Anderson Business Advisors Podcast

Tax Tuesday Special Offer

Wednesday Feb 06, 2019

Tax Tuesday with Toby Mathis 11-13-18

Wednesday Feb 06, 2019

Toby Mathis and Jeff Webb of Anderson Advisors are here to ease your nerves and help you make intelligent decisions by answering your tax questions. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.

Highlights/Topics:

If I liquidate a 401(k) and take the cash, what taxes will I pay? If your younger than 59.5, you’ll pay a 10% penalty for a traditional 401(k); penalties are different for a Roth 401(k)
I have a home office. How do I indicate that on my taxes? Use Schedule C and Form 8829; but go for a business reimbursement, rather than a home office deduction
My phone is for personal and business use. How do I indicate business use on my tax form? If required to have a phone for business, expense the whole thing by being a corp
I purchased another vehicle for business use. Do I title it under the name of the business? No, to avoid additional liability and higher insurance costs
What’s the minimum income required for social security/medicare benefits to receive your four credits? In 2018, you’d have to earn $5,280; in 2019, it goes up to $5,440
Does the C corp have to be setup in 2018 to carry forward the deductions to next year? No. If you pay during your tax year, it’s not an applicable deduction in that particular year

For all questions/answers discussed, sign up to be a Platinum member to view the replay!

Resources

Rule 72(t)

Schedule C

Form 8829

Home Office Deduction

MileIQ App

26 USC 195

453 - Installment Method

105 Plan

Affordable Care Act

Tax Wise Workshop

Railroad Unemployment Insurance Act

Wednesday Jan 16, 2019

Business Deductions with New Tax Act 2018

Wednesday Jan 16, 2019

Did you know that you can no longer write off miscellaneous itemized expenses? That’s because of the Tax Cuts and Jobs Act. Toby Mathis talks about how to take personal expenses that are not deductible and make them reimbursable business expenses that you don’t have to report as taxable income.

Highlights/Topics:

Identify expenses that may not be deductible to you as an individual, but to a business; expenses that benefit a business that you incur personally as an employee
How businesses are structured (sole proprietorship, partnership, corporation, etc.) and operate affects personal expenses for business
Accountable Plan - Reimbursements and Expense Allowance Arrangement: Amounts paid are excluded from employee’s gross income, not reported as wages/compensation
Keep a paper trail; document who, what, why, when, and where you’re writing off
Four-part Test:

Is there a business connection to the expense?
Substantiation: Can you provide proof (i.e. a receipt) to the employer proof that you incurred the expense?
No Excess Payments: It can reimburse you what you paid. But, can it give you extra money?
Timeliness: Do you let the employer know of expenses every 90 days, for the employer to reimburse you within 120 days?

Examples of expenses that you might get reimbursed on include travel to and from the hotel and business meals
Employee Home Office - Four ways for a home office deduction, if you:

Are an employee doing administrative activities at home, it qualifies as a principal place for business.
Have a cash register for your business, or transacting business and collecting money in your home.
Have a physical place where you meet patients, clients, customers, or whatever.
Have a detached structure that is not part of or attached to the dwelling unit.

Resources

Tax Cuts and Jobs Act

Securities and Exchange Commission

Wednesday Jan 02, 2019

Tax Tuesday with Toby Mathis 11-27-18

Wednesday Jan 02, 2019

Toby Mathis and Jeff Webb of Anderson Advisors like to spread tax knowledge to the masses. So, here they go again. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.

Highlights/Topics:

My parents own two homes and willing one each to me and my sister. What’s the best way to transfer the properties? Transfer inherited appreciated property through will/ trust
If I offer a small-term life insurance policy for my employees, will tax benefits outweigh costs? Yes, but tax benefit of deducting premiums won’t equate to premiums you pay
What is an accountable plan? How is it formed, described, executed? Plan must be between employer and employee; you account for certain expenses, we reimburse you
How would I be taxed, if I get a loan on a 401K to use toward buying real estate investment properties? A loan isn’t a taxable event; you repay the loan through the 401K
What’s a DB plan? Defined benefit; defined contribution (DC) defines amount you put in
As a sole proprietor, can I write off life insurance premiums as a business expense? You can’t write off insurance premiums unless you're an employee; you don’t get deductions
I've invested money into tech startups that have failed. How can I write off these losses? It's capital loss, and you need capital gains to offset it; can deduct up to $3,000 a year
Can C Corp losses be applied to a personal 1040? Depends. Losses can be applied, if corp is liquidated, it’s a traditional corp, and 1244 stock election was made
Does Anderson Advisors have a favorite app to track mileage? Anderson Advisors doesn’t, but Toby Mathis recommends MileIQ
Can I get advice on how to save money from your company? Yes. We're happy to help, just contact us to talk to any of our representatives
Can I get the $500 credit for my 17-year-old son? Child tax rate cuts off, if they're 17 at the end of the year
If my child earned $11,000 in 2018 and no tax, does he have to file his own tax return? Yes. If you don't have a tax liability, you still have to file a tax return to claim it
If my C Corp didn't make money its first year and all the expenses I had were for education, will I end up paying money to the IRS or receive refunds? The corporation would have the $40,000 deduction; it can reimburse $40,000 as a loss, not a deduction
How do I structure, if I’m working for another company as a day job? Doesn't matter. You can work for multiple employers and set up your own companies
Do I have to hire my wife as an employee to give her a pension? If you want to put money aside for her, she needs to work; you can't just give her a salary for doing nothing
Can I invest directly into real estate in an opportunity zone or only in an opportunity zone fund? Put money into the qualified opportunity zone and invest through a qualified opportunity fund via an entity, not individually; you can take capital gains
What's the best accounting software to use to run an S Corp? QuickBooks is the most used and people are familiar with it; also have a good bookkeeper
I'll be 59 1/2 in March. Can I use my 401K to purchase real estate investments without penalty? How is the tax handled? If you pull money out, it has to be after you're 59 ½, not a day before; you can make a 72T election when you're 55 to spread out contributions

For all questions/answers discussed, sign up to be a Platinum member to view the replay!

Resources

338 H8 or H10 Election

Year-End Tax Planning

Zoning Hacks to Get You Started FAST Course

Friday Dec 21, 2018

Residential Assisted Living with Michelle Pinkowsk

Friday Dec 21, 2018

Have you considered investing in residential assisted living (RAL)? Do you see it as an opportunity to make money in the real estate space? Did you know that there’s several ways to make additional revenue in this area? Then, you’ll need an attorney who specializes in RAL because of associated liabilities. You could be sued several different ways because you're taking care of other individuals. In this episode, Clint Coons of Anderson Business Advisors talks to Michelle Pinkowski, an attorney, about RAL. Michelle actually developed a system for finding the perfect location for an assisted living residence and strives to impress upon people the importance of asset protection. She’s a big proponent of having enough insurance to handle risks.

Highlights/Topics:

Unlike flipping and fixing single- and multi-family homes, real estate investors need to understand the underlying land use for RAL
Fair Housing Act: When looking for a location, identify if it’ll be assisted living for seniors, disabled adults, or recovering addicts; each group has protected disabled populations
State regulations govern limits on the care you can provide, but the state licensing agency doesn't have the jurisdiction or power to make certain determinations
Besides licensing statutes, you need to understand zoning regulations that define how many people you can put in your RAL home
Each entity (HOA, county, city, etc.) has its own rules; don’t get discouraged/give up because one entity tells you that you can do something, but another says you can’t
Don't find a house first; find the path of least resistance - the locale that will be the best place to start your search
Educate yourself and do research before calling a planning department - may or may not tell you the correct information; know what questions to ask to avoid getting bad advice
People open RAL homes because they want to help people and make a difference; they don't want to be litigating cases in court or facing zoning enforcement actions
Utilize a professional who specializes in RAL to overcome obstacles and get your house open, up and running, and making some money off it

Resources

Michelle Pinkowski

Michelle Pinkowski’s Phone Number: 303-803-4309

Gene Guarino’s Residential Assisted Living Academy

Fair Housing Act

Clint Coons

Woody v. Comm, T.C. Memo. 2009-93

Full Episode Transcript:

Clint: Hi, everyone. It's Clint Coons here with Anderson Business Advisors and, in this segment, what I'm going to do is talk about residential assisted living. I know a lot of you out there have seen this as an opportunity to make money in the real estate space, and I can tell you that there's just something different that everyone should be aware of when it comes to investing because there are ways to make additional revenue.

As you know, I worked with Gene Guarino. He's an expert in Residential Assisted Living. Now, he was recently down at one of his conferences. He does an annual conference each year for Residential Assisted Living, and I met an individual there, a fellow attorney, that really piqued my interest because, when it comes to this space, at Anderson, we do the structuring. We set up the corporations, the LLCs, teach you how to structure your business the right way to reduce taxes and liability.

One area where I think a lot of people still need help is understanding how to actually run the business, understanding that your state may have certain rules, regulations, the counties that you're getting into, the cities, and how do you navigate those because we can teach you how to go out there and set a business up, how to make money doing the business but, at the end of the day, something that I think, at Anderson, we always tell you – you always need someone who understands your particular type of business, that is, what you're getting into.

