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161. Taking Over the Family Hotel Business, Why STRs are Awesome, & Crypto with Naitik Patel, CPA

Thomas Castelli

In this episode, Thomas is joined by fellow Senior Advisor, Naitik Patel, CPA to discuss his experience taking over his family’s hotel business, why the short-term rental strategy is awesome, crypto investing, and more!

This episode is sponsored by Landlord Studio and Tax Smart Investors.

Full Transcript:
This podcast has been transcribed using AI, please excuse spelling, grammatical, and other errors.

Thomas Castelli 0:00
You’re now listening to the real estate CPA podcast. 

Brandon Hall 0:05
Your source for all things real estate, accounting and tax. Here we reveal our secrets that can save you 1000s in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business, and how they steer clear of Uncle Sam.

Thomas Castelli 0:30
Hey everybody, thanks for tuning into this episode of The Real Estate CPA Podcast. Today we’re joined with Natick Patel Natick is a CPA and senior advisor on our team former Big Four alumni and fellow real estate investor and he also has his fair share of crypto investments these days as well I’m sure we’ll touch on that as it’s been a very hot topic amongst our clients, and pretty much the entire world this year. Before we jump right into today’s episode, we all know minimizing taxes is essential to growing your portfolio However, another important aspect of growing your portfolio is making sure you have the right accounting system in place. And while there are plenty of general business accounting software options out there, they’re not designed for landlords managing rental properties and can feel clunky and overly complex. Landlord studio on the other hand, is designed specifically for Do It Yourself landlords, they offer a full suite of tools designed to help landlords save time with their income and expense tracking, as well as property management tasks like rent collection, rental listings, lease management and tenant screening. One thing I found particularly impressive was its ability to connect bank accounts to view and reconcile transactions from inside the software. And by using landlord studios mobile app you can digitize your receipts and the software automatically lifts and imports the receipts details. Landlords studio is also a great way to stay tax compliant, particularly as they offer a number of different financial reports including Schedule II where rental properties reported on your form 1040 You can learn more about landlord studio by heading to WW dot landlord Again, that’s landlord We’ll drop that link in the show notes below. But for now, we’ll jump right into today’s episode. Hey, Natick, would you like to give a quick overview of yourself your background? How you got into the field of real estate?

Naitik Patel 2:11
Yeah, yeah, thanks, Tom for having me. Yeah, it’s been interesting, getting into real estate didn’t think I would get into real estate, so to say, but you know, growing up, my family business was owning and operating hotels. So that was kind of my first introduction into real estate. And then kind of that kind of went from, you know, having some rentals, duplexes, all that sort of thing. And then as I grew up, and got into college, I was still very hands on at the family business, I realized there’s a huge opportunity for tax savings in real estate because a lot of times you know, you have a lot of income that’s generated from real estate investment, whether it’s capital gains, or just you know, recurring business that comes through and through depreciation my first my my first real experience through it was through depreciation, understanding how depreciation kind of affects taxes and reduces taxes. And you know, real estate is really the best place to get the depreciation deduction. And that’s kind of how I got interested in when I went to Masters I realized I enjoy tax a lot more than than taxes and real estate kind of go hand in hand. And then I was fortunate enough to find the real estate CPA. So that was, that was a great a great time to get to join up and learn even more about these tax strategies that we can implement.

Thomas Castelli 3:36
Awesome, awesome. Definitely agree real estate tax go hand in hand and kind of just want to drill down into the into the family business and your investment, your investing experience with the hotels. I got to ask. I don’t think we’ve actually ever discussed this before. Yeah. Where? So what type of hotels is you invest in? Where do you invest in these hotels? Where was? Can you can you elaborate a little bit on on that side?

Naitik Patel 3:58
Yeah, yeah. So we were most I was born and raised in Kansas City. So right around Kansas City. So I went to school over at the University of Kansas. So we had a hotel there. And hotels around that area. And that’s kind of my dad got into it many years ago, probably when I was like four or five. So I just kind of grew up around that. I grew up around real estate and accent Yeah.

