Welcome back for Part II of Semi-Retired MD’s post on Fast FIRE. If you haven’t yet or would like a refresher, please go back and read last week’s post, How to Fast FIRE Your Way to Generational Wealth – Part I.
Below, you’ll see some eye-popping numbers. As a disclaimer of sorts, I’d like to state that the doctors who wrote the post have seen amazing results with their real estate investments. That does not mean you can expect to repeat their results.
There is risk involved in this plan, including using leverage (debt) to rapidly acquire more and larger properties.
For me, the take-home point is not necessarily the huge discrepancy between the results of in index fund and their hands-on real estate investing example, but rather the incredible amount of earned income that can be offset with paper depreciation losses when one can claim real estate professional status.
How to Fast FIRE Your Way to Generational Wealth – Part II
This is a continuation of a two part series on using Fast FIRE to achieve financial freedom quickly (in less than 5 years) and by financial freedom, we’re not talking Lean FIRE, we’re talking Fat FIRE.
In Part I, we shared our four step system for achieving Fast FIRE. The first two are See the Money and Make the Money. We used an example of a fourplex to illustrate the difference between investing $100,000 in index funds vs. cashflowing rentals, and we showed that after 10 years, the money in index funds would grow to $200,000 and the money in the fourplex would grow to $320,000. And that’s without even including rent and market appreciation, which would make that number even larger.
In Part II, we’re going to show you how to take these returns to up a level. Using these next two steps, it’s not uncommon to generate returns of greater than 200%.
Keep the Money
Keep the Money is all about utilizing the tax-saving strategies offered to those who buy and manage real estate. Although there are many tax saving strategies, for brevity’s sake, let’s just cover the main one that is applicable to our head-to-head comparison: Real Estate Professional Status (REPS).
What is Real Estate Professional Status?
Real Estate Professional Status is a relatively unknown tax status that allows you to use paper losses from your rental income and shelter W2 or 1099 income.
This is not a small thing. It’s huge.
In fact, we like to call it “the greatest wealth building secret that nobody knows about.”
This is what we’ve been using to pay zero taxes on our clinical income each year for the last four years. Yes you heard right, ZERO taxes.
For those of you pursuing Lean Fire and frugality, imagine eliminating your single biggest expense line item.
We won’t get into the details here but if you want to learn more about REPS status, check out this post. [PoF: In summary, by spending 750 hours a year (about 15 hours a week) on a real estate business, one can claim real estate professional status (REPS) and use depreciation from real estate equity to offset earned income.]
Let’s now apply this to our fourplex example and show you how REPS works in real life.
The first year that you buy the fourplex, you do a cost-segregation study. This allows you to create a $100,000 loss from just this one property.
This results in approximately a $100,000 tax write-off (which you can use against your clinical income, for example), which, at the 25% effective tax rate, would save you $25,000 in taxes (as an aside, if you had four of these properties, you could generate a $400,000 loss to offset $400,000 worth of income!).
Imagine getting $10,000 a year in cashflow, $5,000 a year in equity AND sheltering $100,000 in taxes (giving you a $25,000 tax refund)!
Now, let’s say you reinvest that $25,000 refund into another property yielding 10% cash-on-cash return over 9 years (because you don’t get your refund until year two). The $25,000 grows to $60,000!
When you go back and compare the two investments, and you add in the value of the tax savings, your fourplex has now made you $380,000 vs. $200,000 with index funds (see Table 2).
Now I’ve shown you how you make more money in real estate compared to index funds. But I haven’t shown you how you get to Fast FIRE in 5 years, and I haven’t revealed how you build generational wealth.
Fast FIRE Step 4: Expand the Money
You’ve learned about the cashflow and the equity you build up. You’ve seen some of the tax benefits of REPS. You even have had a taste of all of the other ways you make money besides cashflow, like rent appreciation and market appreciation.
It’s time to show you how you can use real estate to dramatically step-up your wealth.
To do that, let’s trot out our $400,000 fourplex again. But this time, I’m going to give you a little cash to rehab (fix up) the property.
It’s time to rehab!