You need to have an attorney that specializes in that area, especially with Residential Assisted Living because there's a lot of liabilities out there. If you've heard me talk about it before, you know that you can be sued 10 different ways and none of which you actually caused yourself but still brings liability to you because you have people working for you. You're taking care of other individuals and so that puts you in a special relationship to them.

We're not going to cover that on this call today, this podcast. What I want to do is I want to bring on a special guest. This is the individual I met down there. Her name is Michelle Pinkowski and, Michelle, why don't you just introduce yourself?

Michelle: Hi, Clint. Thanks for having me on.

Clint: It's great. Thanks for being on. You came up to me when we were down there and we just briefly chatted. I saw a great opportunity to bring you on and get this information out to our students because we have so many clients that are seeing this as an opportunity. I want them to know that they have resources, and you're one of those resources that I feel that would be definitely beneficial to people. Why don't you tell everyone a little bit about yourself?

Michelle: Thanks for that. I appreciate that. I was a practicing trial attorney for many years, and I'm a recovering trial lawyer now, how I like to say it, but I've represented–I've worked on a lot of different cases but, before I essentially retired from that practice, I spent my time representing real estate developers. It was super interesting because they had lots of different problems from construction defect cases, to people who were injured in their building, to being sued in a class action onto the ADA by disabled people, to fights with their insurance carriers, things like that.

I really fell in love we that kind of law, construction law, but then made a change and started working internationally and working with countries on the policy level to develop construction permitting systems and spatial planning systems. It was kind of interesting, actually. We lived overseas for about 10 years and wanted to make our way back home and started to look at ways to re-enter. I had just finished helping a country set up their spatial planning system and teaching people about zoning and things like that, and that's when we found out about residential assisted living.

We thought, "Wow, this kind of investment combines our love of the built environment in real estate with also being in a helping kind of a situation." We started researching, and that's when I really developed my system for finding the perfect location for the Assisted Living Residence. In getting to know more people in the industry, I learned that this is something that I can add value to people with because a lot of people, real estate investors, when you're looking for a single-family home to fix and flip or maybe you're doing multi-family, you don't really have to understand the underlying land use. With Residential Assisted Living, you really do have to understand that. I developed a system and started working with people in that environment, and then our practice grew once we came back to Colorado. Now, we have a whole practice area focusing on assisted living.

Clint: Wow. Just what you brought up there about how you got started into real estate, you went through the litany of things that I always cover about how many different ways you can be sued. You can actually go out and teach at one of our events, it sounds like, to impress upon people the importance of asset protection. Just as an aside, how many of those individuals that you represented had structures in place? Did they all have LLCs, corporations and stuff to protect themselves or were many of them just individuals that owned the properties in their own name?

Michelle: I've represented really big developers so they had a lot of structures in place and they also had a lot of insurance in place, which I'm a big proponent of, and insurance to handle the risks.

Clint: Good. You started in then RAL so you came back and you saw the opportunity there. You talked about working with people, you live in Colorado. That's where your practice is. Can you operate in all 50 states? Can you help someone who is thinking about setting up an RAL, say, in Arizona or they want to set one up in Florida?

Michelle: Yeah, absolutely, because a lot of the things I advise on is at the federal level, the Federal Fair Housing Act, and so we can work with clients and basically provide consulting services. Then, occasionally, we do need to work with local counsel if we need somebody on the ground or to interact with the cities or hopefully not the courts but sometimes the courts.

Clint: When you're bringing up the Federal Fair Housing Act, what are some of the key points you think that people would need to know if they're getting involved in RAL that they should, of course, be aware of when it comes to that?

Michelle: The first thing is to know that when someone is operating in assisted living, whether it's assisted living for seniors or disabled adults or recovering addicts because–sober homes, that's a type of group home–all of those groups are considered to have populations that are disabled, and that's what the protection is under the Fair Housing Act, is it's to protect against housing discrimination pertaining to different classes of people, including disabled people. It doesn't protect people just because they're older, but they have to be disabled, which anybody who is looking at assisted living when they're older certainly meets the definition of disabled.

Clint: Okay, let's run that down a little bit. How would that apply to me? Let's say I set up my RAL and I have a corporation where I'm running the business through and I'm leasing the property. Maybe it's from a third party or maybe I own the property and my own limited liability company. Here's my corporation. I'm doing the advertising. I'm trying to bring people in. If someone came up to me, are you saying that, if I decided not to rent them the space because I looked at that individual–I thought, "Wow, there's going to be a lot of work and it's going to cost me a lot to assist them," whereas I can bring in the other guy who's not in a wheelchair, looks pretty healthy and it's not going to take as much time to make sure that they have a comfortable environment, could that be a potential threat for someone then?

Michelle: Potentially. I think that's going to be governed by the state's regulations more than the federal Fair Housing Act because state regulations will kind of govern the limits of the care that you can provide. Really, the Fair Housing Act comes into play long before you ever get to that point. It really comes in when you're looking for the location for your group home at the beginning. Somebody will get interested in a space.

They'll come to you. They'll say, "Clint, hey, set up my structure so that I have good asset protection," so they've got all their corporate structures set up, they've gone to Gene Guarino's class, so they're excited about how to operate the business, and then they go out and they start looking for property. Sometimes, people get confused because they'll read their state health department regulation, for example, and they'll read the state licensing statute that talks about, "You're a small facility if you're 16 and under," and they'll think, "Hey, that means all I have to do is find a single-family home and I can put 16 people in there because the licensing statute says that," not understanding that that's not–the state licensing agency doesn't have the jurisdiction or the power to make that determination.

That's a whole different area, so what they really need to look at, in addition to the licensing statute, is the zoning regulations for the areas that they're interested in because it's the local jurisdictions like the city, or the town, or the township, or back east they are called parishes, all the different names of local jurisdictions, sometimes even counties. They have their own zoning regulations, and every zoning code is going to be a little bit different, and that's where it's defined how many people you can put in your home.

You have to be able to find and understand that. That's where I really have been helping people because they get really excited and then they go out and start trying to find a house. It's a little bit overwhelming to confront all of the codes for all these different jurisdictions. In your area, you probably have a lot of different jurisdictions. In the Denver area, we have a ton of different jurisdictions.

Clint: Everyone's a little bit different.

Michelle: Yeah, everyone has their own zoning regulation.

Clint: What I'm hearing is if I had a single-family home–and let's assume that I had six bedrooms–and I'm contemplating people 6, 8, or maybe 12 people in to that house, I would have to know whether or not I can actually accommodate 12 people based upon the city or the county in which that house is located, because even if the state law states that you can have up to 16 people on a property, the city is going to determine or the county will also determine whether or not you can have X amount of people.

Michelle: In that particular location, yeah. Some places are a little bit backwards. Some don't recognize issues at all in residential areas and they'll say, "Oh, if it's assisted living or if it's a nursing home, you need to be in the business district," or some even say the industrial district, which is ridiculous. That's where the Fair Housing Act comes in, because the Fair House Act says, congress has determined that it's the policy of the United States to prevent housing discrimination based on certain categories, including disabilities, which means that people who are not disabled can live in a residential neighborhood and people who are disabled also have to have the opportunity to live there.

Clint: Got it. I know that's one of those things. I remember, as an I aside, when I moved into my house–I don't know when it was, 20 years ago–I had a satellite dish, one with a direct TV, and they had in the CC&Rs that you can't have a satellite dish there, but they didn't understand that federal law trumps whatever CCR is. They tried to get me to remove it. I remember I went to the first meeting and I said, "First off, I'm an attorney. Do you really want to pick this fight with me? Second of all, you do not preempt federal law. Federal law states that I can have a satellite dish."

I can see how this comes up because these people who sit and make these regulations for the county, they don't understand federal law and they're actually violating it many times. Don't be discouraged, I guess, is what you're selling people. Just because the local county tells you, you can't have it in a residential neighborhood, federal law is going to preempt that and allow you to have that facility there.

Michelle: Yeah, that's exactly right, and it's not just the city or the county, it's also deed restrictions or HOAs like you mentioned.

Clint: Yeah, exactly. Tell us about that.

Michelle: It's the same principle. A lot of times, HOAs will like to have in their covenant something that says, "You can't have any business or commercial use," and they'll say, "Well, residential assisted living is a business use," but, in fact, there's a lot of case law out there where the courts have determined that it's actually a residential use because it is a way for disabled people to be able to live in a residential environment.

To enable them to do that, yes, they have to have the supporting infrastructure like the caregivers and whatnot and there has to be enough people allowed in a home to make that financially viable. An HOA can't prohibit any kind of group home for the disabled, including residential assisted living. They'll try sometimes, and that's where it helps to be able to say, "Well, I'm an attorney." We have some advantage to be able to start with that statement, but I'm trying to work with people also to enable them even if they're not attorneys to be able to go in and have the firepower to make that argument.

Clint: Okay, let's say this: Think about buying a property in an area that's subject to an HOA. Now, what I'm hearing from you is that the HOA is not going to preempt federal law so federal law is going to allow me to put people into that property. However, what happens if the HOA has limitation on how many vehicles you could have? They're going to say, "All right, well, fine, you can have six people in there but you can't have any vehicles in the driveway." Could they kick me on that one?

Michelle: Yeah, you could still be protected by the Fair Housing Act because Fair Housing Act says that they have to make reasonable accommodations to any rules or policies to enable disabled people to live in the home, so if it's reasonable and necessary, to argue, "Look, having two cars in the driveway is not unreasonable. It doesn't change the character of the neighborhood and it's necessary to allow us to operate this group home," then they need to allow it.