Thomas Castelli 4:25
Nice. Nice. And did you What role did you end up playing in? You know, in the family business?

Naitik Patel 4:31
Yeah. So when I was at the ripe age of 14, my dad decided to take my summers away from me, made me start working at that hotel. So started off you know, doing things that you probably wouldn’t imagine be fun. So, you know, cleaning rooms, clean toilets. And then I got promoted to being able to sell a hotel room so got into like the front desk and answering phone calls, talking to guests, and then eventually I took over the entire operation because my dad, my dad came to some health issues eventually. So I just took over and kind of ended up becoming, you know, the main the main person that has handled all the day to day and then overall investing and finding different areas to, to invest in find different opportunities, I guess. So kind of did it all from zero to zero to high level. Nice, nice,

Thomas Castelli 5:26
nice. It’s good, no great experience. You know, I think you’re getting started at 14 years old. And the family business makes a lot of sense. And I’m sure when you’re 14, it’s it’s a little, you know, who wants to give up their summers, but, you know, yeah, it

Naitik Patel 5:40
wasn’t a choice. It wasn’t a choice. Choice. So, so yeah, but now now I have a daughter. So now I’m thinking 14 years from now, you know, I can I can put her put her to work at something. So

Thomas Castelli 5:52
absolutely. I know, it’s a client. There’s a Strat attack strategy a lot of our clients actually use paying their children to

Naitik Patel 5:57
that is true. I don’t think we ever use that though. So now I’m like, Man, I could have had more money, and I could have had saved away but it’s alright.

Thomas Castelli 6:07
Yeah, you know, it happens. So, you know, I recall, you know, from prior conversations we’ve had, you’ve you eventually wound down that portfolio properties or that business? I guess, you know, what was behind your decision to do that? And why? Why did you just decide to sell at that point? And guess what, when you exited those properties? Was there any particular tax strategies you used or explored to as an exit strategy? Or did you just straight sell them to the person as as just a plain old vanilla sales transaction?

Naitik Patel 6:39
Yeah, no, that’s a great question. I think eventually, the reason why I’m kind of wound that down is had moved over to Texas by that time, so managing those properties remotely, was a little difficult. You know, it’s not like your normal single family rental, where you’re kind of managing tenants with hotels, it’s like, Airbnb, but you have like, 70 rooms a night. So it’s, it’s, it’s a really, it was a really, I guess, a taxing event. But I’m, in both ways. So kind of wound that down, I moved the family down here in Texas, and really more rounded down just because, you know, Dad was gonna getting ready to retire. So learn him to have the money that he they work so hard to. They work so hard for to use that towards the latter part of retirement. And we sold it. I mean, I guess, fortunately, and unfortunately, we sold it around. Right, December 2019. So really got lucky, right before, you know, COVID. And I think, you know, in real estate we’ve been talking about it’s been like, really hot market has been true for you know, the single family rental short term rentals. But hotels were kind of not not so good for for the longest time. I think this starting towards the latter end of this year, in 21, they started to recover a little bit. But for most part of the year and a half there it was, it was really, really difficult to tread that space. So we got lucky in that I wasn’t, I wasn’t like the I wasn’t the mastermind. Like, hey, something’s coming to just tell it. I totally got lucky with that. Yeah, we definitely looked at 1031 exchanges, nearly got it done. And actually, we were about to go to 1031. And we were going to close the week after the lockdown happened. So that at that point, I was just like, we just didn’t know what was going to happen. So I we cancelled 1031. Otherwise, it was a pretty much done deal that we were gonna roll it into a 1031 It was a pretty, I guess, anxiety provoking time for me, just because I never, you know, dealt with investing that much money at once into real estate. So the entire, you know, rolling forward, the entire capital gains into into a deal was, was something definitely, but in hindsight, he would have worked out great, but, I mean, hindsight is always 2020

