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May 23, 2024 | read

170. Building a Rental Portfolio with Partners, Tax Smart Investor Q&A, + More w/ Ryan Carriere, CPA

Thomas Castelli

In this episode, Thomas is joined by Ryan Carriere and they talk about Ryan’s real estate journey and answer questions from the Tax Smart Real Estate Investors Facebook Group.

This episode is sponsored by Landlord Studio.

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 Tax Smart REI podcast.

Brandon Hall 0:03
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
Everyone, thanks for tuning in to this episode of the tax money Rei Podcast. Today we’re joined with Ryan carrier, we’re going to go through his background, how he got involved in real estate, his real estate journey. And then we’re going to take some more questions from the tax smart investors Facebook group and I know you’re wondering, are we always going to answer questions in the tax smart investors Facebook group? And the answer to that question is no, we’re just doing that because putting in so many questions, we just want to let everybody know about the value of the Facebook group and why you may want to join. So with that being said, we’re gonna take a quick word from landlord studio and then we’ll be right back with Ryan. If you’re doing yourself landlord managing rental properties landlord studio is made for you. The software helps landlords simplify income and expense tracking. With their easy to use app, you can digitize receipts record income and expenses in real time and generate reports and even manage leases and tenants plus landlord Studio makes late rental payments and bank visits a problem of the past with secure online rent collection get the rent paid directly to your bank account. And you can even automate rent reminder emails and late payment fees. Landlords studio is also the best way to stay tax compliant. They offer a range of financial reports including Schedule II and supplier expense reports designed for tax time, you can learn more about landlord studio and start your 14 day free trial at landlord studio.com/cpa. And use the coupon code real estate CPA at checkout to get 25% off your plan. Again, that’s landlord studio.com/cpa and use the code real estate CPA to get 25% off your plan today. Ryan, thanks so much for taking the time to come on the show today. Would you be able to give our listeners a brief overview of your background and why you got involved in real estate?

Unknown Speaker 2:07
Yeah, thanks for having me, Tom. Yeah, my name is Ryan carrier. I’m a CPA here and Minnesota. Yeah, I’ve worked at other CPA firms doing real estate and tax and things like that. So why why getting into real estate back in probably 2016 2017 A really good friend of mine introduced me to bigger pockets. And as a lot of people have heard those episodes they ended with you know, what’s a good book recommendation. And so a lot of them were rich dad poor dad. So I ended up listening to or reading Rich Dad Poor Dad. And that was kind of my, my hook into real estate. And yeah, I’ve kind of from there just ended up buying a single family and I know we’ll get into some of this but ended up buying a property soon after that. And that just kind of snowballed my my experience into real estate.

Thomas Castelli 2:54
Awesome. Awesome. A lot of people come into real estate through the Rich Dad Poor Dad books. I know. That’s how I got involved read the book went down the rabbit hole. But so you know, you’re your CPA and you’re an investor, like you just said, What is your current investment strategy?

Unknown Speaker 3:07
I’m primarily a buy and hold real estate investor. So I own a mix of single family and multifamily all here in Minnesota. Something that’s a little more unique to me, is pretty much 100% of the properties that I’ve purchased, except for my primary residence is with partners. So besides from our primary residence, everything else is in 5050 with with someone or you know, a third ownership, but apart from that we also own just a limited partnership interest and an Arizona apartment building that was just kind of a value add strategy that, yeah, ended up investing in with one of my co partners and allow their deals.

Thomas Castelli 3:49
Nice. Nice. So would you be able to kind of take us through briefly, how’d you get into your first property? Like what was the story behind that?

Unknown Speaker 3:56
Yeah, so I was living with a good friend of mine. And we were both renting. And you know, I was reading these reading Rich Dad, Poor Dad reading other books, and it was kind of walking through kind of my interest and talking about the books with him. And he was getting interested in it as well. I thought I was going to be leaving Minnesota for my first job after college. And that ended up not working out. So then I was looking for, you know, where am I going to live next. And through just kind of meeting more people and talking through this, I ended up starting to look and then he ended up saying hey, I want to be you know, looking with you to buy a property. So he and I basically went through the, you know, approval process for a loan and worked with a realtor. We found a single family in Minneapolis and basically you know, we did an FHA loan and house hacked. So we we lived in the basement, split kind of this bigger bedroom and then rented out the top unit so that we could not live there for free but lived there for much less and that kind of, you know, got me into even more just the real estate had experience and things like that.

Thomas Castelli 5:01
So house hacking was your first, your first foray into it. So what does your portfolio look like? Now, I know you mentioned you own some other other properties, this point with some partners was that look like?