Clint: Okay, so there's a way around it, then? Because I can see them trying to prevent you a second way. Have you ever had–say that situation came up. What would you do? If I was in the RAL space and I was looking to put a home in and I get this pushback from someone at the HOA and I'm in, say, California. Would I then just contact you and you could send a letter off? How would you approach that?

Michelle: We have to look at it state by state and what their rules of professional ethics are but, yes, we prepare a letter, either that I can send or I work with your local lawyer to send it, and it helps that I prepare the letter because I understand the Fair Housing Act. People won't have to pay to get their local lawyer up to speed, so I can work with the local lawyer and, as long as they're comfortable with my work, then they send it on their letter again.

Clint: Yeah, that's really important, that people understand that because if they go to their local guy, he's not going to understand this to the level you do. That's why I brought you on, because, at Anderson, we have our platinum program where clients can call in and we don't charge them to answer their business-related questions if they're a platinum client. We get a lot of questions from RAL members about the topics that we're discussing, and that's just not our wheelhouse.

Associating with someone like you is important, I think, for anybody that's looking to do this just because they're going to then be able to tap into that resource. Now, of course, it doesn't come for free but the idea here is that now you're dealing with someone who understands it and, if you do have an issue, they can go and put their local guy who doesn't necessarily understand it–because I know where my limitations are, and they should, too–and then, collectively, the two of you can assist them in getting that house open, and up and running, and making some money off of it.

That's good, having a team approach, and I think Gene does that a lot in the way he teaches a class. You need to have a team, people on your side that understand your business and can help you move that ball forward, as I'd like to describe it, that they'll find success. If somebody is just getting started–let's say I'm considering starting my assisted living and I'm in Texas. How should I go about it? The structuring side, leave that alone, because you know what I'm going to say: Set up business entities, because that's what we do. I'm thinking from the regulations side. Do you first go and research the county or the city for ordinances or do you go identify the house and buy the house first?

Michelle: Don't go find a house first. Do not do that. I have clients who went and bought a house, thinking that they could–their pro forma is based on a certain number of residents, 12, 14 or 16, whatever, and then they go and try to pull their permit and the city says, "Wait a minute, you can only have six," and that's really disappointing. That's why you don't want to get there. I have a methodology. In fact, I've got, on my website, an online course that people can do.

It's less than two hours. It doesn't cost very much. If you want to learn how to do it yourself about how to analyze the zoning regulations in your area super-fast, you can take that course, or you can call me. I can give you some hints. I'm happy to do that, or we can do the analysis for you if you don't want to do it yourself. Basically, you need to look–what I like to do–and Gene Guarino says this all the time–find the path of least resistance.

You might be in a certain area, but that area will have 4, 5, 6 or 10 different jurisdictions that have their own zoning codes. You want to quickly look at those and find out where's your best place, where's your best entrance point. For example in my county where I live, I did this analysis. I tried all this out on myself, by the way, so I know it works. In our county, I did this analysis, and some places said, "Well, you can have to eight," and, keep in mind, you still have the Fair Housing Argument.

If you have somebody who has it in their code with big enough numbers that you don't have to make that argument, then it's a lot easier. One place will have up to eight and another place will have maybe up to six and another has unlimited. Then, there was one that did not allow it at all in the residential zone. I love this story because it's so dramatic. You can't have group homes for elderly disabled people but, in the residential district, you can have chickens, goats and potbelly pigs but no old people. Do not bring old people here.

Yes, that is a clear violation of the Fair Housing Act, but if I really wanted to get my home open and get it opened fast and get people in there, I'm not going to start in that jurisdiction because, obviously, they're backwards. You'd use this methodology to find the best entrance point and start there.

Clint: That's important, what you just said there.

Michelle: It is, yeah. That way, you're not surprised. The other thing I recommend to people is do your research before you call the planning department. Some realtors I've heard say, "Hey, just call the planning department and ask them what you can do with your property or the property you're interested in," and I'm like, "No, don't do that," because they may or may not tell you the right information. I had a situation where I knew exactly what the zoning code said and I knew that I could have an assisted living residence there.

I called for another reason–I don't know, maybe parking, setbacks or something–and they said, "No, you can't do that here." Of course, I was able to say, "Number one, well, I am an attorney and, two, I have read the code." At least if you're not an attorney, you can say, "I've read the code and I know that I can do that." Had I done that and I didn't know what my rights were, I might have gotten discouraged and given up on a jurisdiction that was really actually very, very favorable.

Clint: See, there's two things that you mentioned that I think are really important for people who are listening to this, and that is, number one, you're doing it. That's something I tell people a lot. Whenever you're going to work with a local professional or any professional, that is, and you're in a certain space, you need to make sure that they're doing exactly what you're doing because they're out there learning the issues that you're going to be facing and they're finding solutions to those problems that you come up against because it's going to affect their business just like it will yours.

That, I think, is key because so many people who are not doing it don't know what questions to ask of individuals with whom they're going to be working with. As a result, many times, you get bad advice. That is so important. I think people should really understand that. The second thing you mentioned, you had something on your website for individuals that really caught my attention there that they can go to and they can get this information on what to look for as far as the zoning for whatever state they're working in, county or city.

This program that you have or information, series of videos, if they wanted to take advantage of that, how do they go there? What's the website address? What would they need to do?

Michelle: My law firm is Pinkowski Law and then there's a tab that says "learning center". On that is the zoning. It's called Zoning Hacks to Get You Started Fast, and it really is. Hopefully, I'm not too boring but, if I am boring, it's only an hour and 45 minutes long. It's worth it. I've had people take it recently. He's actually somebody that later turned out to be a client but he went through the course first and it's really made our interactions go so quickly because he analyzes the whole zoning code and he says, "Hey, I think that we can do this here in this zone but not in this zone." He's totally grooved in. I think it's practical information and it doesn't cost that much, so Pinkowski Law: Learning Center.

Clint: One of the things we do at Anderson–and I see that you're doing the same thing–is I tell people that, "Come to one of our asset protection events first before we start working with you so then we can educate you on what it is we're going to be doing, the importance of having LLCs and corporations," and I get a lot of pushback many times from individuals. They just want to skip that step. They say, "Well, I just want you to do it for me anyway so why would I sit through this class and learn about this?"

It's because you don't know the right questions to ask then if you haven't sat through the class because we're not always going to be there with you and it makes our communication between the two of us so much more efficient. I assume that sounds like what you've done for people on the RAL space. You need to get the education first, go there, learn about this and then, when they need your assistance, they can contact you and then those conversations are going to be more meaningful because both of you are speaking out of the same book, so to speak, when it comes to addressing these issues.

Michelle: That's very true. I think if you're going to be in any space or do any business like real estate investing, the more competent you can be, then the more things are going to come your way. I've had some really good things come way just because, over the last year, I made it a point to study this area of law to learn. I went to Gene Guarino's three-day course and, before that, I did the online course and I went to our state administrator training course, as much as I could do to learn these things. I really encourage people to do that because, when you're competent, one, you understand it. It takes the mystery out of a lot of things, and people recognize that. People are drawn to those who are competent. You'll attract good partners, you'll attract good deals and your residents, ultimately, will understand that about you, too.

Clint: The last thing you want to do is open up a space and you put in 12 people then, all of a sudden, the city comes knocking and says, "Hey, you've got to kick out eight of them because you're in violation."

Michelle: Yeah, that's absolutely right. In the sober home space, group homes for recovering addicts, there is one company–I won't name them, but they would do exactly that. They were very aggressive and so they would just open up their homes, put people in them and wait until zoning enforcement knocked on their doors, and they did come knocking. There's a lot of case law out there dealing with this company, but they had a high tolerance for litigating things. I think most people who just want to open one, two, three, or even 10 Residential Assisted Livings, they want to do that because they want to help people and make a difference; they don't want to be litigating cases in court or facing zoning enforcement actions.

Clint: Exactly. The way you look at it or I always often tell people is that–let's say I hire someone such as yourself for your expertise and maybe it cost me $1000 to have this information and do some strategy sessions with you, but then I'm going to be able to open my home up and I'm going to be able to get it right from the get-go because trying to litigate this afterwards–you're going to look in a rearview mirror and say, "I so wish I would have connected with the right professional ahead of time, paid that small amount of money to get this information so we're doing it right," because litigation's not cheap.

I just spoke someone today who's involved in an unfortunate situation where he lost $75,000 in a joint venture deal gone bad, and he had gone to another attorney and talked to him about it and he came to me for a second opinion. We both gave him the same advice, which is, "You may want to sue him but it's going to cost you a lot of money and you're not going to win at the end of the day." It always comes back to understanding that litigation is never where you want to be unless you're this big company who has more money than they have sense and you just want to fight it.

That's not what we're going to be able to do and that's not what you'd want to do because that's going to take your eye off the ball. You're here to help people to run a business, and whenever you're dealing with the county, the city, the state or litigants, it's going to detract you and it's going to have a severe impact on your business and the success and liability of that. I hope people that are listening to this take advantage of it, reach out to you, go to your website, look at that video, sign up for that so they understand the issues that they need to be aware of going into a certain area so they're not doing what you just stated, buying into a house where you can only have chickens and pigs living it but you can't have elderly people, and so they're going to know ahead of time where they should be looking so they can plan out, come up with a business plan.