Let’s say, you put $100,000 into fixing up your fourplex. You do so with an eye toward increasing your cashflow. So after the rehab, instead of 10% cash-on-cash return, you now make 15%.
And that’s 15% on your now $200,000 investment ($100,000 down and $100,000 for rehab), which is $30,000 a year. This might seem like a big increase in cashflow but we’ve regularly achieved these types of numbers whenever we rehab our small multifamily properties.
So what does doing a $100,000 rehab and increasing your cashflow to 15% do for your net worth? One small thing and one really big thing.
First the small one.
That $100,000 that you just put into your rehab is a write-off. It’s a loss on your tax return. It’s equivalent to the government paying for a portion of your rehab for you. So, even though you put $100,000 into the rehab, in the end you actually only pay for about $75,000 (assuming a 25% effective tax rate).
Assuming you do the rehab in the year you bought the property, you’ll get the $25,000 refund in the following year. And like before, if you reinvest the $25,000 refund into another property yielding 10% cash-on-cash return over 9 years, the $25,000 grows to $65,000. Add that to the other tax savings you got from doing cost segregation, and the total value of this tax savings reinvested totals $130,000.
Now let’s move on to the really big thing.
As some of you may know, the market value of multifamily rentals is primarily determined by their income. We’re not going to get into the nitty gritty details of this but with the increased income, your $400,000 property would now be worth double, or $800,000.
That’s right. You put in the equivalent of only $75,000 of your own money (since you wrote off the cost of the rehab as a tax loss) to fix up the property and as a result it appreciated $400,000. And the renovation took less than 6 months.
That’s what we call one giant step-up. And that is the power of forced appreciation.
Let’s now circle back and look at the head-to-head comparison of putting your money into index funds vs an investment property and tapping into forced appreciation (see Table 3).
In the case of the index funds, we are going to assume you invest $200,000 and at 7% growth to make it a fair comparison to the rehab-fourplex case (where you put in $100,000 as a down payment and $100,000 to rehab the property). Over ten years your index fund investment would compound to $393,000.
Now let’s look at the fourplex.
- The $100,000 you initially invested is now growing at 15%, so this expands to $405,000 over 10 years.
- The equity build up (from renters paying down your mortgage) ends up being the same as we saw in the example above because your mortgage hasn’t changed, so that’s $60,000 at the end of 10 years.
- We add in an additional tax savings of $25,000 that you get in year two from your cost-segregation study (which results in a $100,000 phantom loss). This grows to $60,000 by year 10.
- The last component of return that we’re adding in is the $400,000 of forced appreciation from the renovation.
- The $100,000 you put into the rehab is spent money, but $25,000 of it comes back to you in the form of a tax refund year two. If you immediately reinvest that into a property making 10% cash-on-cash, you end up with $60,000 by year 10.
So what do you do now?
One option is just to sit back and collect the cashflow. After all, this property is now cashflowing $30,000 a year. Not too shabby.
But what if you took that $500,000 in equity ($100,000 down payment plus the $400,000 it appreciated after renovation) you now have and reinvested it to make you even more money?
Are you starting to see your net worth growing exponentially? And what if there was a way to do all of this tax deferred just like a 401(k) (but way better)?
I think I’ve heard of a 1031 exchange…
You may have heard the term 1031 exchange thrown around in passing. Or.. maybe you haven’t.
I mean, who really goes around talking about 1031 exchanges with passion and excitement except real estate investors!?!
A 1031 exchange is a tax incentive created by the government named after the section of the IRS code where the rules are described in detail.
The ruling allows you to sell a property and take all of the proceeds from the sale and buy another property. The taxes on this transaction are deferred to a later date (or maybe you never pay them at all – which I’ll cover next!).
Because 1031 exchanges allow you to move from investment property to property, leveraging your appreciation tax-free with each move, the 1031 exchange enables you to grow your portfolio very quickly by making “steps up.”
In this case, one option is that you could hold your property for a year and then trade it in for a bigger property. You would sell your fourplex, valued at $800,000 with a loan of $300,000, and roll the funds into a $2 million property (if you put down 25%) tax-deferred using a 1031 exchange. At 10% cash-on-cash this new property would yield you $50,000 a year in cashflow plus the equity paydown, rent appreciation and market appreciation.
