Two new segments are coming to The Real Estate CPA Podcast!
Debrief: In this segment, Brandon and Thomas will give their thoughts on the strategy or topic discussed with the guest on the episode.
Q&A: In this segment, Brandon and Thomas will take questions asked by listeners and answer them on the show. Visit www.therealestatecpa.com/podcasts to submit a question.
These changes will take place beginning Episode 60.
In this episode, Brandon and Thomas analyze the different ways wealth can be stored and grown through real estate investing. From truly passive investing, like investing in a syndicate, to more active management such as flipping, Brandon and Thomas discuss the pros and cons of all strategies from the perspectives of time, money, and tax.
In general, those who accumulate properties quickly have another relatively significant income stream. Medical, finance, or law professionals, business owners, salespeople, and other industry professionals are the most common who fall into this category. Discretionary income is then placed in real estate, and the first perceived benefit may be as a tax shelter. These investors can quickly build a portfolio. We ultimately want to lower the effective tax rate compared to the earnings you generate. This is easiest to do through real estate, once you get ahold of your budget, understand your expenses, keep your living expenses relatively static.
We also see the BRRRR strategy used. The Buy, Rehab, Rent, Refinance, Repeat process can be used to recycle cash, but it can also be difficult and time-consuming. This strategy raises the question of active versus passive investing.
To turn your operation into a bonafide real estate business, you must systematize. This requires work up front to set up your business to be run effectively and passively. This especially applies to those looking to buy multiple properties.
To be truly passive, you’d be better off going with a syndication as opposed to turnkey companies.
A real estate syndication is the pooling of money by accredited investors to buy a large property, such as a 300-unit apartment building. You’re investing in people who are efficient and experienced, and their pay-outs are usually based on performance-based metrics. Syndications will almost always have optimized their tax situation which will be passed through to you. After meeting the right team and building trust, the only time commitment is usually a quarterly review of financials.
To a certain degree, you can make more money investing by yourself. You have total control over the asset and value-add opportunities. The trade off is related to the time, passion and drive required to be successful building your own portfolio as a landlord.
It’s very difficult to shelter ordinary income from tax, such as wholesalers, brokers, and flippers. These are not passive investing strategies.
It’s not bad to get crushed with taxes on your ordinary income streams. Obviously that’s not ideal, but it’s okay. The key is what you’re doing with your after-tax income. Investing in rental real estate is a great way to store wealth and build deferred taxes from cash flow. Deferring taxes, combined with the time value of money, it is overwhelmingly worth it to defer and invest the money.