Is there anything else you think that the listeners need to know about when it comes to RAL and this particular issue?

Michelle: I think that, just to reiterate, understand the difference between the licensing statute and local zoning regulations. That's a big thing. You'd have to know both of them, but don't get them confused.

Clint: Perfect. Excellent, and you can help them with that. Again, if somebody wanted to contact you, what's your phone number?

Michelle: 303-803-4309.

Clint: Right, and your website again?

Michelle: Pinkowski Law, and I love talking to people. Call me for free consultation because I really like gathering data from people around the country and that's kind of fun for me to see. I can help my clients better that way, too, if I know what's going on over in Louisiana, up in South Dakota or down in Texas. Then, we can compare notes and benefit everybody and hopefully raise the waters for everybody.

Clint: Absolutely, and I think, just to hit on this one more time, if you're just getting started, this is a crucial step in starting your RAL business, is going and getting this type of information because it says it doesn’t have anything to do with asset protection and business planning; this is about understanding whether or not that can actually be a viable business. For those individuals, I think it's important. Also, if you've already started in this space, you may be operating as an outlaw right now, and if you don't know what the zoning requirements are and you haven't looked into it, you better get the information and just do a top-down analysis to make sure you're complying.

What I would suggest you do is go to the website there, watch those videos and then, if you need some more information, get a free consultation or sign up for a consultation time with Michelle and take it from there to make sure you're doing it right for your business. With that, I want to thank you for being on here with me today. I think everybody's going to listen to this. They're going to go, "Wow, there's so much more about Residential Assisted Living than I knew when it comes to starting that business up," and you're going to be a great resource for us so I want to thank you for coming on this podcast with me and taking the time to explain it to all of the listeners.

Michelle: Thanks very much for having me. I enjoyed it.

Clint: All right. I'll look forward talking to you soon.

Friday Dec 21, 2018

Tax Tuesday with Toby Mathis 10-16-18

Friday Dec 21, 2018

Toby Mathis and Jeff Webb of Anderson Advisors like to talk about taxes. It's a lot of fun for them, and hopefully, it's educational for you. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.

Highlights/Topics:

We have a vacation rental that we're rehabbing. Should we form an LLC to collect rents? Don't put your rental in your corporation; if you take it out, it's considered wages
If the rental is an LLC and you want to flow it to the corp, isn't that contribution LLC to corp? No. If you want the money to go to the corp, you’re paying in a management fee
I've taken real estate training and investing using my LLC's credit card. Can I deduct those courses? If it’s a new business, no; if it's an existing business, yes
Travel Meals: If included in lodging, is it 50% or 100%? Depends on how you're billed for travel; if items aren’t separated out on a bill, they're 100% deductible
How much can someone loan or gift to you in a single year and it not be a taxable event? $15,000 a year per recipient; if it’s more than that, you have to file a gift tax return
I'm a self-employed life insurance agent and want to wholesale properties. How should I structure both businesses? Licensed agent is an S Corp; wholesaling is an S or C Corp
How does the process change, if the rental LLC is owned by a Qualified Retirement Plan? It can't be a second/vacation house because you're a disqualified party as a QRP
Is this LLC with rental and income qualify for the 20% pass through? If real estate is triple-net lease, it doesn’t qualify for 199A; if not triple-net, you get the 20%
My condo’s roof has a bad leak, and it took 8 months to fix it, during which it couldn’t be rented. Can I declare it as a rental for the entire year? Yes
If I buy a house subject to rent it out, does the income on the property go toward my person or business? The personal owner, unless you put it in the LLC
I manage 10+ single-family houses. Can I deduct 100% of cell phone and Internet expenses? If through a corporation, then yes; if sole proprietor, write off business portion
What if you loan money to your LLC, is there imputed interest? You can't impute interest to yourself; but if it's a separate taxpayer, then you have imputed interest
What if I rent a hotel or Airbnb when I'm looking for an investment property? Set up a corporation to write off those types of expenses
Can you deduct food expense when going to a cafe to do office work on your laptop? If it's your business, yes; if going there to do office work on your laptop, it’s not deductible
Our mom's condo was put into three siblings names. We sold it. Should we put it in a trust? You should have kept it the mom’s name to pass it on with a step-up-in basis
We would like to own a house in Florida, but keep our house in Georgia. Tax wise, which is better for a home-based business? No income tax with a home jurisdiction of Florida, and you don't have any ALS tax

For all questions/answers discussed, sign up to be a Platinum member to view the replay!

Resources

Section 179 Recapture

Section 179

1244 Stock Collection

Airbnb

Friday Dec 21, 2018

How to Set Rents with Scott Abbey

Friday Dec 21, 2018

How do you determine rents for properties you’re thinking about buying? As an investor, are you going to get a return on your investment? If you don’t, then you could get behind every month.

Clint Coons of Anderson Business Advisors talks to Scott Abbey of RentFax, who will tell you how to determine rents for your properties. So, when you make investment decisions, you’ll have a range to use to budget wisely.

Highlights/Topics:

Scott pulls data on properties from the Census Bureau to track indicators of positive vs. negative experiences and determine if he could sustain an income stream
Scott makes sure to understand the risks involved when taking on a property to establish a reasonable expectation from a client’s perspective
Quality of the location has a direct outcome regarding your income stream and understanding what rents need to be
Scott looks at a certain area to determine the rent range; 77,000 census tracts are available to identify the neighborhood’s risk and rent range
If your subject and comps are in the same demographic area, it’s likely that those comps will be more powerful, desirable, and accurate than those outside the demographic area
Process involves including the square footage and number of bathrooms of subject and comparing them to comps; RentFax adjusts rents to compensate for differences
Start at the high end of the predictable range, and then market through it over a few weeks by lowering rent, until you get worthwhile applications
Condition of Subject: Some investors barely make changes/fixes, but others modernize and make it nice; take your subject to a higher level to charge more rent
Season of Subject: Some seasons generate less traffic; market rent prices based on number of clients looking for a place to rent and the season
Use RISC Index to identify the risk of your property; rent affordability becomes a major indicator or cause of failure to sustain a cash flow stream
RentFax is helpful for you to buy outside your market and to find comfortable risk tolerances; it quickly offers critical data, appreciation rates, and demographic information
Most people who self-manage tend to be below market; but if they fall far behind the market, then they’re not capturing the full benefits from their investment
Past three years has seen a large growth in rents - a 20% gain; recently, rents have started to slow down
Buying properties in high-risk areas with low-risk tolerances is an investment disaster; RentFax matches area risk, subject location, and client’s expectations/tolerances

Resources

RentFax (Use COONS15 code to get 15% off)

Security Backed Line of Credit

Full Episode Transcript:

Clint: Hi everyone, it’s Clint Coons here at Anderson Business Advisors and in this episode, we’re going to be discussing how you determine your rents for those properties you’re considering buying. As an avid real estate investor, I have over 100 properties across United States and many of these are single family homes.

One of the issues we all face as investors is are we going to get that return on our investment? We’re taking capital, we’re tying it up in a property, and we’re anticipating then that property is going to put X amount of dollars back in my pocket. But if it doesn’t do that, then we could be in a situation where possibly we’re behind every month. There’s more month left at the end of the money when it comes to covering all of our expenses and we never want to be in that situation.

It’s something that I’ve seen in the past with my own investing and I’ve seen a lot with our clients who have made purchases in markets that they thought they could get a certain return on, that their cap rate is going to be X and it turns out it was Y, and they realize they’ve made a mistake.

What I wanted to do in this episode is bring on an expert who can show you how to determine what those market rents will be for your properties so then when you’re making your investment decisions, you know going into it what that range is going to be so you can budget accordingly. With that, I want to bring on Scott Abbey from RentFax. Scott, thanks for being on.

Scott: Thank you, Clint.

Clint: Tell us a little bit about yourself.

Scott: I’m a property manager of 26 years. We managed properties at 450 single family homes in the Kansas City area and by night I am a daily geek.

Clint: What does that mean, a daily geek? You just sit up all night long? I mean, what comes to mind here, you’re maybe sitting in your boxer shorts and a tank top, and you look at the computer, you’re drinking a beer.

Scott: Not quite, but I raised that story because years ago as my business was just getting started, in fact, the year 2000, I was able to bring down free data information from the Census Bureau, and I started studying the differences between properties that I was having positive and negative results in, that were in close proximity to each other. Using the same manager and the same scoring techniques, same screening techniques, same collection techniques, I found that house A and house B didn’t necessarily perform the same consistently even if the management was the same.

So, I pulled down data and data from the Census Bureau. That’s when the night time work came because I had to sort the data out by zip code and then find I had to build statistical models from my property inventory, and I started tracking things that would be indicators for when I had positive experience versus negative experience. That experience as I referred to is, was I able to sustain an income stream? How long was the sustainability of the income stream versus other properties in similar type neighborhoods?

It was a very crude Excel spreadsheet that then went to a database, was able to create a scoring model between 0 and 100, and then compared it to all of the neighborhoods with the zip codes in the Kansas City area, and developed a comparative tool that said, “Neighborhood A will perform better than neighborhood B based on these demographic nuances.”

Clint: And I assume it started working out for you. Did you see that your rental income started going up when you based all your investments on that?