Plus you also get to cost segregate and do 100% bonus depreciation on this next property purchase too! There’s another $500,000 write off (or $125,000 in tax savings) assuming you are sheltering $500,000 of your W2 or 1099 income.
Yep, this is getting real isn’t it. Do you see why we’re willing to put in the time and effort needed to invest in cashflowing rentals?
Or you can do a cash-out refinance
If you want to access your cash tax-free, your second option in this scenario is to keep your property, but do a cash-out-refinance. This allows you to keep your cashflowing fourplex while also using some of the lazy equity in it to continue to grow your portfolio by buying additional properties.
As with the 1031 exchange, this option gets the power of compounding working for you early, so your net worth grows exponentially.
Let’s do the final tally (see table 4)
First, we have our money earned from our first property, the fourplex. As you saw above, this totaled $985,000 at the end of 10 years.
Now, let’s factor in property number two.
Let’s assume you do the cash-out refinance and pull $300,000 out of the fourplex. This could be used to buy a $1.2 million apartment building. Let’s assume this new property cashflows 10% per year (30,000 a year in cashflow). After nine years (because you bought it at year two), your $300,000 down payment compounds to $707,000.
Note: when you remove the $300,000 in equity from your fourplex, your cashflow would likely drop. Since this makes this model even more complicated, I will avoid tackling that issue here.
Now let’s add in the taxes saved from cost segregating property number two. You can safely assume that this property, your $1.2 million apartment complex, will give you at least a $300,000 tax write off the first year (a $75,000 tax savings at a 25% effective tax rate). If you reinvest this $75,000 in another building at 10% cash-on-cash, it will grow to $161,000 (invested x eight years).
For the sake of keeping things simple, we’ll assume that you don’t do any rehab on your second property (even though you normally would since it increases the value of the property so significantly through forced appreciation). We’re also going to assume you don’t sell or do a cash-out-refinance of either of your properties in the subsequent eight years.
So what’s the final outcome?
In that same amount of time that your index funds grow to $393,000, the money invested in cashflowing rentals would grow to $1.563 million.
As mentioned above, the $1.8 million you’ve now earned off of your $200,000 initial investment over ten years, doesn’t include all of the rehab you would normally do to increase the annual cashflow and the value of the second property and beyond.
However, you could imagine how quickly your wealth would grow if you did this year after year and with multiple properties at once instead of starting with a single fourplex and only harvesting your lazy equity once!
And then there’s passing down generational wealth to your children…
Some of you may plan on passing your stock onto your heirs. But what’s going to happen when they go to sell it?
Taxes. That’s right: death and taxes!
But, what happens if you end up keeping your portfolio of rental properties until your death (while living off their cashflow!) and passing them to your heirs?
At the time of your death, there is a step-up in the basis. What that means is that your properties’ basis adjusts to their market value at that point in time.
If your $400,000 fourplex is now worth $1.5 million, well then, your heirs get a property worth $1.5 million with a basis of $1.5 million, which they promptly sell, and pocket the money.
No taxes to be paid on that lifetime of tax-deferred appreciation. Just one more way that real estate is tax-advantaged.
And now, you’ve created generational wealth.
Conclusion
I know that was a lot of data and a very intense model. So, if you’ve stuck with me thus far, let’s conclude with a little summary of Fast FIRE through cashflowing rentals, so you we can hit the highlights again.
- You can apply the Fast FIRE System to build a cashflowing real estate portfolio that pays you tax-free income each year and adds to your wealth through debt paydown, rent appreciation and market appreciation.
- You can take advantage of significant tax loopholes only available to those who actively invest in real estate and completely shelter your W2 or 1099 income.
- You can achieve huge step-ups in wealth by rehabbing your properties and increasing the value of the property disproportionately to the cost of rehab through forced appreciation.
- And then you can harvest market and forced appreciation through 1031 exchanges and cash-out refinances to grow your net worth quickly.
