Discover the secrets to building lasting wealth, safeguarding your financial future, and protecting your medical career from potential threats!
In this insightful interview, Daniel Wrenne, sits down with Brandon Hall, co-host of the Tax Smart Real Estate Investors Podcast and a seasoned expert in taxes and real estate investment.
Brandon shares valuable insights on becoming a real estate professional, understanding passive activities and material participation, and maximizing tax deductions in real estate investments.
Discover the key differences between those who build large real estate portfolios quickly and those who struggle to get started, and find out how you can scale your wealth over time. Whether you’re a physician with zero properties or already own a few, this interview is a goldmine of practical advice for physicians seeking financial freedom and flexibility in their careers.
Don’t miss out on this opportunity to learn from the experts and take control of your financial destiny. Invest in your future today!
Links:
Connect with Brandon on his LinkedIn
Tax Smart Real Estate Investors Podcast
Connect with me on my LinkedIn
Contact Finance for Physicians
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Full Episode Transcript:
Daniel Wrenne: Brandon. Thanks for coming on today.
Brandon Hall: Thanks, Daniel, for having me. I’m excited to be here.
Daniel Wrenne: Yeah, man. love this topic and I’m excited to dig in. So Brandon is the man when it comes to taxes in real estate. He is the managing partner for Hall CPA, which focuses in real estate investing for pros. We were just talking about it. Y’all have about 800 clients around the country, right?
Brandon Hall: Yeah, yeah. About 800 clients across the country. We’ve got a U. S. team of about 42 and another 20 offshore. Yeah.
Daniel Wrenne: So pretty big team. Lots of, lots of good tax stuff going on there. And he is the host of the tax smart real estate investors podcast.
And we were also just talking about that since 2016, right?
Brandon Hall: Since 2016. Yeah. So 2016, I went into my firm full time. I was on the BiggerPockets podcast as a guest and I realized how powerful being on a podcast was. So I wanted to start my own, but as I was kinda explaining it to you off air it was really haphazard at first.
It was just whenever I could record like three episodes, I would, so I’d released three episodes and then I’d go months without an episode. And my co-host Tom Castelli at the time he was, I had hired him to be an employee of mine, and he was like, Hey, I wanna help with the podcast. But my one requirement is that we do it consistently every single week.
I was like, all right, well, as long as you can hold me accountable to that, I’m good with that. We can do that. I was like, I’m not
Daniel Wrenne: going to do it. That’s the hardest part about it is long, long, long term consistency. It can kind of get a little monotonous at times, but then it’s exciting at times. So nice work for hanging in there for this long.
They do all kinds of good stuff. If you really want to dig into Tax and real estate. Well, we’re big advocates of like educating yourself especially in real estate. Like you, think it’s a little risky to just or maybe even ignorant to just jump right in and do it. And so educating yourself, at least along the way, it’s huge.
And if you want to dig into the tax or really you should be digging into the tax and you can find all kinds of good stuff just in digging into your all’s podcast. Cause you, I mean, heck you’ve been doing it since 2016. So you’ve got all kinds of good gems in there. So that’s, that’s a good, spot for you guys to go to if you’re, new to this, we’re going to be touching on like high level. We’re going to not go too much in the weeds. we’ll try not to. Um, but anyway, so maybe a good starting point, or talking tax and real estate. So there’s a lot of good tax benefits of real estate. I’m sure you, you guys listen and heard of like, you know, real estate, it’s a great tax shelter or it’s a great tax benefit or and usually that’s kind of it.
You hear just like it’s a great tax shelter or great tax benefit. So maybe we could start with like talking through like. How does it actually work? Like, where does real estate go? what’s this whole like passive thing and active thing? Like, where’s it go on your taxes? How does it generally
work?
Brandon Hall: Yeah. So when investors first buy real estate they do hear about all the tax benefits and when they get to their first tax return with the real estate on it, the rental real estate, I should say on it. They are often disappointed and they’re disappointed because the tax loss from the rental real estate doesn’t actually offset their W 2 income or their business income like they thought it might.