Scott: It took over 10 years of changing the sauce and finding the right algorithms, but I brought in a partner, Shane Sauer, who is an engineer by trade and who also managed properties at the time. We were able to put the tool on steroids and we tested it in seven or eight different markets. That was really the foundation of RentFax.

What I, more than anything else selfishly, I wanted to make sure that when a new client came to me, I understood what the risks were of taking that property on so that I could establish a reasonable expectation from a client’s perspective. In real estate acquisition, location, location, location really is there for a reason. It is a critical part of the decision-making. When you try to quantify location with a realtor, it’s always vague and ambiguous. The quality of the location has a direct outcome in terms of what your income stream is and it also helps drive understanding what the rents need to be.

Clint: Wow. There is a lot that went into putting this together when you started RentFax. How long have you been in business then?

Scott: 26 years.

Clint: 26 years. How many clients do you have right now would you say that are using it?

Scott: Oh, wow. Well, RentFax hasn’t been in business for 26 years. My client base of my property management company—I have 450 doors—I don’t actually know how many clients are using RentFax right until it’s expanding all the time.

Clint: Got it. What you’re doing then is that you’re looking at a certain area and you’re determining the rent range. I’ve got two questions. Number one, is this all across the United States, no matter where I’m investing you have data on those areas?

Scott: Yes. There are 77,000 census tracts. We used to use zip codes, now we use census tracts. It’s a smaller area so it’s even more accurate. We have data for all census tracts for the risk of the neighborhood and the rent range. Now, I will tell you that when you’re in low density markets when you have a small number of rental properties, it’s hard to build a statistical model big enough to get accurate data. So, in those rare instances, if the data’s not there, we can’t provide an outcome. But those are very small in number.

Clint: When you’re looking at a particular area to come up with these ranges, how do you determine that? You’re looking at what their current rental rates are for homes if people are listing them for rent? You don’t have to give me your whole secret sauce here but, kind of what’s in the details? What’s in the mix?

Scott: We go out and we pull the most recent listings from the web and then they’re de-duped so that we’re not duplicating listings because listings get populated to a lot of different places. And then we look for the like type which is single family home or multi family. Our product is designed for residential that means four and less, and it’s either single family or it’s a multi family. Then it looks for the number of bedrooms. Then it brings in the closest group of comps that it can for the proximity of your subject. Then it give you those rents that are being charged.

We take it a step further because there’s a lot of products out there that offer rent information but typically the range of rents that are offered are very wide. So, it’s not as helpful as it would be if we could bring the range down to a more manageable number. What we’ve learned is, is that if your subject and your comps are in the same demographic area, the likelihood of those comps being more powerful and more desirable, more accurate are higher than those that are outside your demographic area. The further you go away from your subject, the less accurate the comp is, so we look at distance and we weight the comps accordingly.

We also do something that many don’t. We look at the square footage of your subject and compare it to the comps, and we look at the number of bathrooms, and then we adjust the rents up or down to compensate for differences in square footage and number of bathrooms, much the same as an appraiser would do.

Clint: Wow. There’s a lot of information.

Scott: And then we drive it into a 70% probability curve, and that brings your desired rent range into a fairly manageable number. What I’ve learned as managing properties for all these years is that no one can tell you exactly what rents are because it’s a function of how many competitors do you have at the moment, and how many customers there are at the moment. So, to pick a single number is generally flawed. What we suggest is you start at the high end of the predictable range and then market through that over a number of weeks by lowering your rent over time until you start getting good applications.

Clint: You advise then if I was going to going into a certain market, say Kansas City, I should probably base my rent on the property I’m buying and what maybe the lower end, and then like you said, market it from the top end, and make sure my numbers take into consideration that I may end up at that low-end number. Is that advisable?

Scott: Well, one question one would ask is the condition of your subject. A lot of the investors will barely put a bandaid on a purchase and others will go in and modernize and make them nice. So, the data that you’re getting is of the average market. Kind of get it? It’s somewhat driven by the economics of the market. But if you take your subject to a higher level of the market, then you want to be sensing the fact that you can charge more rent. Whereas if you look ugly at the street, you’re probably going to need to drive down the rent numbers.

Also, like in Kansas City, we have seasons. We’re in a season now where the traffic is much lower. So during this time of year, I tend to market closer to the lower end to accommodate for the smaller number of clients that are going to be looking for a place to rent.

Clint: Okay. With that in mind, let’s assume that I’m looking for property now in Kansas City. When you use your modeling, does it then break it down by month? If you’re going to start renting it in, say December, then you ought to expect to charge high end this amount, low end this amount, versus if you’re doing the same thing in June. Is that how—

Scott: It doesn’t do that. You have to be sensitive to the fact that when year-end climates that have cold and hot, generally speaking, as a general statement across the United States, your March to August time frame is where most of your moving actually takes place. It’s even more exacerbated where you have cold weather because people are less likely to get out. I know here in Kansas City, January-February are just miserable periods of time. The number of people that want to move in January-February are pretty slow. Now I’ve had warm Januaries where we had good activity. As an investor, you have to be sensitive to those kinds of tactical things you want to consider.

The other thing that I want to emphasize is that, when you’re looking at rents, it’s helpful to know the risk of your property because the RISC Index will tell you, “Is this a good property on the neighborhood in the city? Or is this not so good?” As you go up in a risk, what we find is that rent affordability becomes one of the major indicators or one of the major causes of failure to sustain a good cash flow stream. As you are in the lower realm of your economics, you want to start being very sensitive to affordability. Our system looks at your median income and what happens is, usually in a neighborhood, tenants are attracted to similar neighborhoods and see you have to be sensitive to the median income of your applicant, being sensitive to the rent affordability.

The thing I tell you is as your rents go down in value, generally you see that the tenants that are renting from those properties, sensitivity to job interruptions is greater and if they’re accustomed to getting five hours overtime a week and that’s cut off, that could have an impact on your ability to get paid.

I can also tell you that, particularly in the lower economic areas, utilities become a huge part of the rent. In winter time, for example, if you’re renting a property for $800, it’s not unreasonable to see utility bills that represent 40% of that bay. When you’re looking at that total rent cost of utilities and rent and then you compare that to the gross income of your applicant, it provides a reason for you to consider driving your rents down more on the context of preserving your tenants over long periods of time versus the money that you hope to make from having a short-term tenancy.

Clint: The program itself, when you start using it, does it gives you a profile of a typical tenant in that area?

Scott: If gives you a profile of the demographics of that area. It provides a lot of information for investor-making decisions about where to buy. For example, if you’re an investor from out-of-area and you’re coming to Kansas City, for example, and you find 2-3 bedroom houses comparatively, and you’re looking at the rents in there reasonably comparable, but you look at the demographic score that we have and the risk score, I would tell you, you want to pick the house that has the better score because that house will, over time, perform better at providing a steady income stream.

Clint: Okay, so then what I’ve seen, and correct me if I’m wrong here, if I have two addresses of two different properties I’m looking at, I would go to your site, log in, and then I put in the address of the property that I’m looking to acquire, and run the report on that, and then do the same thing on the other property or do you put in multiple and then compare them?

Scott: If you want to load up multiples, you can. But generally, most people, they’re looking at two or three. You just enter one and you study it, and then yet another and study it, and yet another and study it. It is a fast way for you to have some really critical data because it shows appreciation rates, it will give you demographic information that’s helpful to learn.

What I’ve learned with clients that have been using it for a while, they have an investment that works for them. They’ve got A-B-C house on such-and-such address and the thing just consistently works for them. Then they’ll run a RentFax on that property and understand what that RISC Index is. And they’ll look for like index numbers or above to buy property because an index of 33 in fill-in-the-blank, Philadelphia will have similar results of Atlanta, Georgia, if they fit the same index number.

It’s a very helpful tool for you to buy outside of your market and to find the risk tolerances that you’re comfortable with. I have some clients have loved the high risk, which generally reflects a perceived high cash flow. I have other clients that are risk-inverse. They are at the end of their run and they want to preserve and protect. They want higher risk numbers because generally in the higher risk number, you have less yield but you have greater probability of appreciation.

Clint: Got it. This is for people who are considering in purchasing property. They definitely want to run the property through the analysis. How about for somebody who already owns property you’re considering? All right, my tenant is going to be moving out the end of the month and I’m wondering now, should I move up my rents $500 a month? I can see someone wanting to run their own existing properties here. They’re to see where they should peg their new rental amount at.

Scott: Right. What I’ve learned in managing property is that most people that self-manage tend to be below market. They usually are by design which, at a strategic level, I agree with being below market but if you fall far behind the market, then you’re really not capturing the full benefits you can from your investment.

What we do on our renewals, is since we’re 90 days away from a renewal date, we’ll pull a report, we’ll send it to our client and we’ll make a recommendation of what we should do with rents. And then after he gives us a blessing on that, we send it to the tenant and we show the tenant that, “Look, your property is under market. Although we’re raising the rent, we’re not raising it as high as we could and if you go out and look for another house, here is the market.”

Over the last three years, we’ve seen a large growth in rents. Now, I’m sensing recently that those rents are beginning to hit a slowdown point but there’s been 20% gain over the last 3-4 years in rent values and a lot of self-managed properties leave money on the table and not keeping those numbers up. You can see the report justified to the tenant.