Unknown Speaker 5:10
Yeah, we own two single family homes, two duplexes, and one four Plex, again, those are with various different partners and the splits are primarily 5050. And then we’ve got obviously a primary residence that thankfully we own 100%. And then the one syndication deal in Arizona, that was more of a limited partnership investment.

Thomas Castelli 5:32
Nice. Nice. So what tips do you have for working with partners, I know you said you had some various partners in these deals, and some people have ups and downs working with partners is, you know, sometimes people like to go in different directions, like, how’s that going for you working with partners,

Unknown Speaker 5:44
it’s probably a lot more difficult than just doing it by yourself in certain ways. Because, at least for me, similar to like being married, it feels like we’re going into this long term commitment, because we’re buying something together. And we’re taking on this huge asset. You know, thankfully, we can end a partnership much easier than maybe ending a marriage, but it’s hard to do all the communication and things upfront, but when you do that, it provides so much more clarity, just kind of moving forward and being with people who are like minded, right, people who are wanting to do a similar thing, they understand the strategy, the benefits, with real estate, the investment value, and, you know, kind of just the overall trajectory, and that good constant communication, pretty much with all of my partners, I tried to message them or, you know, depending on the partner and how many properties we own together, it could be, you know, weekly or monthly or whatever, just kind of checking in, depending on how much we manage, and how active we need to be. So definitely, to highlight that just communication upfront. And yeah, just being on the same page kind of like minded in why are we doing this? Right? So

Thomas Castelli 6:54
it sounds like you kind of need to have alignment with the partners going into it that you’re on the same page, what the goals of the investment are, I imagine do you discuss exit strategies, by any chance, like what your exit strategy is going to be on the front end before you go into business for them,

Unknown Speaker 7:08
we definitely should do that more, we have not spent a whole lot of time on that. The the extent of that has pretty much been, hey, we’re buying this to hold until you know, we retire, we’re basically buying this so that in 30 years from now, it’s completely paid off, we have no intention of just, you know, five years, 10 years, it’s like, Hey, we’re just gonna hold this, and we’re gonna manage it and get the cash flow, get the debt, pay down some of the tax benefits, things like that. And we’ll just ride this out until we get this great offer, or we’re tired, we’re tired of this property, and we’re ready to kind of upgrade maybe to a bigger property or something.

Thomas Castelli 7:46
Nice, nice makes less sense. Great advice, too. When it comes to like, you know, owning properties, everybody has some or some people at least have some nightmare stories that they have talked about, or some lessons or mistakes they learned about along the way. So I guess let’s start there. Is there any lessons or mistakes that you’ve learned across your real estate investing journey so far that you want to share with the listeners?

Unknown Speaker 8:04
Yeah, I think it’s finding a good property management company, right? Like, although the property management company is going to do a lot of the day to day things, they’re still in an element of as an owner, that no manager no matter how great they are, that they are going to care about your property as much as you are going to care about your property. So it’s something that I’ve I’ve just learned more and more is that one, I need to have more of an ownership mentality. Even though I’ve kind of outsource some of the day to day management, I still need to take ownership of, hey, this is failing, we have low vacancy, we have really high repairs, you know, I need to take ownership and say, Hey, I need to do X, Y, and Z so that I can better, you know, have our asset and our property perform. And I just need to take more ownership of that. So that’s one thing. The second thing is kind of with that just treating it more like a business, rather than just like buying stock, right? Because buying stock is just so it can be so passive, right? You buy it, you kind of just let it ride, maybe that’s your whole investment strategy. I think with real estate, depending on the property and kind of what your goals are, you need to act like it’s more like a business, you need to treat it more like it’s a business. So something recently that I’ve started doing with some of my business partners is kind of talking through what are kind of our business values. And what are our KPIs that we want to be looking at, for these, you know, businesses, whether it’s vacancy or like repairs as a percentage of income, things like that kind of driving better performance and treating it like it’s a business.

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Thomas Castelli 9:42
Right, right. We hear that a lot and I could definitely see you know, it’s basically real estate when you’re when you’re buying properties directly. It’s not a pure investment and it’s not something you can kind of set and forget you do have to have some level of involvement and really, like you said treating it like a business and it’s not because stocks so This is what a lot of people sometimes forget about real estate, it’s a call real estate investing. But really, when you’re buying a rental business, or when you’re buying a rental property, you’re really buying a business, you know, regardless of the size of the property. And even though it might be passive for tax purposes, as we all know, if you’re listening to this show, it’s not always 100% passive, like a stock, like you said, so good tips there. What’s next for you?