Thomas Castelli 9:08
Yeah, yeah. Right. Right. I mean, I think maybe you had some conversations about some past investment woes, decisions, but it’s true, you know, or you could always look back in hindsight and say, oh, you know, I should have done this, or we should have done that, or it would have worked out perfectly. But you know, you really don’t know in that moment all the time. What’s going to happen and I know that I know that with the pandemic and the lockdowns that caused a lot of uncertainty in the market. If you look at a lot of the transactions that took place during that period of time, you’ll actually see a lot of the properties if you go like on the MLS or whatever. So for a lot less than they were list

Naitik Patel 9:44
Yeah. And and that’s what we try to do is us because we’re gonna, we’re gonna finalize that closing for the 1031 property the week after, and I tried to lowball the offer and say, Hey, would you be willing to I mean, he didn’t budge because as I guess if it were 1031 Back in here into Texas and things have always been pretty inflated or I guess not inflated. But there’s always been a high demand in Texas, let’s just say that. So you may have had a couple offers on the table. But, you know, have you even gotten into the profit into the price that we had negotiated for? You know, it may not be 20 30%. But now you win some you lose some reading do.

Thomas Castelli 10:23
Very true, very true. So I gotta ask, you know, you had you involved in the family business, you also went to college, you study accounting, kind of got into the tech space, I guess, what was behind your decision to, you know, go into tax accounting, or tax advisory rather than stay in the family business for? Was that even a consideration at all? And it just

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Naitik Patel 10:47
Yeah, no, that’s a great question. You definitely was a consideration. And I figured out probably have it to some extent, maybe not, you know, have multiple properties, or have it take up all my time. But reason why I really liked tax advisory or tax strategy was the fact that I got to see so many different scenarios with a family business, right, and you’re only going to come into one or two scenarios, every couple of years, like, my father had his portfolio properties, maybe 1520 years. And at the end of it were like, oh, what’s a cash strategy place? I really enjoyed that aspect of it, and then learning more about that. And I figured, you know, as I kind of, you know, build that real estate portfolio back up again. If I know tax rises ahead of time, I can kind of start planning, you know, 510 15 years down the road, rather than, you know, deciding, hey, I want to sell in next year, and then at that time, figure out, hey, what do I need to do for tax strategies? Because a lot of times, you know, and we’ve seen both, right? If things are structured, in different ways on when you buy, or even when you’re operating, it really makes a big difference when you go to sell. So really understanding the entire US, but I just think you know, seeing those different different things that every day is a new puzzle. That’s a really what I really liked about the tax advisor. Oh,

Thomas Castelli 12:14
absolutely. i It is everybody has everybody is slightly different facts and circumstances and things going on. It’s piecing everything together for somebody is really, really interesting. And then being able to know that for yourself, too, for your own future. Benefits is awesome, is also a great a great thing to have as a tax strategist. So kind of I know you were also you also worked at KPMG was one of the big four firms A while back, what what role did you play there?

Naitik Patel 12:45
Yeah, I was started out as a tax associate. I went in, in their sales and use tax division. So I guess, I would say, you know, you have to have a really big passion for sales and use tax. If I realized quickly that it wasn’t there for me, really enjoyed the the real estate side. So they did have a side where they had property tax. So that’s been a new up and coming area tax that you know, that that’s been there because it festers real estate owners, right? If you ask them, What is your biggest expenses, it’s either you know, mortgage interest or property tax, and oftentimes, usually the property tax. So that’s how I kind of got into real estate tax, and then just just realize that, you know, I like real estate like tax. So if I could put those two together, that’d be that’d be a great rule for me. So.

Thomas Castelli 13:42
Right, right, makes perfect sense. And it kind of seems like everything kind of comes together very natural progression of things. Yes. I got to ask what what is your favorite tax strategy from for, you know, that you’ve learned on the real estate side? You know, whether it’s just been something you’ve helped advise clients on, or you use yourself or whatever the case is?