Clint: I’ve talked to a lot of investors and they see if the market slows down, that somehow that’s going to impact their rental income, personally, what I experienced when the market crashed in real estate back in 2008-2009, my rents went up considerably because people were displaced, they didn’t have houses, they couldn’t qualify for loans, and they had to become renters. That gave me an opportunity, of course, to make a little more money. Then once the properties have worked their way through and people started getting back into buying homes, I actually start reduction in my rental income because that pool of tenants started to shrink up some.

Having, I think, that kind of data as well, especially now I think would really really important, given the fact that interest rates have gone up, and you’re starting to see a decline in purchasers now of homes. I was talking to a title company, an officer just the other day and she told me that they were getting 100 a day. And now, they dropped to 70 since the rates have gone up per home.

Scott: I think there’s some surprise pressure, too. In my market, a house going to market and there being multiple bids and no mobile offers. It was a bidding war. Some of them would get to close and they wouldn’t approve this. I think that frenzy is behind us for now. My sense right now on RETS, in my market at least, is that I want to be careful to overstep the market in rents. We had our foot on the slow go during some of the economic troubles to keep the rents and to keep the rents affordable because I didn’t want to lose tenants. Then the rents went up and then we put the foot on the gas, but we’re now pulling our foot back off the raising of the rents because we’re seeing some pushback on rents and we’re seeing some affordability questions.

Not everybody’s boat is rising at the same rate, and again, it depends on the economics of your property. You talk to someone that has a rent that rents for $2500 and you talk to others that rent for $750, that’s a whole different economic group. You have to be sensitive to both, though.

Clint: I think what’s unique is you built this to sound like for yourself, initially, for your properties, and then you saw there’s an opportunity that other people can take advantage of it because it helped you with your business. Is that a fair statement?

Scott: It is to an extent. I have to say selfishly when I first developed it, I didn’t want to have to drive to every house to look at the neighborhood before I accepted it. There are neighborhoods in Kansas City that, at the time, I wouldn’t accept to manage because the neighborhood was so difficult. But subsequently, as I started investing more and more of my passion into the product, over the years I’ve seen so many people come into my business, sit down, and said, “I want to hand you, I want you to manage this property for me,” and the first thing I’d do, I would, of course, pull a RISC Index.

I found that a lot of people were buying properties in high-risk areas with low-risk tolerances. It turned into an investment disaster because the risk of the property area didn’t match the tolerances of the investor and the investor would burn out after two or three tenants. It was important to me to help match the risk of the area, the location of the subject property to the expectations and the tolerances of the client that was making the purchase.

Clint: Yeah, because you don’t want to have pissed-off clients.

Scott: I’ll share a story. A little lady and her son walks into my office and sat in my conference room. He had taken her retirement money and paid in cash for a house, or was about to pay cash for a house that was in a very high-risk area. I might work but the greater probability is it wasn’t going to work than it was going to work. He just kept telling her, “It’s going to be okay. It’s going to be okay,” and I ran the report and I gave it to both of them. When she saw the risk, when she saw the demographics, and she saw the crime factors and such, it had a big impact on her decision on whether she was going to give grandson the $75,000 he talked her into to buy this house.

I can repeat story after story. A couple of retired teachers came in with three houses they have packaged up. They wanted zero risk but they were told that these were a good deal and they were low cost and how can I go wrong. They were in a war zone in our city.

Clint: Yeah. They didn’t get out and visited the properties at all?

Scott: They did but unless you have an experienced eye, you don’t recognize some of those things.

Clint: Correct.

Scott: And not everybody that goes into real estate investing has the training and has the knowledge they should. They make bad investments and oftentimes they’ll blame it on the realtor that sold it to them, or they blame it on the manager that manages it, but in fact, part of the problem was the due diligence they did on the front side of the acquisition and understanding where they are in terms of their investment protocol, like, “Do I have enough cash to sustain three months of vacancy if something terrible would happen? Do I have enough cash to sustain a new roof? Am I comfortable with what appears to be great cash flow but can often be nine months tenancies where there’s eviction every two years?” Those are things that can happen in the higher risk areas. And then, just making sure that there’s a good match there so the investor gets out of the experience what he had hoped for.

Clint: And this is why when I first came across your company, I was so intrigued by it because we have a lot of clients that are on the coast that buy in the Midwest because it’s affordable. You can’t get the returns on the coast right now that you can in the Midwest. But the problem I see is that they hook up with these people who sell properties, that are buying them and then rehabbing them and then selling them as packaged deals to these investors, and the investors don’t even know what they’re buying. All they see is the numbers like, “Oh my gosh. That house is only $85,000. That same house out in California would be $500,000. Give me four.”

Scott: That’s it. I’ve seen it for 20+ years. That’s one of the motivating factors that drawn all those late nights in developing a tool that not only can I use for my clients but can be used universally for investors to make a good match between the investment risk of the neighborhood because in real estate, it’s about location. Location has driven so many other factors that impact the asset as it ages and the tenant that it attracts.

Clint: Got it. I know this that you agreed to give us special discount to Anderson clients that come to RentFax. We negotiated that so we can get 15% off if they go to our site, they go through the length that we’ll have up there for them and then they could take advantage of all the services you have to offer. I want to thank you for that.

Scott: Yes. What’s important is that the folks use it and study it. The product I suggest the most is the Rent Package because it has a detailed risk report, it has a rent report, and also shows the historic vacancy report. When you look at those three factors, that really gives you most the tools you need for making decisions about what properties to buy and how to manage those properties.

Clint: Great. Yes everyone, when you go to the link, you go to the site, make sure you put in the coupon code COONS15 in there and that’s going to get you the discount on those reports that you’re going to be running. Scott, I want to thank you for coming on today. This has been a great podcast. I know a lot of people are going to get great information out of this and they’re going to be coming to your site to start running those risk analysis because those are things that many people do not realize are so important in making an investment decision. Anything else you like to add?

Scott: I wish everybody good luck with their investing. Thank you very much, Clint.

Clint: All right, Scott. Take care. Thanks.

Friday Dec 21, 2018

Tax Tuesday with Toby Mathis 10-02-18

Friday Dec 21, 2018

Toby Mathis and Jeff Webb of Anderson Advisors are here again to bring tax knowledge to the masses by answering your questions about company vehicles, expenses, capital gains tax, payroll tax, and much more. Do you have a tax question for them? Submit it to Webinar@andersonadvisors.com.

Highlights/Topics:

Should I buy a car in my business?
How to avoid/minimize capital gains tax on sales of stocks/mutual funds held for many years?
I’m selling a commercial property and doing a 1031 exchange. Can I withdraw the original down payment, tax free from the sale?
If LLC is used only for trading, can it be a single-member LLC? Or, do you recommend a multi-member LLC?
What’s the difference between Section 179 and 100% bonus depreciation?
What’s a cash balance plan?
Should I have my main family home in my real estate business?
Can corporation reimburse us for our medical premiums and HSA contributions?
Can you have a leasing company and lease a vehicle from it?
What do you suggest for a single-member S corp for healthcare expenses?
We invested $35,000 with an education company. How would startup expenses work?
What happens if your business doesn’t make any money its first year? Can you write off expenses the next year?
Trader vs. Investor Status: Does trader status need to be declared?
Should I run an assisted living/memory care center as a non-profit or for-profit?
Can real estate losses offset stock capital gains?
Which is better: Pre-nup or putting all assets in a trust?

Resources

Section 179 Deduction

Lease Income Inclusion

Klabacka v. Nelson: Nevada Supreme Court Makes Historically Significant DAPT Ruling

Employee Health Benefits Allowance - What Options Do I Have?

Homestead Tax Break

National Real Estate Insurance Group

Friday Dec 21, 2018

Importance of Insurance for Real Estate Investors

Friday Dec 21, 2018

Let’s face it, even if you use an LLC, you still need insurance. However, when we need insurance for LLCs, corporations, and land trusts, our local insurance people and providers don’t know how to write the right type of policy to protect our assets. Clint Coons of Anderson Business Advisors talks to Shawn Woedl from the National Real Estate Insurance Group (NREIG) about the importance of insurance and different types of policies that are available.

Highlights/Topics:

Creating a Limited Liability Company (LLC) doesn’t relieve you of your responsibility to insure the property
REIGuard: Accommodates portfolio of one to four family rental dwellings or any line of commercial real estate through any phase of occupancy, anywhere in the country
Flippers should purchase Builder’s Risk Forms that include liability coverage for the premises
Fix and flips are highest risk type of property for an insurance company; investors are forced to buy a longer-term policy, but won’t get a refund if they sell the property sooner
Liability claims take down a company faster than any property loss, regardless of size
General Contractor’s Policy covers faulty workmanship; a general contractor needs to provide Certificate of Liability Coverage and Workers’ Compensation Coverage
Call monthly to verify their coverage, or add yourself to their General Contractor’s Liability Policy
Flipping through a corporation can make it difficult to obtain policies; some carriers only offer coverage in the property owner’s personal name
Local insurances don’t insure LLCs, only individuals, because of pre-negotiation through their reinsurance treaties and contracts, so they can’t accommodate for it
Insurance agents encourage separate policies for each LLC, not an umbrella policy, to run up the cost; NREIG can aggregate them under one policy to lower rates
Name anyone who has an ownership interest in the property that can potentially be included in a lawsuit as additional insured on your policy
New investors who come to NREIG discover that they have many choices for property and liability insurance; NREIG structures unique coverage based on client’s needs

Resources:

https://affiliate.nreig.com/Anderson

REIGuard

https://nreig.com/category/reiguard/

Clint Coons

https://andersonadvisors.com/clint-coons/

https://andersonadvisors.com/

U.S. Social Security Administration

http://andersonap.com/

Full Episode Transcript:

Clint: Hi everyone, it’s Clint Coons here with Anderson Business Advisors and today I have Shawn Woedl on from National Real Estate Insurance Group, and he’s going to talk to us about the importance of insurance and the different types of policies that are out there.