Unknown Speaker 10:24
Yeah, we’re looking at either doing another kind of LP investment into, you know, another property out of state, like apartment syndication, maybe in Kentucky, or Arizona, or somewhere kind of down in the southern belt there, or we’re kind of looking at do we want to buy a short term rental? Because, you know, thus are obviously very popular with Airbnb and VRBO. And actually, I didn’t mention this, but one, one half of our duplex is a short term rental on Airbnb. And it was one that we lived in and basically lived on one side and have been doing Airbnb on the other. So we have a little bit of experience with that. So we’re kind of looking at, can we buy something in Florida, or Texas, or maybe Arizona, or Tennessee or something like that, or Minnesota? Right? Because me and pretty much all my partners live in Minnesota. So we’re kind of looking at a short term rental for the next purchase.

Thomas Castelli 11:19
Nice, nice. And I know you mentioned you had a syndication as well, as you have a direct portfolio. What do you like better? And why would you say choose a syndication maybe over a direct acquisition? Or maybe vice versa? Like, what do you what do you like better? And why would you pick one or the other?

Unknown Speaker 11:35
Yeah, I love the passivity of an LP interest, it’s very nice to just give some however much it is 25 50,000 to, you know, a syndicator, that does a good job has a good track record, understand the investment itself, maybe it’s in a location that you can’t get to, or it’s an asset class that you can’t get to like a big apartment complex, but you know, that those can perform well. And that’s an asset that you want to hold. But you don’t have the skills or the, you know, team around you to get to that. So it’s maybe wanting that asset class and wanting it to be passive, I think that’s great. But then with the short term rentals, I think there’s a lot of upside and appreciation to that, too. And I think there’s a lot of growth there. And again, like I said, as Airbnb and VRBO. And these other kind of short term rental places companies continue to grow, there’s more opportunities for people like me, and a lot of our investor, or clients are doing this, to be able to just buy those and kind of hold on to them, and just get the higher cash flow and have a little more control over it, and kind of take 100% of that reward for themselves, instead of you know, trying to share it with 50 different investors, if it’s a big syndication or something,

Thomas Castelli 12:47
that’s great advice, great insights, you know, the way I always look at it is kind of like, you know, if you’re gonna buy direct, it is a business, like you said, and that takes a little bit more of your time, it takes a little bit more of your responsibility, and maybe a little bit more worry, in some cases to do it. But it is more about it’s more control, you have more control over when you want to sell the asset, typically in a syndication, it’s going to be a three to five or three to seven year run, whatever the term the syndicator has, and then they’re gonna move into it, and then they’re gonna sell it. And you may want to keep an asset, right. So it’s a kind of like control versus passivity. But I also like, what you’re saying about kind of getting into different asset classes, my philosophy has always been in sounds like it’s kind of similar to yours is like, basically, build a portfolio that you own directly, maybe in a market or maybe eventually spend on to other markets. But then there’s going to be maybe a self storage asset class, or there’s going to be, you know, whatever asset class that you can’t get to, because like you said, you might have the skill. So team, so you go and put some money into a syndicate and you get access to that without having to, you know, go and build the team yourself. Or if you want to get into different geographical location to diversify a little bit, you go ahead and put some money in there. So great answer. I love it. I just shift gears a little bit. And we’re going to talk a little bit about tax. We are a tax focused podcast here. So what is your favorite strategy that you use for your own situation, your favorite tax strategy.

Unknown Speaker 14:07
So this might come as a surprise, but I don’t feel like I use a lot of the strategies that we talk often with clients, to be honest, I think going forward, as we buy more, we haven’t bought anything in 2022. But as we go forward, continuing are using more cost segregation studies. And the at the price point that we’re buying, it’ll probably be like a software study that we’ll use, even if that’s passive, that might still be okay, kind of depending on our income situation for the years. And then also one that I’ve used recently is we had a big renovation at one of our properties, and the Contractor sent me, you know, an invoice that was pretty significant. And it was pretty much just one line item, and it was over that de minimis Safe Harbor amount. So I actually went back to him and said, Hey, can you break this out into a little more detail for me? And basically, once he gave it back to me, I was able to, you know, use that amendment Safe Harbor every thing was under $2,500, and was able to expense all of that rather than, you know, the contrary to that would be capitalizing it. So it just kind of benefited us a little bit. But other than that, it’s not like I’m using, you know, reps, me and my wife both work full time jobs, and we have, you know, half of a short term rental. But that strategy has mostly been kind of a seven plus, like days, seven to 30 days, it’s kind of been where we’re at right now. But I’ve talked to with my wife about maybe being a realtor or something like that in the future, if we, you know, she stops working or something, but she has not really been been a huge fan of that. So probably going forward, more short term rentals for us.

