation. And you look at 2005, 2006. So after the boom, right. The year after, still appreciating almost 6%. 2007, just about 5%. 2008, about 4%. 2009, only 0.85. But think about that. That's the most devastating year financially in this country in seven decades. Right. And it's still appreciated. And the income in Houston is fantastic. The rent to value ratio well into that point.

Real quick. Also, in the Charlotte market, in the Atlanta market, there were only, let's see here, 1, 2, there were only two times out of 29 years, I don't know if we mentioned, Jason, this is over. Well, we're looking at a appreciation rate over 29 years. But in 29 years in the Charlotte market, there was only two years that was actually negative in appreciation, which is only like 2 or 3% negative. In Atlanta, there's only a couple times there's like 2 or 3% negative. So that's pretty darn good, I think, in almost 30 years.

And remember the game of income. Property is a game of staying power. And the rule is, remember my ten commandments of successful investing. The property must make sense the day you buy it or you don't buy it. And when I say make sense, I mean from a cash flow perspective. People that manage cash flow win the game. Why do they win the game? Because they have staying power. The gamblers, the flippers, the speculators. They may have a few wins here and there, but ultimately they lose. I've seen it happen a million times. Now contrast that to Orange county in some of those years. Now Orange county was really starting to hurt and gave back a lot of its gains. For example, 2008 in Orange county gave back 19%.

So yeah, it's a good point. Well, another thing to mention too, Jason, is that in most of these markets that we're recommending to our investors and our clients, if you invest your capital into one of these markets, like let's say Indianapolis or Atlanta or Charlotte or Dallas, it's going to be a pretty safe investment because you're not going to have to worry about trying to get out of the market and try to sell it because if you look at history and history repeats itself, we all know there is no reason to go out and sell, sell these properties right away because they don't have the big ups and downs unless you're in a market like Vegas or potentially Phoenix again, if that happens.

Right.

But if you. If you buy in Phoenix now, your basis would be so low. Right. That you wouldn't be.

It's back to where it was 15 years ago.

Right. They basically gave it all back because they had their crazy time. So, again, it's not about speculating. A lot of people ask me, Jason, how long would. Should I keep the property? The answer is I don't know. But generally speaking, if you're talking about the markets we recommend today, I would say keep the property for 27 and a half years until you run the depreciation out of it and you collect all those nice tax benefits. And then you do a 1031 tax deferred exchange, so you continue to defer, defer, defer, and never pay tax. And then it goes into your state when you pass on. So income, property is a great deal, but if one of our markets gets to a point at some time in the future, a couple years down the road where we think it's really frothy and it's a bubble and it may be time to take. Take some capital gains and get out. And you won't take the capital gain because hopefully you're not going to totally liquidate. You'll trade via the 1031 tax deferred exchange and you'll be able to trade into other markets. You'll hear us talk about that here on the show, at our seminars, in our newsletters, etc. We just like the buy and hold philosophy. I've noticed over the years I've been in real estate, which is. I hate to kind of admit it's a long time now. I've been doing this, okay. And since I was in college, 19 years old, I got my license, and back since then, I've seen a lot of people selling thousands of properties. The people that buy and hold have real wealth and the people that buy and flip have spending money. And I don't know about you, but I'd rather have real wealth any day. Wouldn't you, Ari?

I would, absolutely. The thing is just stability. If you're a type of person who wants to put your investment in something and not have to worry about it going up or down in value or whatever so much. That's most of our markets.

All of them.

All of them. They're very linear, very stable markets.

Exactly. Exactly.

