Epic Real Estate Investing - A Faster "Rat Race" Escape Trick | 810

Episode Date: October 19, 2019

In today’s episode, Matt shares the formula to escape the rat race, the ways to classify your real estate business for tax benefits, and a smokin' tax strategy that will save you money! Take a listen and find out more. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Success in real estate has nothing to do with shiny objects. It has everything to do with mastering the basics. The three pillars of real estate investing. Attract, convert, exit. Matt Terrio has been helping real estate investors do just that for more than a decade now. If you want to make money in real estate, keep listening. If you want it faster, visit REA.

iAase.com. Here's Matt. If you want to escape the rat race, the mission here is to get your monthly passive income to exceed your monthly expenses. That's the formula. So there are a few ways that you can go about this. You can increase your passive income or you can decrease your monthly expenses or you can do both.

And most people will eventually tackle both to some extent to reach that milestone where the passive income does exceed the expenses. But maybe you are just. focused on the passive income and just want to maintain your lifestyle and that's fine too. But it can happen a lot faster if you do both simultaneously. And that's really what makes real estate such a great rat race escape vehicle because when you're investing in real estate, both things are happening. You're increasing your passive income and decreasing your expenses. And here's what I mean. See, your biggest expense in life, taxes. And real estate,

It's one of the, really one of the last great tax shelters for the average person. And tax shelter, tax strategy. And if you're going to work on your rat race escape and reducing expenses is a part of your plan, it does make sense, doesn't it, to work from biggest to smallest? I think it does. I mean, Dave Ramsey, Susie Ormond, they want you to work on your expenses by reducing your daily coffee, which isn't going to move the needle at all when it comes to your... your rat race escape. Let's start with the biggest expense and that biggest expense is taxes or our taxes.

And with the tax benefits of buying and holding real estate and not to mention the business deductions you can take as well because when you start investing in real estate, you're essentially starting a small business also, regardless of what size or to what capacity you are investing in real estate. The income is increasing and the biggest expense in your life, your tax burden is decreasing, all with your focus on just one activity, investing in real estate. Now, most people don't realize that you can really kick this dynamic into overdrive. And you do that by classifying yourself as a real estate professional. It's a tax classification.

And I'll tell you why you would want to do this, particularly as you are trying to make this migration from nine to five day job into full-time real estate investor, if that's what you're up to. But I'll tell you how to become a real estate professional first. and then I'll tell you why you'd want to do it and what the big impact is as far as your bottom line goes. So if you're taking your real estate investing seriously, it's not nearly as tough as you think it might be to become a real estate professional. For example, I've got about a dozen doctors or so as coaching clients. I've also got three or four pharmaceutical sales reps, a couple medical device sales reps.

I got a couple policemen, a few firemen, I got them as clients as well. And so my physicians and sales reps, they make big incomes from what they do, right? So they've got some money to work with. And my policemen and firemen, they do really fine for themselves as well. But notably, they have quite a bit of time off that they can dedicate to their real estate. So my common advice is for all of my coaching clients is to do what's necessary to become a real estate professional for the tax. benefits. And there are two pretty straightforward ways to establish yourself as a real estate professional. And I'll get to the tax benefits in just a second. But let's take a look at how you

can become a real estate professional and then you can decide which one would work best for you. So method one is to get a real estate license, to get a real estate license. And that question comes to me frequently, but usually from a different perspective. And I always give it like, you don't need a license, forget it. No big deal. But by getting a license, you can classify yourself as a real estate professional. So you get a license, you hold it, and sell a house maybe once a year or so. And if you do that, you will essentially qualify as a real estate professional from a tax perspective. And it would be a good idea to confirm this with your CPA. I am not one. And if there's a detail in there that I'm missing, I'm confident it's not a very big detail.

And here's the kicker. If you don't want to get your license, have your spouse get their license. If you're married, it doesn't even, it doesn't have to be you that gets the license. One spouse with the real estate license qualifies both as real estate professionals. All right. So that's one way. Second way, work on your real estate investing business for the required number of hours. So you don't need a license, but you would need in that sense or in that circumstance. If you didn't have a license, you'd need to work at least 750 hours per year on your real estate.

estate business, then that qualifies you also as a real estate professional. So you don't even need a license in this case. So since my policeman and fireman clients have so much time off, they typically can work the necessary hours a year to qualify as real estate professional without any real extraordinary effort. And regardless of your profession, if you're taking your real estate seriously and putting in the time on the weekends and a couple days during the week, it's just not that difficult to reach the 750 hour mark. You know, if it's a hobby and you're just kind of tinkering it with it, on the side, that might be tough to hit the 750 hour mark.

But if you're going after this and you want to eventually quit your day job and you're taking it seriously and you're putting effort and time and finances and investments into it, then it's not that difficult to reach the 750 hour mark. So those are the two ways. You can do it by getting a license or your spouse can get a license. You can be classified as a real estate professional. Or you just work in making sure that you are working 750 hours per year in your real estate. So why would you want to do this?

All righty. So tax benefits. That was the spoiler alert. But let me show you how this actually works in what it looks like in real life. Let's say one of my doctor clients earns, say, $300,000 a year from his medical practice. And he earns $100,000 a year in gross income from his real estate efforts, from his rental units. Okay. Now let's say 40% of his gross rental income goes to the property expense. expenses. So my doctor-client has to pay $40,000 from his gross rental income to manage and maintain his properties. And so that's not an insignificant amount of money, right? But because he's a real estate professional, he can move that $40,000 because typically on the $100,000 earnings, you know, through your real estate, that's going to be more deductions than you can probably take inside of just a stand-alone real estate business. But because he has also $300,000 a year from his medical practice, he can move that $40,000, what he was unable to take, the leftover, the remainder of that $40,000 that he can't claim

for the real estate side, he can go and use that as a deduction against his $300,000 medical practice income. That's significant. That's huge. and in the event you have a property that has some significant repairs and it amounts to more than you can deducting your taxes or if you just have a couple deals or a deal, it could be one deal that just goes south and you lose money. You can carry all those losses over to your active income.

That doctor could go ahead and apply that all to their active income. And the other great thing about it is even there, if you have more deductions than you can take, you can carry those losses forward and use them next year. Pretty nice benefit, right? Now, like I said, I'm not a tax professional, so please consult your CPA to confirm all of this, but I think you'll find that it can be well worth your while to take on this little side career as you build your real estate portfolio. It means you can keep more, a lot more of the money that you are making from your day job

if you're doing real estate on the side. And if you have that license or you're working at least 750 hours a year. Got it? Smoke and smoking strategy. I haven't talked about this in a really long time, but it's a great tax strategy. And, you know, we all pay our fair share in taxes, but there's no reason to pay more than what we're required to pay, right?

Awesome. So God bless to your success. I'm Matt Terrio. Living the dream. Take care. We got the cash flow. Yeah, yeah, we got the cash flow. Yeah, yeah, we got the cash flow.

You didn't know, home boy, we got the cash flow. Podcast is a part of the C-Slood. Suite Radio Network. For more top business podcasts, visit c-sweetradio.com.