Thomas Castelli 15:37
Awesome. Awesome. You know, I think people often overlook, they get, they get too caught up with the reps, the short term rentals, which are excellent strategies, but they forget about the basics and how powerful the basic strategies can be, or, you know, like the de minimis Safe Harbor, and that saves people probably 1000s of dollars a year, I know, I’ve seen clients save a lot of money using them in a safe harbor and other safe harbors that are available. Now, when you’re working with clients say, oh, what’s your favorite strategy that you particularly like to work with clients

Unknown Speaker 16:03
on? Yeah, it’s kind of twofold. So one is the short term rental and cost segregation, kind of combining those strategies, because so many of our clients are working full time jobs, often it’s a husband, wife, and they’re both working full time, and they can’t get reps, or they’re not going to hit reps for years to come. So the next best thing, if they want to generate large, non passive losses is to buy a short term rental, right, they don’t need to do this 750 And more than half their time, and then combine that with a cost segregation study. But other than that, I really like the kind of shifting income to kids, I think that’s a really powerful tool for investors who have kids, just Yeah, it’s a very tax efficient strategy. And I think, at least for me, and I know talking about certain clients, they get very excited about getting their kids involved in that one for a financial literacy aspect to for just kind of real world experience. But three, there’s obviously the financial aspect of possibly getting the kids tax free income, and then putting that into a Roth IRA to grow tax free going forward until they pull it out. So there’s a lot of benefits to that strategy to that

Thomas Castelli 17:11
I like, you know, absolutely. I love that strategy, too. And I know, when I have kids, and they’re old enough to work, they’re going to be doing that. I mean, I think you can never go wrong putting money into a Roth IRA. Really, at the end of the day, even at an early age, if they want to use it for an early retirement account, all those years of compounding will give them a huge head start, if they use it as a retirement account, or they can use it to you know, a part of it at least to buy their first primary residence. What is some other benefits they can use to pay for college, so they have to pay tax on the earnings, but they avoid the penalty. And they could also take out the principal, you know, pretty much at any time. So you know, if they hit, you know, 18 or whatever, and they they don’t want to go to school, they want to start a business, maybe they could pull some money out, you know, tax free from the Roth. So I love that strategy as well. Definitely a good way to you know, not only save for your children’s future, but also teach them the value of hard work. So we do have some questions here from the tax Bart investors Facebook group, for anybody who’s listening if you’re not already a member of the tax money investors Facebook group, go to tax one investors.com/groups/tax smart investors and go ahead and join I also want to let everybody know that I we did hold our tax smart insiders, a live q&a This past Wednesday, answer a lot of great questions live with me on a zoom call. So if you want to have a chance to ask your questions live, you have tax questions you need answers for head on over to tax warn investors.com. And you can become a tax part insider, it’s $59 a month we do two live q&a a month we post premium blogs in there with the same strategies that we work with our private clients on. And there’s a lot of good discussions going on in there as well. Our team answers questions in there, as well as myself and Brandon. So without further ado, we are going to jump into some of these questions we have here today. Ryan, the first one we have a throw this year away is going to be when a short term rental is purchased with partners. Do the tax benefits apply to all partners?

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Unknown Speaker 19:02
Yeah, so that’s not an uncommon question. So first, the there’s always what the short term rental strategy to make it go from passive to non passive, it’s kind of a two part test. So first, you can partner with someone and you could invest in a short term rental, meaning that the average day per guest for the year, the whole year is seven days or less. Okay, that’s that’s only the first test, though, that makes it a short term rental, yes, in the eyes of the IRS. But if we take that a step further, which most clients are trying to get to, which is to make that a non passive investment, right, so then it’s like, we have to look at let’s just say it’s two partners, both partners need to evaluate if they materially participate in if they just have one short term rental, if they materially participate in that one short term rental or if they have multiple short term rentals. If they group in that one with the rest of their short term rentals. Do they materially participate? In that group, so it’s it’s kind of a two part test, it’s not extremely just black and white, you got to look at both, is it seven days or less? And do you materially participate? Right?