Naitik Patel 14:01
Yeah. haven’t been able to get in myself on this just because of how the real estate market has been lately and feels like you put in probably 10 Putting offers and maybe you’ll get one, maybe. But it that the short term rental strategy. I really think like, it’s a powerful tool, because not everybody can become real estate professional, just from the logistical point of view, right? Certainly, we have many clients who have the ability to transition from their current role into the current real estate professional. But you know, if you’re starting out if you’re pretty young, like a lot of our clients, right, moving on from your day job, in going straight into real estate is not exactly plausible. Getting into short term or short term rentals kind of gives you a footing into what the real estate world is. Also, more importantly, you get the tax benefits, right? You don’t have to Need to be the reps in order to qualify and get this a similar sort of tax benefit. So I really think short term rentals is a really powerful strategy that, that, that a lot of clients are using. And we’re able to see the effects of that. And it is pretty massive.

Thomas Castelli 15:19
Yeah, I know, the short term rental strategy really is like a gift, a gift from the real estate gods. That yeah, that loophole does exist. And I hope it stays around for a while, because it’s really been really beneficial. And when you think about it, Airbnb, or VRBO, is just short term rentals. In general, there’s a lot of things that go on that you don’t see in just a normal rental property. I mean, if you go and you buy a long term rental, that’s a stable property doesn’t need much work to it, you put the right tenant in it for 12 months, you don’t have to worry about that property. And he may, you know, you don’t have to worry about it day to day, probably for at least a year. I mean, yeah, sure things can happen, but they’re fewer and far between. But when you’re using a short term rental business, and you have people staying for seven days or less, I mean, there’s a lot of things that can go into that clean it you have to have it clean, you have to get it set up, you have to stage it properly. I mean, there’s just you have to deal with the people on the you have to deal with the conversations back and forth on the Airbnb or the enquiries you have to get everybody set up, it’s up systems, it is definitely more of a business for sure, then yeah, then a pure rental property. And that’s what actually gives people the opportunity to take losses against their W two incomes without being a real estate professional, because it is exactly under the tax code, a business and not a true rental, which we Yeah,

Naitik Patel 16:41
rentals are passive. And I guess the the hoteliers side of me is also like, you know, if you get into a short term rental, you’re not capping out how much you can make in a month, right? Once your contract is set is set for your long term rentals, you’re going to get you know, 1500 1800 2000, whatever the month a month is, you’re not really going to exceed them now. So to be able to, you know, kind of be have that opportunity to get get a little extra revenue, I think, is also very, very lucrative, along with getting tax benefits. So, right, you know, something

Thomas Castelli 17:18
else, I’ve been thinking a lot about short term rentals, too, is like, if you really, if you are if, say someone wants to go and have vacation homes and certain locations throughout the country that they want to go travel to, from time to time, well, you know, typically, the average person’s not gonna be able to afford all that, because you’re not gonna just carry all these mortgages on Yeah, he’s not gonna have money to pay for him. But you know, what if you can buy them strategically, in locations where you can rent them out. And then what you’re able to do is you can go buy these, these, these vacation properties in these various areas across across the country where you where you might go travel to from time to time, but then actually rent them out Airbnb, and if you do it the right way, can actually be extremely lucrative. If you think about it, you could, yeah, stay there for 14 days or less, right, or 10%, we’re not gonna get into all those details. So you stay there for 14 days or less, but throughout the year, it’s still treated as a rental property, right, excuse me as as the short term rental business or for rental, but you get to stay there. And then you can have your tenants or your guests rather, pay off, pay, you know, pay the expenses for the property, and you can even make a profit off of it. So it’s actually really young, but sell myself on this idea here, go buy some vacation properties, you could travel around and kind of have a business and have your own vacation. You can have business and pleasure at the same time. So yeah, I mean, that’s definitely, definitely interesting. So glad you chose that. That one is one of your top strategies, because there’s, there’s, there’s a lot to go on there. Any other particular strategies that you like, in on the real estate side of things?