We all know as real estate investors that when you go out and you try to find insurance, you talk to your local guide. Many times they look at you as if you’re from another planet, because you’re using strategies that they’re unfamiliar with. We’re talking about LLCs, corporations, and land trust and we’re putting our properties into these entities or as a protection. Many times, when we need the insurance, our local insurance individual does not know how to write the right type of policy that we need to protect our assets. Because let’s face it, even though you use an LLC, you still need insurance.

Just this week, I was speaking to an attorney who’s an investor. They called me up, and he said, hey, I have this property in an LLC, and my tenant has been hurt. The ceiling fan fell down and hit him on his foot, and he can’t walk anymore, he’s going to be permanently disabled, and he’s suing my LLC and I don’t have insurance. You think I have a problem? Now, of course, you do have a problem, because even though you create a Limited Liability Company, it doesn’t relieve you of your responsibility to insure the property. So, when we’re setting up these structures, it’s imperative that you get the right information. That’s why I brought Shawn on, I think he can explain, why that’s important. We’re going to ask him a number of questions, and hope that by the end of this, you’re going to understand this is the group you want to go to. So, Shawn, thanks for coming on. How are you doing?

Shawn: Doing well, thanks. Thank you, Clint, for having me.

Clint: Great. With National Real Estate Insurance Group, can you just give me a brief background as how this came together – this group, because you offer a number of products out there that I think are really advantageous for investors.

Shawn: Absolutely. National Real Estate Insurance Group itself is a national independent insurance agency who are licensed and active in all 50 states, with a focus on real estate investors. About twenty years ago, we developed what’s now known as the REI guard insurance program, and it kind of started with two separate programs that came together as one. We have Mike Wrenn here, one of our owners in Kansas City that was working with the home investors franchises and developed renovators insurance, which was a short term program for guys and girls who were doing fix and flips that needed a month or two of coverage and the insurance industry wasn’t responding to their need. Tim Norris and myself were in Cincinnati, Ohio, and we were developing National Real Estate Insurance Group and National Condo and Apartment Insurance Group, with the focus on residential real estate investors that were buying hold opportunities, as well as larger apartments, condo, association, really any line of commercial real estate.

In 2010, after really passing some business opportunities back and forth that multiple events across the country, Tim and Mike actually merged their agencies, and developed this crazy program called through National Real Estate Insurance Group called REIGuard, that now can accommodate for a portfolio, one to four family rental dwellings through any phase of occupancy, anywhere in the country, on monthly recording. And then in 2014, I went ahead and merged my agency as well, and we now can accommodate really for any line of commercial real estate an investor decides to dive into.

Clint: Wow. I mean that just, I mean, seems like it’s perfect for our clients especially, because at Anderson, we pride ourselves as being a one-stop shop for real estate investors, giving them the tax information, business planning, and asset protection, even a state planning. And it seems like what you’ve done with National Real Estate Insurance Group is hit the same type of demographic target, and that you saw there was a need out there, and people could then go to one place to make sure all their insurance needs are covered. And that’s refreshing, because I know how frustrating it can be, even with my own investing.

As I tell people, I own over a hundred properties and it’s just difficult to go out there and find an agent that gets it, and it sounds to me in my experience with working with you, that you guys understand it. And I can tell you this, it took us a long time to finally find someone such as National Real Estate Insurance Group that understands real estate investors. I’ve been real happy with our relationship, to make you a trusted resource for our clientele because of the value you bring to them. So with that, you’re talking about policies. Can you tell me why is a flipper, because we have a lot of flippers, they go out, they buy and sell properties. I don’t think they understand the importance of the insurance, and what type of insurance should they get?

Shawn: So, a couple of quick points that I’d like to make on those builders risk type of policies, or forms that these investors can purchase for these fix and flip opportunities: one, it’s typically a builders risk forms for property only. So, unless you specifically ask for liability coverage, that can be an exposure on a lot of builders risk forms to think of, maybe slips and falls, personal injuries like you just mentioned with one of your friends there, that’s happening, those are exposures on a lot of builders risks forms unless you specifically ask for liability to be included for the premises. Understanding the market the way we do, because we’re all investors ourselves, we of course include that into our forms, but to just kind of piggyback on that – renovation properties, short term fix and flips, are considered probably the highest risk type of property for an insurance company to agree to insure.

There’s lots of parties going in and out, there’s a lot of ongoing operations, typically, those are susceptible of theft or people breaking and entering. So, insurance companies are going to force investors most of the time to come in and buy a longer-term policy, a six-month to an annual policy, which doesn’t make a lot of sense if the flip in your possession, you think you’re going to have it done in three to four months. Because these policies are fully entered in conception. Meaning, from the get-go, as soon as you agreed to purchase coverage from your carrier, you have to pay the full premium up front, and by the way, if you cancel early because that flip’s completed, you can’t get any money back from the unused premium, that’s the cost of doing business with a lot of these carriers that will agree to actually take on risks, and it’s just on renovation property. And it’s really just because they don’t have an appetite for the risk they’re taking on and they don’t understand the market.

Clint: Wow, yeah, I did not know that. I haven’t flipped properties in years, but yeah, I bet a lot of people think that when they buy a policy like that, once they cancel it, they’re going to get a refund of the premium, but they’re not. So that’s good to know. So you’re saying that with all your fix and flip policies, and you’re going to automatically include that liability coverage for them? It’s not something they have to ask for?

Shawn: Yeah, this premises liability that’s going to be included on every opportunity that we propose and go over with an investor, whether it’s regardless of its occupancy, we think it’s more important to cover the liability exposure than any property exposure. Think about it, a liability claim, a wrongful death, a personal injury that is severe, can take a company faster down than any property loss regardless of the size. It’s the unknown, once you fail on it, liability goes a couple of years down the line where you think your business is growing well, and then all of a sudden get hit with a lawsuit for a slip and fall that occurred on the site a couple of years ago when you had ownership and percent of property. So absolutely, we always include liability. The only time we’ll ever remove it is if it’s specifically asked for by an investor during a proposal process.

Clint: So, you just said something interesting in there. So if I bought this property and renovating it, and then I sell it, and then a year and a half later, somebody brings a claim, that they were injured on the property while they were working on it. You said that would be covered under your policy.

Shawn: It would be covered – liability is a slippery slope, there’s a lot of gray areas, right? So, if the injury happened, and they were just maybe, maybe they were breaking and entering, or the house was left unsecured, and they fell down the steps and were injured, then yeah, then that type of exposure would be picked up under the premises liability coverage that was enforced at the time of the loss. If it’s a loss that was occurred under from general contractors negligent, or if you, as the investor, were actually doing the renovations yourself, and then a lawsuit was filed for faulty workmanship post-sale by the new owner, those are all types of stand-alone coverages that you have to purchase in addition to your premises liability. But yeah, a lot of those would be covered under the premises form.

Clint: Got it. So there’s other policies you can or additions you can acquire when you’re purchasing a builders risk policy to cover that. So I’m going to give you an example. Just the other day, someone came into my office. They had rehabbed the property, they sold it, and it turns out there’s an issue with a catch basin in the basement. They have both greywater and rainwater that run into it, that pump it into the sewer lines. Supposedly, that’s not correct, and that needs to be changed. Would you have, would an insurance policy cover that type of change, that the contractor screwed up on or not?

Shawn: The general contractors policy would pick that up, for faulty workmanship, right? So, your carrier, the premises liability, if needed, would provide you with defense clause, would go in and help you, you know, go against the general contractors policy, but that’s a GC exposure. So, you know, typically what we always recommend that our investors do, is when a general contractor comes on to your site just to bid on the property, to work on a property, they should be able to give you two pieces of information: their certificate of liability coverage that tells you their business is covered adequately, as well as their workers compensation coverage, if they have employees that are going to be on site as well. And you know, the certificates of liability give you a couple of cool pieces of information that you can use. It gives you the carrier that wrote the piece of business, as well as the agency. So if you want to go in and reach out to the agency each month and make sure their premium is paid, this will get a nice shiny certificate for a year showing coverage by paying a month or two of premium up front.

You can do one of two things, and I always recommend the second, but the first one is you can call monthly to make sure their coverage is in good standing, or you can learn as an investor that those general contractors policies can work for us as investors, and we do that by adding ourselves as additional insured to their general contractors liability policy for the duration of time they’re working on your property. Those are always, those are usually free to do, or at most it costs $50 to endorse their policy, it’s well worth it to pay that money if they’re bellyaching about it. But that extends their liability coverage to you, if they do something negligent and you’re named in the lawsuit. And equally as important, it’s going to notify you as an additional insured prior to their policy cancelling or non-payment, or any other underwriting issues, and you can get out ahead of it and make sure that it’s right.