Good point. Well, hey, thanks for gathering this up. This is our interesting stuff and again, we gave out the website earlier so people can go check it out directly there. Want to mention, make sure you go back and listen to a couple of our prior shows and I'll just kind of mention some of them. You know, I've been talking a lot about the self management thing lately and again, some of my properties, I'm going to take my worst property managers that I like the least for whatever reason and as their management contracts come up, I'm not going to renew them. I'm going to let them go and start self managing some of these properties. And I've talked about that a lot on the prior shows, so listen to that for details. And Ari, one of your clients is considering doing this. I know. So listen to those prior shows, just the last few shows to hear more about that. On show 174 I talked about the ultimate investing equation and we had the interview with the National Inflation association on number 180. That was a bit of an odd show, I'll be the first to admit. Remember, it's in every 10 show where we talked about the Divine Cosmos 2012 and dreams and DNA and all kinds of new agey stuff. So again those are meant to be a different show. But getting a lot of great feedback on the more technical stuff on the last show, number 181 with Bruce Norris and she's got a lot of great stuff. Go check that out. And I really want you all listening to get a copy of our Financial Freedom Report. That is one of the best things we do. And we gave away a free, free sample of that on show number 173. And you should really get the Financial Freedom Report. What you didn't get is you didn't see the beautifully printed color version that's all available via digital download. You'll get that every issue. You get the audio to download as well. So it's, it's professionally narrated and read to you in the printed copy. There are a lot of charts and graphs and things like that that you'll see as well. And I know a lot of you like the show where I had my mom on. Go listen to that one. And we had a Harvey McKay recently and 68 we talked about mobile home parks and self storage. And by the way, I'd like to just reiterate, thank you for all of you who have expressed interest in that. If you're interested in partnering up with us, we're just kind of, we got a small group of people together and we're putting our own money into deals. It is hard to source these deals. This is not easy at all. We make offers almost every day on something somewhere and if you have at least a hundred thousand dollars or more to invest. And again, this can't be your emergency saving money. This needs to be money that you're willing to put into an investment. So can't be your last penny. Give us a call here at 7148-2042-0071-4820-4200 and we'll be glad to talk to you about that. And join us for the Masters weekend. And that is coming up October 15th, 16th and 17th. We have early bird pricing still and there's a preview call for that on September 23rd. So join us for that. You got to register for that preview call in advance@jason hartman.com. so do that. And Ari, are we ready to go to our interview today about tax benefits?

Yes. As much as I don't like speaking or hearing about taxes.

Yeah, we'll listen to it. Everybody wants to listen. I'm telling you, man, everybody wants to roll their eyes back and fall asleep when we start talking about taxes. But this is something that it's just funny to me. Here's why it's funny. People will, if they want to buy a new big screen tv, they'll shop around, they'll go online, they'll read reviews, they'll get the best deal, they'll negotiate. If they want to buy a new car, they'll do the same thing. They'll shop around, they'll go on the Internet, blah, blah, blah, read reviews, get the best deal, etc. Yet when it comes to taxes, the single largest expense any of us have in our life, people amazingly just trust their CPA or their enrolled agent to handle it for them. And I'm telling you, you don't need to know every detail about taxation. But you have got to do some prudent things and know some stuff yourself to minimize this impact. Because this is something that will destroy a lot of your wealth if you don't know how to play the game. I mean, if you can save that 30, 40, or even 50% of the money you give to the government, imagine what a difference that makes, especially when you compound it over several years. That money that you save, you can buy more properties with it, you can open a business, you can take vacations, you can live the good life. So as boring as it may sound, sometimes tax is very important. So let's go to our interview. We'll be back with that in less than 60 seconds.

Here's your chance to catch up on all of those creating wealth shows that you've missed. There's a three book set with shows one through 60, all digital download. You save $94 by buying this three book set. Go ahead and get these advanced strategies for wealth creation. For more details go to jasonhartman.com.

It's my pleasure to welcome Barbara Weltman to the show.

She is the author of many books.

But her Most recent are J.K. lasser's Small Business Taxes 2009, the Complete Guide to a Better Bott and the Complete Idiot's Guide to Starting a Home Based Business. Barbara, welcome.

Thank you so much.

It's great to have you here. Tell us a little bit about, especially.

In the context of the times we are in now, why someone would want to consider a home based business and.

How much of a commitment is it?

Is it something that replaces your job or is it something you do in addition to or both?

Well, it's interesting that you phrase it that way. More than half of all businesses are actually run from home, 53% are home based. So there must be something good about it. And what's good about it? There are a lot of reasons. First of all, you save a great deal of overhead because you're already paying the cost of the office, for example, so you don't have to pay for rent. You may want to increase insurance, but that's something separate. Basically, you're already paying for your business location. So that's a real good advantage. Another advantage is that you're saving a tremendous amount of time by not having to commute outside to a location some distance from home. And so not only do you save the time, but also the commuting costs. And remember when gas was spiking just a year ago, that was on everybody's mind to not have to travel too far. And also you have more flexibility in terms of running your life. That's not to say that you won't necessarily put in a lot of hours if your business demands it, but you may be able to arrange those hours to suit your personal situation, whether it's child care or adult care or just pursuing some other kinds of interests that may put a demand on your time. So again, I guess to sum it up, you have a great deal of cost savings and a lot of flexibility working from home.

Yeah, there are definitely some big benefits there. I think one of the things before we go on to what types of home based businesses are available and the.