Naitik Patel 19:02
Yeah, I think I didn’t realize how powerful of a tool, you know, combining all of that with a cost segregation study is, um, you know, having been able to, you know, see the effects of that play out for several clients here. That’s definitely a game changer, when it comes to being able to have an opportunity to dissect different aspects of a property, allowing you to take depreciation earlier, especially for clients who want to keep, you know, a near property for the next 1015 20 years to be able to extract that, you know, tax benefit over years and then just have a huge cash flow over the next couple of years. I’ve seen that play out really well for water clients. So yeah, that’s definitely you know, that kind of goes hand in hand, exactly the short fundamentals.

Thomas Castelli 19:54
100% 100% So, kind of shifting gears a little bit. You know, we’ve talked a lot about crypto over the last two podcasts. Yeah. So we, you know, a lot of our clients continually ask us about it. We have members of our tax smart community who asked about it, we even started our own tax smart crypto group on Facebook. So and I know you’re you’re, you’re in touch with the subject you’ve been you’ve been involved in crypto space for a while, I guess could you kind of give us an overview quickly of you know, how you got into crypto and, and what you’re currently having involved what you currently have spinning right now. And before you say it’s before, before you get into that this is not investment advice for anybody who’s listening to this. Crypto is a very volatile market. It’s not regulated, it’s not highly regulated at the moment that goes with that. And so this should go without saying do your own due diligence, you know, you’re taking your own risks, but I just kind of wanted to hear an eight ticks take on the crypto, the crypto environments, he’s been involved.

Naitik Patel 20:53
Yeah, I definitely think it’s been an interesting environment. I think, you know, if you were to ask me in 2013 1415, I’m like, yeah, stay away from crypto. But I think a lot of people did that. But yeah, gone into it, after being exposed to more information and knowledge about it. My brother in law is, has been a huge fan of crypto for for a long time. So and, and he’s on the really technical aspect of things. So he’s an engineer, so he was able to really explain to me the technology behind it. And then it starts to kind of make a little bit more sense as to Hey, why does something like Bitcoin or Aetherium, kind of have value, it’s not just, you know, not everything is a meme coin, that people, if you throw into, you know, the Doge, or the Shibu, all those things, but so not everything is that, even though they have their own sort of, you know, technology, that’s kind of back behind it, but that’s kind of how I got into it, and then realize the sort of potential that’s there, and they kind of be the group that’s been created the craze that’s there for it. So I kind of dabbled into mining myself several months back, and then got into you know, okay, you know, holding Aetherium buying it, Bitcoin as well, then now, you know, staking has become really, really new. And then I think with the advent of, you know, Aetherium 2.0, that’s going to be rolled out soon, that’s going to that’s going to change a lot of things from just the sustainability perspective, as well. So there’s a lot of cool things happening, I think I’m still trying to understand more on the technicality side. So I can really understand in value, if the technology is something that is going to be more valuable in the future, I think similar to how you how we value companies, right, and kind of value tech companies based on what sort of valuable generate for users and customers in the future, I think a similar sort of thing is applied to crypto. And I think the reason why there’s are created there is, you know, because it’s still not regulated, people don’t know exactly what’s going to happen. So higher risk, higher reward. I may not go and invest all the real estate funds to go into crypto, but maybe, you know, just to invest enough so I can keep me interested to keep learning about it. Because for me, if I don’t invest something, I’m not necessarily gonna write a book and try to learn about it. So I don’t know,