When you invest in cashflowing rentals, you achieve financial freedom years earlier than you would with traditional passive investments like index funds.
So, what do you think?
And, more importantly, what are you going to do?
The duo behind today’s post, Drs. Kenji Asakura and Leti Alto offer a popular course, Financial Freedom through Cashflowing Rentals.
If you’re interested in learning more about how two hospitalists got on the fast track to financial independence with rental properties, this course is for you. It’s the most expensive course I’ve featured, but past students are clearly happy with the value.
Like any course I choose to feature, they offer a full money-back guarantee with no questions asked. You’ll have three weeks from the start of the course to decide whether or not to keep lifetime access to the training. The course is not currently available, but you can join the waitlist for more information.
So what you’re saying is active management beats the hell out of passive investing. Properly done, why yes, yes it does.
Yes, exactly!
As long as people continue to see rentals as an investment, they’ll probably have trouble with this comparison. However, if they realize that each rental property is a mini-business, the high returns don’t seem so surprising.
I still don’t understand why physicians are so averse to real estate? I don’t think most of us understand the power of qualifying as a real estate professional and paying NO taxes. For goodness sake, this is your highest line expense every year. Imaging eliminating $100,000 of expenses every year and investing that. And then also doing a cost segregation – this is ROI on returns.
Of course if you’re single this not an option but if you have a spouse that can qualify as REP and help shelter your income from taxes, why would you not do it? I still don’t understand it?
I would argue than more multimillionaires have been made from real estate than by moonlighting. Imaging combining both. Again, I don’t see why we are so averse?
Agree, thank you.
I can guess that a subset are held back by fear. Another subset made mistakes or had bad experiences. (I have had my fair share of mistakes but fortunately, I didn’t let that stop me from continuing in real estate). I know that another large subset just aren’t aware (yet). We did a poll recently and >90% didn’t even know about Real Estate Professional Status and the benefits. That’s a huge number and one that we hope to change if we are going to help our physician colleagues live better lives.
Even my mom and dad, who really didn’t know what they were doing and invested in the 80s when interest rates were 14-15% (I couldn’t even imagine!!), now fully own several properties generating $250-300k of income each year.
The other misconception is about the time it takes to invest in real estate. My parents literally spend less than 5 hours a year on their properties. For our personal portfolio of 60 units, we could probably scale back to about 5 hours a month if we wanted. Eventually our goal is to own multiple 100 unit apartment complexes and spend no more than 5 hours a quarter on our properties. Dr. Cory Fawcett argues exactly this in his recent book on real estate investing. He says, you can choose to do as little or as much as you want managing your portfolio. Currently, we choose to do more (750 hours) so that we qualify for Real Estate Professional Status, but at some point, we will choose to do significantly less! 🙂
So you purport to spend 750 hrs yearly, and your goal is have a larger real estate portfolio and spend 20 hrs yearly. Doesn’t add up, trying to have it both ways.
No, I’m saying that at some point, I’ll choose to give up my real estate professional status and only work 20 hours a year.
With larger properties (>100 unit apartment complexes), you can hire on-site management, which dramatically lowers the need to be involved in the day-to-day management. So interestingly, the larger your properties get, the less work you need to put into them (in most cases, assuming you have a good team in place).
A bit disingenuous as you cannot claim RPS status while also working clinically as your primary source of income. Especially if you are W2. Maybe a little bit of wiggle room as 1099 but if you are putting more hours towards clinical work than RPS, IRS will not allow you full deduction on property.
The physicians I know doing this either work in a very part-time way like the author Kenji Asakura or their spouses are helping to manage the business and claiming REPS (true of David Draghinas of Doctors Unbound and Victor Mangona of ThirtyNinePointSix).
Cheers!
-PoF
For sure, real estate has to be your primary profession for you or if you are married, for your spouse. A doc can be working full time as a clinician and have a stay at home spouse claim REPS. In our family, as PoF mentioned, I’m the stay-at-home dad and only moonlight as a hospitalist.