And what they then learn about is something called the passive activity loss rules. Those rules came into play in 1986 Congress, the, the intent of Congress was to stop people from investing in r in rental real estate as tax shelters. So before 1986, you could be earning a million dollars of income.
You could go buy rental properties, use depreciation to create large tax losses and directly offset your W 2 income. No issue. So rich people were buying a ton of rental real estate. And using that to pay no taxes because they would use it to offset all their W2 income. So Congress put section 469, the passive activity loss rules into play in 1986.
And those rules basically said rental real estate. Is now considered a passive activity and losses generated by passive activities cannot offset income generated by non passive activities. My non passive activities are my W2 income and my business income. So basically what happened was rental real estate kind of got siloed into its own bucket.
And any losses generated by my rental real estate could not be used to offset my w two and my business income. And there are exceptions to the passive activity loss rules. But in general, you know, we, we report the rentals on our schedule. E we take all these deductions, take all the depreciation.
We get really excited about it. And then the actual tax loss does not flow through to offset my w two and my business income. Instead, it gets suspended and carried forward into future years.
Daniel Wrenne: Right, which is kind of a debbie downer. Most of you guys listen to her physicians. And so it’s, when you’re in practice, you’re typically in a higher tax bracket.
And that’s where a lot of times when you hear like the tax, great tax shelters, great tax benefits going off this idea that You can offset your top tax bracket income practicing as a physician. Like if you, especially if you’re in the top tax bracket, if you’re making high income, you can offset that high tax bracket income with this loss on real estate.
On the front end, but what Brandon was just explaining is like, you know, in a lot of cases you actually can’t and, and due to this whole passive rule maybe, maybe we should take a step back to, to clarify, like for those that haven’t invested in real estate, like. How are you getting a loss? Yeah.
Brandon Hall: That’s a great question. So depreciation is primarily what drives tax losses. And actually I should say, hopefully depreciation is the only thing driving your tax losses, because if you’re, if you’re depreciation, if you’re, if you have a loss before we factor depreciation in. You have a real loss, like you’re actually losing money.
Um, but the way that it works is if I buy rental real estate and it produces, let’s just call it 30, 000 in rental income. And then we have 20, 000 of operating expenses. All right. So my maintenance, my insurance, property taxes, all that type of stuff. I have 10, 000 of cashflow of, of net income. It’s 30, 000 revenue minus 20, 000 of operating expenses.
So in this case, I’ve made money. 10, 000 says either hit my pocket or it’s gone to the bank to pay off my note. But then we have depreciation expense. Depreciation is an annual expense that you get to claim because you own the property. It is calculated the same way, regardless as to how you purchase the property, all cash, all financed, 70, 30, whatever split.
Depreciation is still the same every single year. And you basically to calculate the depreciation, the annual depreciation expense that you get to claim, you take the purchase price minus the cost of land. And that gives you the building value. Then you take the building value and you divide it by 27 and a half years for residential and 39 years for non residential property.
So. My building value divided by 27 and a half years is my annual depreciation expense that I get to claim. So going back to our example, if we had 30 K of revenue, 20 K of operating expenses, I made money, right? I had 10, 000 of cashflow, but if I have 12, 000 of depreciation. I get to tell the IRS that I lost 2000 bucks, right?
So even though I made money, I get to tell the IRS that I lost money. Now there’s, there’s tax benefits embedded in that regardless, because I made money from my rental and I’m not paying tax on it today. But the other piece of it is. How can I use that 2, 000 tax loss? And that’s where the passive activity loss rules come into play.
So to your point, a tax loss does not necessarily mean that I actually lost money, and that is a very important distinction to understand, especially if you’re investing with like. syndicators, you know, like in different sponsors and sponsorship groups and stuff like that. Really, really important to understand the difference between an operating loss and a tax
Daniel Wrenne: loss.
