I want to talk about how we can take advantage of the tax code and save some money. We are all frustrated with the fact that Uncle Sam takes more than their fair share. The more money you make, the more they seem to take, and so you are almost disincentivized. If you have a CPA who’s educating you through the process, they are going to tell you, “You’ve got to buy more equipment or you’ve got to make less money,” or whatever. That seems ridiculous. We all work our butts off to try to build wealth, to try to grow our income, but the more you do and the higher tax bracket you fall in, the more taxes you pay. How do you keep from paying significant amounts of tax?

First of all, you’ve got to structure your life around living below your means so that as you make more money, you don’t have to continue making more money to spend it on things that do not appreciate or grow in value. You want to try to figure out a lifestyle you can maintain where, as you make more money, you can invest that money. The key to paying less taxes is investing. It’s what are you invested in.

What I want to talk about is the many advantages to investing in things like multifamily apartment complexes, and we’ll cover some of those things like cost segregation studies. What are those? Cost segregation study is a study where you bring an engineer group in and they analyze the property that you are investing in along with the sponsorship group that you are investing with. The sponsorship group takes your money with their money, and then they go buy these assets. You’ve got to sign these legal documents that outline everything in the agreement. You are a passive investor and they are the active investor do the active role the general partnership team.

Once you do that, they hire this firm that comes in and does this assessment, and that assessment allows you as a passive investor to take advantage of depreciation, basically a fancy way of saying you pay less taxes. You get a write off, if you will. I will give you a quick example. If you invest $100,000 in one of these assets, you could see a depreciation study or an advantage, a write-off, of somewhere between 60% and 70% of your investment. In this example, you put $100,000 in, you could see a $60,000 to $70,000 write-off at some point.

The key to paying less taxes is investing.

If you don’t have passive cashflow or unearned income, meaning you only have a W-2 job, you are not going to be able to take advantage of all of that depreciation right now, but it doesn’t leave. You have it. You could take advantage of it once that asset sells that you invest in. That’s one way you can take full advantage of paying less taxes by investing in multifamily.

When you invest in multifamily apartment complexes, you also get a piece of the equity as the asset grows. If that apartment complex that you bought with this group is worth $10 million, and in 5 years, it’s worth $7 million or $9 million, you get to share in part of that upside. It’s like buying a bunch of single-family houses together. The difference is the value in these assets is assessed based on the income it produces and not what the neighbor’s house sells for. There’s a major tax advantage that you get to take full advantage of. It’s a great tax advantage, and then you get this equity. The third thing is you have cashflow.

If you invest in a stock market, you can’t spend that cash. You have to pay taxes on it and penalties if you are going to pull it out. If you are investing in multifamily, you pay taxes on it, but it’s not as bad as trying to pull money out of the stock market after you’ve invested it. If you have that cost segregation study, you can usually write off some or all of those taxes on the cashflow because it’s passive income, which is cool. It might not come until the second year, but you will be able to write off the cashflow that comes in, which is exciting.

Three advantages, you get the cost seg study, which is a fancy way of saying, save on taxes. You get the equity multiple, which is building up the value of the property and sharing in the profits, and then you get cashflow that you can spend or reinvest in these assets, which is cool. Your money is not tied up for 20, 30, or 40 years. You are incentivized by the government to put money in and save on some taxes in the beginning, but you can’t touch it because they want to hold onto your money, give loans against it, and so on and so forth. It incentivizes corporate growth. That isn’t a real advantage to you long-term. It’s tied up. Whereas a multifamily investment, you can get your money back out every 3 to 5, maybe 7 years at the latest, in addition to living off that cashflow if you want. That’s pretty cool.

I want to give you an example of somebody who invested in multifamily to illustrate. They invested $50,000 and that investment grew to around $100,000. In this example, it’s over 24 months. Normally, it’s 3 to 5 years, but it grew to about $100,000, so $50,000 profit or equity upside. Some of that was cashflow. In this instance, it was about $8,000 a year in cashflow over a couple of years.

Of the $50,000 profit money that this investor made, $16,000, because it was about two years, was cashflow. About a $50,000 profit, $16,000 in cashflow. That leaves about $34,000 in equity. What that means is, by the end of this two-year cycle, sometimes they are 4, 5, or 7 years, but at the end of this two-year cycle, he got his $50,000 back, which was his original equity.

He got another $34,000 back in equity upside or profit, and then he had that $16,000 that he was getting kicked out as distribution payments total for the two years. There are three advantages. You’ve got the cost seg study, you got the equity multiple or upside equity, and then you got the cashflow. You got these three great advantages.

It’s an amazing tax shelter for anybody who wants to diversify outside the stock market, and the stock market is not very liquid, at least without major penalties. Whereas in the real estate space, it’s a little bit more fluid and you can diversify against lots of different assets. It’s tangible. You can go put your hands on it. It’s an apartment complex that you own with the group and you don’t have any of the liability, any of the tenants, toilets, termites, and things like that, but you own it. You walk up to it, you could fly to it or whatever, and you are a part owner in that asset while you get to take full advantage of paying that little to no taxes in some cases.

I’m not a financial advisor. You want to talk to your CPAs and see how all this would work in your current environment, but in most cases, you have a major tax advantage against some of that. Earn passive cashflow and unearned income. It’s like passive cashflow is what they call it. I encourage you to reach out to your CPAs and ask them about this stuff. Not all financial advisors and CPAs are very savvy in the multifamily real estate investment space.

You may want to talk to a syndication group, someone who specializes in this, where they can educate you and see if it works for you. You review these opportunities and you decide if it makes sense for you. If you want a good tax shelter with all kinds of other options like equity upside, cashflow and flexibility, this is a good space to get into if you have not explored it. I hope this episode has been helpful and here’s to you in building your wealth.

Important Links

• https://www.SterlingRhinoCapital.com/create-your-fortune-podcast/