We are small landlords with a few properties that we’ve held for well over a decade. We had a lot of earned income we would’ve loved to offset; however, when we’ve asked about claiming one of us as a real estate professional, neither of the two CPAs we’ve used to prepare our taxes has encouraged us to claim that one of us is meeting the 750-hour threshold.
I’m assuming that’s because neither of you was meeting the 750-hour threshold.
If you’re going to claim REPS, you should not only be spending the average of about 15 hours a week on the real estate business, but also documenting it. If you were, any CPA worth his or salt would almost insist you claim the status.
Cheers!
-PoF
No, we probably weren’t–although 1) we’ve certainly spent a lot of time on them over the years; and 2) when things go wrong with a rental, it can feel like you’re meeting the threshold. Separately, I do wonder how often the 750-hour requirement is fudged.
You should track your hours and see if you can make it. If you are close then you can do more work to get close to the 750 hours. It is worth it.
Also, you should probably get another CPA comfortable with real estate, especially REPS. Most CPAs are scared of a potential audit but if you log your hours then you don’t have anything to worry about.
The other thing to keep in mind is that most accountants aren’t there to push investment strategies. They are there to keep track of the numbers generated by the strategies you put into place. So if you want to meet criteria for Real Estate Professional Status, it’s just a matter of going out and doing the right things to meet the requirements.
750 hours a year for the tax benefits—woof.
But the bigger thing? It’s not like this is a little risk. If this goes south, you’re bankrupt (because you’re going to be personally guaranteeing these loans). High risk high reward. But it does feel like a strategy concocted in the middle/perhaps late stages of an historic bull run and economic expansion, which real estate is not entirely decoupled from (it supports the rent level), and historically low interest rates, which obviously play directly into the bottom line. Part of me wishes I invested more heavily in real estate and was more comfortable with leverage, but man, the bankruptcy risk on this. At least being aggressively invested in the stock market the absolute worst that can happen is destruction of the equity position (and if that destruction is permanent we all have bigger problems than paper wealth). This is a recipe for personal financial catastrophe that is decoupled from broader risk.
In hindsight, they chose an excellent five years to become active real estate investors. The five years before that (2009 to 2014) might have been even better. The next five years? It’s tough to say.
I decided to introduce this post with a fairly lengthy disclaimer, knowing that the path the authors have taken is not for everyone, involves work and risk, and is far from guaranteed.
“Below, you’ll see some eye-popping numbers. As a disclaimer of sorts, I’d like to state that the doctors who wrote the post have seen amazing results with their real estate investments. That does not mean you can expect to repeat their results.
There is risk involved in this plan, including using leverage (debt) to rapidly acquire more and larger properties.
For me, the take-home point is not necessarily the huge discrepancy between the results of in index fund and their hands-on real estate investing example, but rather the incredible amount of earned income that can be offset with paper depreciation losses when one can claim real estate professional status.”
Best,
-PoF
Interestingly, I actually owned multiple classes of properties during the last downturn and the one class that did well was my multifamily property. I bought the property for $740,000 before the downturn, I raised rents and sold the property 12 months later for $920,000 during the worst of the downturn. If you study the accounts of real estate investors during the downturn, you’ll read similar accounts where multifamily properties and more specifically certain classes of multifamily (you have to know what you are doing) consistently thrived.
As I mentioned in a previous comment, we are very risk averse. We are constantly building in contingencies for potential investment losses. The tax savings is actually one component of that. In 2019, we will have a $1.2 million tax shelter in place. If we were to make $1.2 million in income, we would get a $300-400k tax refund. This component of our return is guaranteed and is going to happen regardless of what happens to the economy or our properties.
“The tax savings is actually one component of that. In 2019, we will have a $1.2 million tax shelter in place. If we were to make $1.2 million in income, we would get a $300-400k tax refund.”
Explain further please? You generally only get a tax refund if you overpay your taxes during the year. “$300-400k refund” means nothing without context. Folks can get into negative tax rates but I presume that’s not what you’re implying.
Some of this will be W2 income where we withhold taxes. For other types of income, we pay estimated taxes. We won’t make $1.2 million in income but let’s assume we make $600,000 and withheld or paid estimated taxes that totaled $180,000. We wouldn’t pay taxes on the $600,000 and we’d get back the $180,000. The remaining $600,000 (of the $1.2 million) in losses would get carried forward to be used for the next year.