Yeah. Huge difference. And so the tax loss, when you’re passive is you don’t get to claim that against your income. Going back to what we were saying earlier, which is a. I’m not going to say it like ruins the tax benefits of real estate. Real estate can, it still has some like pretty nice tax benefits, but it’s a, it’d be far more appealing if you could.
Take that tax loss now when you’re earning your top top earning potential as opposed to, to not being able to take it. But there are some, uh, options, right? Like you can, there’s some ways to potentially take that, right?
Brandon Hall: Yeah. Yeah. There, there are exceptions to the passive activity loss rules. And you know, it’s.
Kind of to your, your point about the loss, if you can claim the loss against your W2 or business income, what we say is that that’s that’s ideal state, right? That’s fully optimized from a tax perspective. But if you can’t claim the loss, it gets suspended and it gets carried forward. That’s not. That’s not like, I mean, it’s not fully optimized, but it’s not awful at the same time.
Yeah. And a lot of people do think that they go like, well, we will have conversations with people and they’ll say, well, I thought I was going to be able to claim the tax law. So investing in real estate is pointless and it’s not pointless because of two things. One. The cashflow that you’re receiving today, you didn’t pay tax on because you’re, you showed the IRS that you lost money, so you made income, you didn’t pay tax on the income.
If you stack that on top of your W2 income that you made, and you compare that to your w2, the taxes that you’re paying on your w2, well, the taxes that I paid on my W2 are not changing, but I’ve now made more total money, so my effective tax rate has decreased. Right. That is good. At the same time, My I’m paying down a note, most likely I have a mortgage on the property.
So I’m paying that down through, through my rents. And my, my property is appreciating in value. So my equity position in the property is growing and I can, I can tap into that equity position. On a tax free basis, I can do a cash out refinance. I can sell the property via a 1031 exchange or even a lazy man’s 1031 exchange.
There are multiple ways to compound, make that snowball of wealth building compound much faster by investing in real estate. So I just want to point that out, but there are many, there are a few exceptions to the passive activity loss rules. The, the two that are most often talked about these days not to, not to make the other two sound less important, but the two that are most often talked about are qualifying as a real estate professional and running a short term rental rather than a long term rental.
So if you qualify as a real estate professional, the passive activity loss rules don’t apply to you anymore, as long as you are materially participating in your rental real estate activities. And if you’re running a short term rental, you don’t have to worry about qualifying as a real estate professional.
You just have to worry about materially participating in the short term rental. And I’m happy to go into all
Daniel Wrenne: that. So that my understanding is the real estate professional. So if you’re doing long term rentals, well, let’s, let’s clarify. What’s the definition of short term rental versus long term rental?
Brandon Hall: Yeah. Good question. So technically there is no such thing as short term rental. But in the treasury regulations there’s a, the definition of a rental activity excludes. Property where the average period of customer use is seven days or less. And that is Airbnb or VO, but VRBO type property, right?
So if, if my average period of customers, my tenants on average, stay seven days or less in my rental then I do not have a rental activity under section four 69. And essentially all that means is that I don’t have to qualify as a real estate professional because section four 69 says all rental activities are passive.
Unless you qualify as a real estate professional. And it also says any trade or business that you don’t materially participate in is passive. So those are the two types of passive activities under section 469. But if I don’t have a rental activity, I don’t have to worry about the, all rentals are passive unless you qualify as a real estate professional, because it’s just like a business.
Exactly. Yeah. So, but I, but I still, because of that second piece, I do have to materially participate in the, in the trader business, in the rental activity in order to make it non passive and that is significant. for anybody that has a full time job, because one of the quantitative tests to real estate professional status to qualify as a real estate professional is spending more time in real estate than anywhere else.
Daniel Wrenne: And that’s the
Brandon Hall: material part you’re talking about. So material participation is separate from the real estate professional status test. Yeah. So to call, let’s explain that. So to qualify as a real estate professional, you have to spend 750 hours. In real property trades of businesses and you have to spend more time in real property trades of businesses than you do anywhere else.