Most profitable, I think people have this.

Concern when they hear what you say. Of course there are big benefits. They have this concern that they will be sucked into working all the time because they never really Leave work.

What do you say to those people?

Well, as someone who's worked from home for more than 25 years, I can say I understand the temptation there because there's always work to be done. But with that said, you can set limits on your time, you can close the office door, you can set up a schedule if you need to and stick to it. So you can certainly set boundaries and make it work for you.

When you say home based business, everybody.

I'm sure has a different perception of what that means. To some it might mean selling Avon.

Or Mary Mary Kay.

To others it might mean Internet based business of sorts, maybe an ebay based business.

And I think you actually have a book on that, don't you?

Yes, the Complete Idiot's Guide to Starting an ebay Business.

Great.

It could mean an ebay business, it.

Could mean a lot of different things. What is it most of the time?

Well, there is no what most of the time. Because today with the Internet, with the acceptance of running a business from home, you can run virtually any type of business activity from home. And in fact, some of the most popular home based businesses are not necessarily what you would think of. I mean, they're not necessarily the Mary Kay's or the gift basket businesses that you would think of. In fact, construction is one of the most popular home based businesses because people run their trades and construction businesses from home. They don't take a separate location and they run it from home. Financial services are another popular business and that might include, for example, professionals, CPAs, financial planners, tax preparation and other kinds of financial service businesses. And those are two of the most popular categories for home based business.

Wow, that's rather surprising actually.

But I guess a landscape person or someone who's a handyman or light contractor, they could certainly do that from home, couldn't they?

Sure. As could an interior decorator or any other kind of business where you would supply the services outside of the home. In other words, you go to a client or a customer's location to do the job, but you run the business from home. You keep your books and records and you schedule appointments and you do all the other aspects of the business from your home.

I really like the way the table.

Of contents is laid out in the Complete Idiot's Guide.

And there's a lot to this.

There's more than one might initially think when you look at this table of contents and you look at all of the different aspects. Maybe we want to just kind of.

Go through this a little bit.

We talked about some of the advantages, the flexibility, the cost savings and so forth.

You have Chapter three about doing what.

You love and how the bucks will roll in when you do that. And I certainly agree that everybody will be more effective pursuing their passion.

How do you know what you love?

What are the ways people determine that?

Well, certainly many people take a hobby and turn it into a business. It's something that they obviously love, they know a great deal about and already have a leg up, if you will, on getting a business rolling.

You have a section here about taking a personal inventory and an entrepreneurial iq.

And of course look at experience. That's always helpful. Any comments on those Running your own.

Business is not necessarily for everyone. You really need to have a certain kind of personality, a certain skill set to be able to the cliche is often called a self starter, but I think that's descriptive of what you need to be to run your own business. You have to be the kind of person who can take responsibility for everything because the buck always stops with you and you have to be able to stand the risk. There is risk involved in a business that you're not necessarily going to be getting a steady income and you have to be able to live with the.

Ups and downs to make it easier for people. There are some franchises out there that are actually more geared toward home based businesses. Whereas many people think of franchises as of course the fast food franchises and.

So forth that are bigger.

They take a big commitment.

What are these sort of small or.

Maybe micro franchises that someone can start at home?

Well, they do come in a variety of categories from child care to animal care, pet care, and really there's no limit again because many are tailored for a home situation. I think there are many pros and cons to opting for a franchise versus starting from the ground up. The benefits obviously are that you sort of get a structure and sort of a how to laid out for you of the steps that you have to follow to run the business. And because it's a franchise, hopefully it's been a proven success. Certainly the Subway franchises as the fast food places you've mentioned show that to be true.

Thank you for listening to the Creating wealth show. This is Jason Hartman, your host and we appreciate you following the show. We have many, many episodes, hundreds of episodes, and some of the older episodes have been archived and placed in our members section and that applies to this one. So we include a sample that's about 25 minutes long. And then for the rest of the show you can go to our members section@jason hartman.com Many of the other shows are still in their full length complete version. However some of the shows like this one are in our members section where you can hear the show in its entirety and again you just need to go to jasonhartman.com and you can get the full show there in the members section plus a whole bunch of other great members benefits and resources whether it be documents, forms, contracts, articles, other video and audio content. Just a great resource so be sure to join as a member@jason hartman.com and thanks again for listening to the Creating wealth show.

This show is produced by the Hartman Media Company. All rights Reserved. For distribution or publication rights and media interviews. Please visit www.or email mediaartmanmedia.com Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network Inc. Exclusively.