Clint: Wow. Sounds like, kind of like buying a tail, then, on their policy. Nice. So how about if they, when someone comes to you and they have a corporation, because a lot of our flippers will teach them is it, either flip through a corporation, or better yet, flip through unlimited liability company that is owned by a corporation. Does that pose any difficulty for obtaining these policies? Does it matter?

Shawn: It does for a lot of carriers, and a lot of carriers are limited to only being able to offer coverage in the personal name of the owner of the property. Again, knowing the market as we do, we’re all residential real estate investors ourselves, it made little to no sense for us to put that limitation on our investors, so we can actually accommodate for any type of name insured ownership entity, we can still have them all on one single schedule so we can leverage portfolio size and activity to keep an investors property rates and costs down at a time, because you’ve got common ownership or interest in the property, so LLCs, corporations, IRAs, trusts, you name it, it can all be bundled together through our program.

Clint: Okay, so hold on, I’m going to back to that topic, because that’s really important for the listeners here. But just on the side of talking about insuring the LLC, for instance, if it owns the property. Why don’t local insurances agree to insure the LLC? Why do they only want to insure the individual? What’s their hang up there?

Shawn: The best I can tell you is that it’s already been pre-negotiated through their re-insurance treaties and contracts, if they have, that’s just, they can’t accommodate for it. And those are the companies that you run into, like the State Farm, the Farmers, the Allstates of the world, they’re all, by the way, tremendous companies for what they do, and what they specialize in are home and auto and some life policies, some lower-risk type of deals homeowner policies.

When you start getting into the investor world, where these are higher risk locations, your tenant’s more likely to burn your house down than you are, they always offer the coverage out of a sense of obligation to their existing clientele. They don’t have an appetite for it, and you can tell by the fact that they require you to insure a property through a very high evaluation per square foot, more than you’ll ever recover from in a loss. And they do that in an effort to garner, to recover enough money in the premium to offset the risk they’re taking on on a higher risk location. So I think it’s just not having the appetite for the risk, more than anything, along with the contracts that they’ve negotiated to be able to extend coverage to them.

Clint: Interesting. Yeah, I can never figure that out, because it seems to me like you’re insuring me, I’m the owner of my LLC, it’s still the same insurance policy, who do you care or what does it matter who owns it, if there’s a claim made, you’ve still got to pay, so yeah. That makes sense. So, when you’re talking about this bundling, that’s something that’s really important, because the few that I’ve talked to, clients that have actually found that maybe their State Farm agent would offer them a policy, and I’ll give an example here. An investor comes into their State Farm agent and they have six limited liability companies, with one property in each LLC. The agent tells them, you need to have six separate individual policies, we can’t give you an umbrella policy over all of these, we have to do six separate agreements. And it just seems to run up the cost. Did I hear you to say that you can aggregate them together, it doesn’t matter how the properties are held in different LLCs, we can do it under one?

Shawn: Absolutely. That’s exactly what we do when it comes to property, and the primary premises liability, your underlying liability, we’ll touch on umbrellas here just a second, but it’s a master schedule for a particular investor or investment group, and it allows you to add and delete locations from your schedule as need me, but think about it, me, myself as your agent, right, if you came to me and said hey, I’ve got one location, and I’ve blanketed it out to the 250 different, you know, carriers that I’m contracted with.

One location, as opposed to ten locations, as opposed to a hundred, the more leverage I can get with that underwriter to drive your property rate down. So when we do a one-off policy for each location, you’re really at the mercy of the underwriter on what they want to assign as a property rate, and that can be based on the different areas of the country maybe that you’re investing in. could just be the mood they’re in that day. So, leveraging that, just it gives me more, you know, kind of fire power to go to, ammunition, we call it, and you go to the underwriter and drive those rates down for you.

Clint: So, tell me this. So, who should you name then as the additional insured on your policy?

Shawn: You know, it’s a good question, and we run across that all the time, and you can look at a couple of things if you have a lender on the deal. So, somebody, you know, whether it’s private or a larger institution, they’re usually going to require that you listed as additional insured, or the very least, certificate holder on your liability insurance. That way, again, they’re notified prior to your policy lapsing for non-payment or any other underwriting issue, on the off-chance that they’re named in a lawsuit, which would never happen and your liability cover, it would also extend to them. But you can, you know, many property management companies, if you’re dealing with a large property organization, would also require that you list their company on your liability as additional insured, so, again, you do something negligent, their liability coverage, or excuse me, your liability coverage extends to them. And you can do the same thing, vice versa, and be listed on their liability coverage, but really, anyone that has an ownership interest in the property, they can be potentially dragged into a lawsuit.

Clint: Okay. So as far as if you had a corporation that’s the manager of an LLC, should it be named then as additional insured, as well?

Shawn: No, the corporation would be listed as first name insured, though if the corporation’s managing other locations, if they don’t have ownership ventures then at that point, yes. That doesn’t stop, that doesn’t prevent them from having to seek out the correct liability coverage to cover the property management operations, as well. But, at least with the premises, they’d be covered without being listed as additional as well.

Clint: Perfect. Okay, so you can do business in all fifty states, right?

Shawn: Absolutely.

Clint: And then, for our clients, all they have to do, we have that link that we’ve set up that drives them right to your page and then they can put in some information and then someone will contact them, is that how it works?

Shawn: Yeah, and we do things a little bit different, as you well know, I’m sure. The last thing we do, especially if a new investor comes to us, and says hey, I need coverage but I don’t know what kind of coverage I need. You know, we’re not just going to send them a proposal and say, hey, take it or leave it. The most important thing that all these investors, all of our investor friends can know is that they have so many choices when it comes to property and liability insurance.

So, what we do is we get one of my license advisors or myself to actually jump on a phone call with our prospect. In the first ten, fifteen minutes of the call, we want to listen to you. We want to know exactly what your business model is, we want to know what your appetite for risk is, what you’re okay self-insuring, what you’re not, what you do, God forbid, a total loss occurs. Would you rebuild the property, or would you clean the land up, sell it, and go buy something else like it? Are there lending insurance requirements that we need to comply with? And then, we’ll help structure your coverage, unique, whatever your package need on it.

Clint: Perfect. All right. Well, I want to thank you for taking the time to be on this podcast today, and I know that for sure we will end up giving hopefully more people brought over to you so they can have their insurance needs taken care of. So with that, Shawn, thanks a lot, looking forward talking to you in the future.

Shawn: Thank you, Clint, have a good weekend.

Clint: You too, bye.

Friday Dec 21, 2018

Tax Tuesday with Toby Mathis 09-18-18

Friday Dec 21, 2018

Toby Mathis and Jeff Webb of Anderson Advisors are here to answer all sorts of tax-related questions that focus on everything from applications to forms and QuickBooks. Do you have a tax question? Submit it to Webinar@andersonadvisors.com.

Highlights/Topics:

Will income earned by lending money to real estate investors reduce Social Security benefits or increase taxes on them? Income vs. earned income; until full retirement age, benefits are reduced; when full retirement age, it doesn't matter what you make
How do I get the 20% deduction from Trump's Tax Plan? The 199A Deduction is a 20% deduction on qualified business income, but you need a pass-through entity; QBI 20% deduction vs. 20% of taxable income are compared, and you get whichever is less
When you make a contribution out of your own account to your LLC as a member, are you taxed on contributions? No. It’s a contribution to an entity that becomes your capital and money you can take back out tax-free, if you haven't used it to recognize losses
What is the best business structure recommended against asset, structure, and personal protection? With any passive activity, use a passive entity - LLC taxed as a partnership/limited partner; whomever has control of entity decides what's distributed
What is the best way to set up QuickBooks when I have a Wyoming Holding LLC and several other LLCs holding real estate in other states? Create one set of books with Wyoming LLC as the primary; do a classified income statement for other states
What are the tax forms for 501c3? Use Form 1023 to apply to be an exempt charitable organization; yearly recording forms include 990-N
If someone has rentals in their self-directed IRA, how are they impacted as UBIT - does it make a difference on the number/dollar amount? No UBIT, if it's a rental; UBIT is for an active business inside an IRA; passive income is almost always exempt
Can I have recourse debt in a 401K or IRA? Can I have non-recourse debt? You can’t have recourse debt, but you can have recourse debt
What are my options to re-distribute funds from one LLC in several entities to separate investments? You can always move it from one to another with no tax implication
Can I write off costs for rehabbing out of the country? Yes. Worldwide profits; if it's income-producing property, you report it to the United States
I lent money to a real estate flipper. She gave me a promissory note, but it wasn’t recorded with the deed of trust. Now, she is in default. Can I foreclose? Document it because you can’t foreclose until you file your secured interest
Is there anything I can do to reduce my taxable income? Yes. There are lots of things you can do - make contributions to qualified retirement plans, charities, and C Corp
I purchased a new computer that cost less than $2,500. Is that a straight expense in the current tax year or some weird depreciation thing? Section 179 deduction; you can buy up to $1 million and write it all off

For all questions/answers discussed, sign up to be a Platinum member to view the replay!

Resources

Unrelated Business Income Tax (UBIT)

990-T

990-N

Section 179 Deduction

1244 Election

Kiddie Tax

Anderson Advisors Tax and Asset Prevention Event