Those are the two tests for real estate professional status. You then have to materially participate in the activity. But material participation applies to all sorts of businesses, right? It applies to your business. It applies to my CPA firm. There’s seven tests for material participation. The three that we see most often are spending 500 hours in the activity, spending 100 hours and more than anyone else.
And your time is substantially all the time. Basically it just means you did all the work and nobody else participated. Those are the three tests we see most often. You only have to meet one of the tests. To materially participate, but real estate professional status, the significance of the short term rental loophole.
And I call it a loophole because there’s like arguments online, if it’s technically loophole or not, but I call it a loophole because when these rules were written, Airbnb and VRBO were like, that was. Not something that was, that was thought of and now everybody’s doing it. So I don’t think that it was the intent of Congress to necessarily allow this to happen.
But regardless, however, loophole verse exception, whatever you want to call it. The significance is that real estate professional status requires you to spend more time in real estate than anywhere else. So if you have a full time job. And you’re working 2000 hours a year. You have to spend an additional 2001 hours in real estate.
So your total working time is over 4000 hours a year. And even though you can do it, I’m an optimist. I believe that we’ve got a lot of hard workers, even if you can do it, the IRS and the tax court will never buy it. So if you have a full time job, you can’t qualify as a real estate professional, which is why people look to the short term rental loophole instead.
Daniel Wrenne: And that’s a much easier threshold to,
Brandon Hall: It’s an easier threshold because you don’t have to spend more time in real estate than anywhere else. And you’re looking at the material participation test. So a lot of our clients that run with this they target that 100 hours and more than anyone else test.
So they’ll track their cleaners time. You know, the cleaners might log 102 hours. Well, you now have to log 103 hours, 100 hours and more than anyone
Daniel Wrenne: else. I imagine it’s a little harder if you’re using a property
Brandon Hall: manager. Yeah, it’s, it’s impossible if you’re using a property manager. Uh, you know, and again, I’m not, I don’t want to say it’s impossible.
I’m sure. Yeah, but. In 99% of cases, you’re not going to be able to materially participate if you have a property manager. And if you think about it, like who, who is the real estate professional there? Who’s the one actually doing the work? Oh, the property manager is not you. And that’s what the IRS is going to argue all day long.
If you get audited for
Daniel Wrenne: this.
Yeah, I think several of our clients that do it they have their spouse do it that, like say they were staying at home with the kids and then they’re now kids are going to school and they’re like, I’d like to get into real estate. And so that’s, there’s no other career to compete with or whatever, and they can literally is their focus.
Brandon Hall: Brilliant strategy. Brilliant strategy. If you are the breadwinner and your spouse stays at home and your spouse has an interest in real estate, and that is very critical. we, we get clients every once in a while. It’s like, well, uh, my spouse is going to do it, but my spouse doesn’t like real estate. And I’m like, well, it’s not going to work.
So as long as your spouse is into it and they want to manage it 100% go for it. That’s a beautiful way to achieve, but they need
Daniel Wrenne: to actually
Brandon Hall: manage it. Yeah. They need to actually manage it. Yeah, definitely. Yeah.
Daniel Wrenne: Yeah. it sounds like the IRS is pretty strict on enforcing these kinds of, I’ve heard people kind of talk like they’re kind of abusing these rules and there’s been some, I mean, I’ve just heard people say things that make me think they’re probably pushing these rules.
And I imagine I’ve not actually been through any experience with the IRS in relation to this specific thing, but I imagine they’re very strict on it and it’s a very cut and dry thing.
Brandon Hall: It is very cut and dry. Yes. It’s, it’s been so litigated that it’s pretty clear on how it works, what type of hours count, what type of hours don’t count, which is also why I’m always like left scratching my head when I hear about the same things that you’re talking about around the ecosystem of real estate.
And there’s, you know, CPAs that are somewhat reputable saying the same stuff. And it’s like when you can point to three tax court cases that is very clearly swinging the opposite direction is just like, what’s going on there, guys? So we spend a lot of time trying to help tax accountants understand this stuff because I think.