Thomas Castelli 20:10
Right? If someone out there is wondering, Hey, so I bought a short term rental 5050 with a partner, you know, what would they have to do? If I’ll let me break this down. So if you invest 5050, with a partner, right, you’re, you’re both is assuming you’ve split Profit and Loss is 5050, you’re gonna get the loss, a, assuming there’s a loss, you’re gonna get your 50%. So both partners technically get the tax benefits. But what do they have to do if they want to make those losses non passive for each of them, and they don’t own any other short term rentals,

Unknown Speaker 20:38
right, we have, there’s kind of three main material participation, they won’t be able to meet substantially all and they won’t be able to meet 100 hours and more than anyone else, because they’re both trying to hit that. Right. So they would essentially both need to get the 500 hour kind of safe harbor test. Because if they can both get to the 500 hours, they don’t really care about each other’s hours, or really the contractors or cleaners or whatever, but they both need to hit 500 hours if they both want to say we materially participate in the short term rental. Awesome, awesome,

Thomas Castelli 21:11
there you go. Now we know is if you’re going to partner up with somebody on a short term rental, you’ve had to have a lot of renovations, because there’s going to be over 1000 hours of activities between you and your other partner, they’re going to need to be spent. And typically, you know, while there’s more activities to be done on a short term rental, or long term, rental 1000 hours, probably a bit much for many. Alright, so we have another question here. How would you explain capital gains tax to a seller in order to get seller financing?

Unknown Speaker 21:38
Yeah, so I think that is leaning towards an installment sale. In my mind, that’s kind of the goal. So if a seller were to just completely sell the property outright, you know, in that first year, kind of like a normal sale, and not do seller financing, that’s great for them, they can get, you know all the proceeds in that year. But depending on their income tax situation, that could push them for the capital gains rate from like zero to 15%, or 15, to 20%. So they could be paying a fairly high tax rate on that capital gain. But if they’re willing to kind of take those proceeds over a certain number of years, maybe five or 10 years or something, then they can basically kind of smooth out those capital gains. And maybe they stay within that zero to 15. Let’s just say 15 instead of 20. So they could save maybe, you know, 5%, and it just kind of smooths out that tax burden. And ultimately, they probably pay less would be my guess. So that’s kind of the benefits of them. Again, they’re not probably getting all their proceeds right now. So that’s kind of what they’re foregoing if they’re going to get this tax benefit?

Thomas Castelli 22:44
Absolutely, absolutely. And I’ve also seen some people who are in retirement, use this strategy as well to kind of make sure their AGI does not hit or their modified adjusted gross income, does not hit certain thresholds, so that they can qualify for certain types of like Social Security benefits and things of that nature. So I think we’re gonna take like one or two more questions here today. This is a good one. It’s an easy one. Where should I report de minimis items on Schedule E.

Unknown Speaker 23:10
So the schedule is pretty much alphabetical. But it’ll be just simply on the repairs row. You don’t have to have it in other expenses or anything. I would just record it with your repairs row. That’s that should be pretty straightforward.

Thomas Castelli 23:24
Awesome. Awesome. All right. Last question. So if you’re thinking of creating a parent company to own real estate assets, would in LLC, or an S corp tax status be a better fit,

Unknown Speaker 23:36
I would say, use an LLC, don’t use an S corp, the LLC very simply just has a lot more flexibility. When we start using s corpse, there can start to be some hindrances and upon transfers, or sales, which just kind of limits us so use an LLC to keep things flexible? And just Yeah, keep yourself from getting into a complex situation.

Thomas Castelli 24:00
Awesome. Awesome. Yeah, you generally speaking just for anybody out there who’s listening, you want to avoid using an S Corp for rental real estate whenever possible, because becomes a nightmare to take it out. Because it’s going to be recorded in most cases as a sell at fair market value, even if you’re just trying to transfer it to yourself. And you know, I’ve worked with a number of clients who’ve faced this situation, and we searched up and down the tax code, talk to different attorneys talk to different CPAs. And just to find out well, we knew from the beginning that there’s really not really good way to avoid this. So the best way to avoid this situation from happening is by not putting rental activities into an S corp to begin with. So that’s just a rule of thumb. You either want to use an LLC that’s disregarded or taxed a partnership. And that’s about it. So Ryan wanted to thank you so much for taking the time to come on the show today was great to hear your story. I never heard the story before and glad you were able to handle some of these questions for our tax money investors out there.

Unknown Speaker 24:56
Yeah. Thanks for having me.

Brandon Hall 24:58
Thanks for listening to today’s show. If you enjoyed the show, please find us on iTunes and leave us a review. You can also email us at contact at the real estate CPA comm with any feedback or topic suggestions. We are always taking on new clients and with the new tax laws in play. You really don’t want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs. To become a client navigate to our client page at the real estate CPA calm and fill out a webform with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.

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