I want to start off by thanking Semi-Retired MDs for this series of articles. However, I just get the feeling that I am being sold something the whole time. And yes it is the online course. To me a physician has a simple path to fire, or fat fire. Their time should be spent growing their income and reducing their expenses. Concentrating on investment returns (greater than passive index investing) is probably the least important aspect in the short term. Instead of spending 15 hours a week to qualify as a REP, if they spent that time moonlighting, or taking extra call that is likely going to increase their net worth greater in the short term. This doesn’t mean that their strategy is not clever and won’t be effective, but will take a lot of dedication and time/resources to achieve it. So it can be Fastfire, but I would term it Fast-Complicated Fire. The simple path to fast fire for a time strapped physician makes more sense to me.
For example, I came up with my own clever scheme a few years ago that used credit cards to pay down student loans and getting cashback/rewards to the tune of a ROI of 25%. It took minimal amount of work, I gave away the information for free, and almost nobody decided to try it. Probably because it took extra work, and was not completely simple. Always good to learn new strategies, but the barrier to entry is too high for me.
I get that feeling, too, saildawg. I still love these blogs (including Semi-Retired, impressive and interesting work despite all the Tony Robbins babble) and have a great deal of respect for all the hard work it takes to build and maintain them. However, each year brings more cognitive dissonance when reading them. We learn interesting and important things from intelligent docs who are always telling us to be wary of financial-minded folks selling us things. Then, inevitably, these same docs turn around and sell us courses (give use your CME money!) and serve us ads from salespeople, specially those offering”passive” real estate investing opportunities, who love nothing more than to pray on burned out physicians and other high income earners. If I had a nickel for every affiliate link I see each time another course comes out…
This is so spot on. This is profit mongering. I like to read the articles but it’s a bit too pushy nowadaya between PoF and WCI. Specially WCI is selling courses or other things all the time. Feels like selling than helping. In the name of profit the original mission is lost.
It’s kinda like any start up (rmr Facebook without ads or other garbage ? Like 2003…) Turns into how to Max profit.
I guarantee there is a race or mandate everyyear saying blog / business income should keep going up and of not find more ways to make more money. So much for enoughism.
Forgive the copy and paste, but I responded to similar feedback elsewheret:
I tend to publish guest posts on topics I don’t write about myself in areas I don’t as much about personally. Hands-on real estate is definitely one of them.
Did you catch the intro?
“Below, you’ll see some eye-popping numbers. As a disclaimer of sorts, I’d like to state that the doctors who wrote the post have seen amazing results with their real estate investments. That does not mean you can expect to repeat their results.
There is risk involved in this plan, including using leverage (debt) to rapidly acquire more and larger properties.
For me, the take-home point is not necessarily the huge discrepancy between the results of an index fund and their hands-on real estate investing example, but rather the incredible amount of earned income that can be offset with paper depreciation losses when one can claim real estate professional status.”
You could make an argument that the posts have no business on my site But, as WCI likes to day, there are many roads to Dublin. If I present index fund investing as the only way to FIRE, I’m ignoring what others have done to fire successfully.
At a recent Camp FI event, I met two burned out health care professionals (a pharmacist and PT) who had gone from having not much to pretty much FI based on cashflow in about 5 years by investing in real estate in growing / steady markets (Nashville and Omaha).
Regarding the author(s), I agree that their article was more optimistic and less balanced than something I would write. I have met them and I believe they are good people with good intentions. They may be a little too keen on Tony Robbins and his seminars, but that proclivity may explain the abundance of optimism.
As far as the course goes, Kenji & Leti told me about 200 took it the last time it was offered and 6 or 7 took advantage of the money back guarantee, citing family issues, or a lack of time or money, but not course content. That’s a pretty good “keep” rate or whatever you want to call it. But buying it is optional, and in the intro to the first post, I linked to a couple of free courses you can take to try out the format.