I think it is nuanced. I think it’s complex. You do have to read. Quite a few tax court cases to get the hang of it. And I think a lot of accountants don’t really read those tax court cases. And if you’re an accountant listening to this and you’re like, I read it, trust me, like there’s accountants out there that do read it and you guys are the heroes, but there’s also a lot that don’t read any of the court cases.
And. Those are the ones that are typically saying things like, Oh yeah, going to a networking event counts as real estate professional status time. Listening to this podcast counts as real estate professional status time, you know, doing research counts as real estate professional status time. And I can show you multiple tax court cases where that is not true.
Yet we see it every day. We, we, we see people, you know, come join our firm and they’re like, my CPA allowed me to do this last year, but I listened to your podcast and I realized it was wrong. So I just want to work with you guys can tell me the truth. I think a lot of this happens because audit rates are so low.
And you know, the CPA, it just, when audit rates are low, you can be a little lazier with your tax strategy and your compliance. And, but the problem is, is that when it gets uncovered you know, there’s nothing stopping the IRS from pulling somebody’s return from a firm. Realizing that they received poor advice and then saying, okay, well, we’ve got this CPA is PETA number.
Let’s just go pull all the other returns that are similar to this, that this CPA prepared. So as a consumer, as a buyer of tax preparation services you have to guard against the FOMO that you will experience when you get into these various groups online and you see somebody saying, Oh, I’m going to qualify as a real estate professional, or I’m going to qualify for the short term rental loophole.
And you’re kind of sitting there like, are you, that doesn’t make any sense. How can you possibly do it? Be doing that. You have to guard against jumping on with that same accountant, because sometimes people won’t tell you what you need to hear to win audits and, and to substantiate yourself. They will tell you what you want to hear to win your business and take your money.
And so you have to be the one that educates yourself on this stuff, at least at a high level, you know, you don’t need to know all the code sections. You don’t need to know the tax court authority, but. Knowing what questions to ask and just knowing, you know, when things are potentially red flags will really help you avoid getting in a bad situation at some later point.
Because when those audits come, they come fast and, and it’s a flood.
Daniel Wrenne: Yeah. And it’s not worth it when, when people go through those, they’re like, this was definitely not worth it. I mean, and they’re going to. There’s typically going to be a cost if you were pushing the limit and even if there wasn’t, it’s probably not worth it because it’s such a, I actually had an audit early in my professional career, very, very early, like several years out of college, even, and I was self employed and I learned very quickly how the experience worked.
It was actually, I would consider it a good experience, kind of like a failing forward experience type thing where, but it, I really learned how they work and had an appreciation for record keeping and all that sort of thing. And they were for real. I mean, they’re like, we need you to, I remember they were, looking at, I think it was mileage because in that job I was writing off mileage and they’re like, okay.
We see your mileage log we need to see your calendar. And so I’m like, Oh, that’s creative. so they kept digging to try to verify it. I’m like, they’re smart people like all of us. and they’re going to find it if you push the envelope.
Brandon Hall: I’m glad you said that because. I think that a lot of us have an ego that thinks that we’re smarter than the IRS agent, but, the IRS hires very capable and very smart people. and, and the people that are auditing section 469, Are very smart people. So, you know, pushing the boundaries here is not, is not a wise decision.
I mean, I mean, I’ve seen, I’ve seen it all. I’ve seen the whole, Oh, it took me eight hours to set up my VRBO listing. And it’s like, dude, nobody, nobody’s going to buy that. Like it, VRBO takes 30 minutes to set up and another 30 minutes to load your photos. So either. Your computer illiterate, or like something is wrong, right?
Either way you need help. But you know, you just, you got it. You got to take this, if you’re going to qualify for real estate professional status, or if you’re going to run with that short term rental exception, you have to be very careful. And you have to be very diligent about documenting your time.