Thomas Castelli 23:23
right now makes a ton of sense makes a ton of sense. You know, one book i one book I picked up recently was the Bitcoin standard. And really interesting book for anybody out there who is who’s interested in crypto or just trying to learn more long story short that books trying to present it as you know, there’s only to be 21 million bitcoins in existence ever. And that should become like the world reserve currency is basically what they’re trying to say. Because they’re because because it’s finite ability, and also the ability to transfer it so quickly. And you know, easily around the world in a matter of minutes, rather than gold, for example, which you really can’t transport that easily, especially in large quantities. So, very interesting book, you know, I put some money in wish I put a lot more in, of course, like I’m sure many people do, but definitely an evolving space. And something I think we’ll be focusing on a little bit more as a firm as, as time goes on. But,

Naitik Patel 24:21
yeah, I’d be really interested to see what you know, tax implications come out of it, too. Right. The way that it’s been taxed, has been interesting. Not as stocks right, as more property are these capital gains, even with like staking, right. I mean, one of the really interesting things is if they’re paying you out on a per second basis, you know, what is your basis in in that? In in that asset, right? I mean, if it’s being if the value changes per second, it’s really hard to come up with, Hey, how do we exactly tax this sort of this sort of asset so

Thomas Castelli 24:58
so we were actually Doing some research into that not too long ago, and apparently is I understand it today is that if you mined a coin, it’s gonna be, you know, you’re gonna recognize ordinary income as a miner as a miner. Yeah. At the second at the moment, the coin comes into existence existence. Yeah. So that’s the point where whatever the fair market value of that coin is at the second, sir, that that comes into existence when there’s your cost basis. But yeah, definitely very interesting field, we’re going to be interesting to see how people track this is going to be interesting from an accounting perspective, for sure. As well, as a tax perspective, I know that the most recent bill, Biden’s the build back better act better. Yeah. They want to they want to expand the definition of wash sales to apply to crypto Because currently, as it stands today, crypto is not a security, it’s not a stock, like you said. And they’re basically saying that it’s not subject to the wash sale rules, and they want to make it subject to the wash sale rules, which obviously makes a ton of sense from a tax perspective. So it’s interesting, we’ll see how it evolves. So kind of before we wrap up the podcast there anything any, any other things you wanted to share with our audience, from a crypto perspective, from a real estate perspective? Anything else you wanted to impart? Yeah,

Naitik Patel 26:28
I think you know, the clients that we’ve been working with everyone that’s joined us, as an advisor, we probably get to learn just as much about real estate from you guys, that we can teach you guys. Now he’s not an SE teach, where we get to, you know, help formulate a strategy. And it’s really cool to see all the different, you know, ways, our clients are thinking about real estate or even just their investments, right. Ultimately, we’re creating a really awesome group with a bunch of smart individuals. And I think that learning process is probably something that keeps us as advisors really interested. So really enjoyed probably every interaction I had with the client, whether it’s talking real estate, whether it’s crypto, whether it’s, you know, any of their businesses that they want. So really, really appreciate the time we get with the clients. Some, that’s my favorite part about about the job.

Thomas Castelli 27:27
You know, no, definitely 100% We’ve definitely learned a lot from our clients is always interesting to see what people have going on different perspectives and different types of investment styles and strategies and temperaments and really just point of views on a lot of things. So it’s definitely been awesome. So I think we’re going to wrap up the podcast for today. But for anybody who’s listening, if you want to get more access to myself or Natick you want to work with us, you can go to the real estate Fill it up, become a client forum and one of our representatives will get in touch with you. Or you could check out tax smart investors tax warn We do have the Plus plan subscription, where we will be doing two to three live q&a days, every month, as well as a monthly workshop, especially as we go into 2022 We’re really going to take that a lot a lot a lot more seriously and really pour a lot of value into that service. So again, that’s tax warn Check out the Plus plans only $49 a month and get two to three live q&a is with myself. Other team members like Natick and others will be involved. I will do monthly workshops. Really a great way to learn about taxes at a fraction of the cost of like just a full blown advisor engagement if you’re not quite there yet, so feel free to check that out. Otherwise, thank you for tuning into this episode. Catch you next week.

Brandon Hall 28:44
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