I understand that some people will be upset when I publish a post like this two-part guest post. I’d rather you ignore the posts you’re not interested in and read ones like the one I published just before Part I of the Fast FIRE guest posts: A Gift on Giving Tuesday: $100 to 100 of Your Favorite Charities
Far, far fewer of you bothered with that one even though I explicitly offered to donate $100 to the charity you named in the comments. Last year, it took all day and most of the evening to get the 100 requests — at least this year, I got them by noon, but it was still one of the least-read posts of the year.
I’m able to do that kind of thing because of posts I publish that might earn some money. The Fast FIRE posts have that possibility, but I’m finding that very few of my readers (2 so far) have been interested enough in the course to register. That’s good feedback, as is the feedback in the comments.
Cheers!
-PoF
How did you do it?? We have been racking our brains to pay loans and earn rewards. This is way more interesting than what they are selling in the original post.
google gift of college reddit and, the window has pretty much closed on making this feasible though as fees are too high now.
Appreciated stocks also experience a step-up in basis on inheritance, this is not unique to real estate.
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Definitely — discussed here.
Although, with decades left to live according to actuarial tables, the step-up in cost basis for both stocks and real estate is not a benefit I would count on. I would not be surprised to see it legislated away at some point.
Best,
-PoF
How do you figure in some of the unexpected expenses that may crop up during the decade of ownership? Issues like hvac and roofing can certainly cause a large financial hit and possibly skew the numbers.
Your examples are regarding direct real estate ownership. What are the pros and cons of real estate via fractional investing (ie syndication?)
Real estate professional status is a really nice way to shelter taxes but unfortunately for me as a single physician I could never qualify for it.
You try to account for every unexpected issue up front and build it into your model. For something like a roof and HVAC, they have a useful life and if it’s near the end, just factor it in as if you have to replace it within the next several years. If the numbers don’t work or you can’t negotiate these things to be done by the seller before you buy, you move on to the next deal. When we buy, we negotiate like hell (and we teach you how to do it in the course) so we’re usually getting the cost of these things covered in the purchase price. For example, I just got a call today about the electrical going out in one of our properties. Like the electric company went out and had to shut down power to the entire building and our tenants have no electricity for the night. But we actually negotiated the price down by the exact amount that it would cost us to replace the electrical system so this “unexpected repair” is covered. On top of that, the government is going to pay for 1/4 to 1/3 of the cost because we are going to write off the repair and we’ll get it back in the form of a refund.
This article is purely about comparing the Fast FIRE system to stocks. Maybe Leif will let us do a head-to-head between Fast FIRE and syndications next time (doubt it, haha).
If you say you will “never qualify” for it, then you have determined your own destiny and you won’t. If you decide it’s a must, then I know you can do. Not only that you can cut back to half time and the cashflow/tax savings will more than make up for the lost income.
If it sounds to good to be true…
… sign up? ?
What is demonstrated, but underemphasized in the example, is the power of leverage in a growth environment. There is obviously a lot of borrowing of money going on to rapidly step up to bigger and better buildings.
The tax benefits are also pretty remarkable when you combine cost segregation with real estate professional status. A lot of earned, ordinary income can become tax-free when you can use this strategy.
Cheers!
-PoF
They certainly had good timing. Who knows if that would happen again vs being stuck with an apartment complex 50% full hemorrhaging money.
Quite risky and costs a lot of time and money. I would hope it has the potential to be profitable. Just does not seem like something just anyone could do. So much skill, timing, and luck involved.
It is good to see all sides I guess.
We feel very strongly that anyone pursuing this strategy needs to be highly educated (and have the right team and peer group) in order to lower the risk, which is why we created our course. If it were easy, we wouldn’t bother creating a course. I think it’s also important to point out that my wife and I are quite risk averse (even though it might not seem that way). We cover risk mitigation throughout the course. Interestingly, if you think about it, the tax benefits of this strategy is a risk mitigation strategy because it is a guaranteed return. We know in the beginning of each year, how much in taxes we’re going to shelter and that tax comes back to us in the form of a refund. So even if a property doesn’t perform as expected, we know that we’ll be getting a lot of money back in taxes.