You know, another thing that we get every once in a while, I’ll get a question and, and somebody will say like out in one of our communities will be like, well, I bought a short term rental, but I’m going to use it 21 days, right? Which trips up the personal use rules. It means that you can’t. If you cost seg and bonus depreciate the property and it creates a big tax loss.
You can’t actually use the tax loss because you trip the personal use rules. The tax loss gets suspended. You can’t use deductions and excessive income once you trip those personal use rules. So they’ll say things like, well, I’m going to go and stay there for a while, but don’t worry, like. I’m going to, uh, do it in a way where, you know, somebody, if I get audited, they won’t be able to find it, or they’ll ask me if I do get audited, how would they find it?
But it’s really simple. It’s like, okay, let’s look at your calendar. When did you block your calendar? Because what are you going to do? You’re going to block your calendar. You’re not going to decide I’m going to take a three week trip and potentially have somebody be able to schedule during my three week trip.
So I’m going to go block my calendar. And then. They’re going to go and look at your bank statements, transactions.
Daniel Wrenne: Yeah, exactly. It’s like, Oh, Naples, Florida, Naples, Florida, Naples, Florida,
Brandon Hall: credit card statements, everything. So you got it. You got to be careful with this stuff. You will leave a paper trail. And that’s the important thing to understand is that they can, they can dig those paper trails up.
Daniel Wrenne: one of my favorite quotes I say on the podcast all the time, it said, I’ll tell you what’s most important. Show me your calendar and your checkbook. that reminded me of that. It’s like the IRS can ask for your calendar and checkbook when you’re getting audited and that will show them very quickly, like what’s actually going on. Like you can tell a lot.
and you kind of have to be reasonable about these things and not so err on the side of like, you know, following the rules at a, at a start and, like you got, your firm is helping someone to follow the rules as opposed to an accountant. I always just. Advocate for clients, hiring accountants that are gonna help them stay compliant as opposed to, a lot of times clients want to hire accountants that will help them find all the loopholes.
Yeah. Yeah. And it’s like, no, no, no, me and you can go find the loopholes. And then, then they can say like, that’s a bad idea. Yeah. Yeah. Like, they need to help you stay between the lines.
Brandon Hall: I get the question every once in a while, Oh, I’m looking for an aggressive accountant.
That’s going to push the boundaries. Are you aggressive? Are you a risk taker? And I always kind of chuckle when I get this question because the people that are pushing the boundaries that are risk takers are typically, they’re typically pushing the boundaries due to their own ignorance. Like a lot of times they’re not intending to do what they’re doing.
But they just don’t know any better. They don’t understand how. These rules work. It’d be like, you know, me going into the restaurant niche and offering tax services to restaurant owners and having all sorts of strategies around inventory, even though I’ve never done anything related to the restaurant niche.
It’s like, yeah. Okay. Like, is that aggressive or is that just not knowing? Um, and so, you know, I, I like having those conversations because I think that. I think that what consumers perceive to be as aggressive is from a professional perspective. A lot of times, not, not every time there are definitely places where you can push the boundaries, but a lot of the times it’s just ignorance.
It’s, it’s just simply reporting things incorrectly setting the consumer up for unneeded risk, right? Especially when it comes to real estate professional status and material participation. I can’t tell you how many times I see the whole, Oh yeah, my accountant, let me count all my research time and all my networking time.
And I’ll be like, dude, I just had two audits last quarter that people called me in on that they lost because that’s what their timelogue showed is research time and networking times. Like that does not count. It doesn’t help. Yeah. It doesn’t help your property collect more rent or pay more bills. Like it just doesn’t work like that.
So, but if you don’t know these rules, then, you know, you can get caught taking positions that you didn’t intend to take.
Daniel Wrenne: Yeah, and that’s really, I think expertise is a key factor, like you’re paying for help, expertise is a huge deal. that’s why, we advocate, specialists like the fact that you focus on in your firm working with real estate.
that’s a huge deal because, shows that you spend lots of time in that area. Just like our planning firm, like we zero in on working with earlier career physicians. I mean, like when you zero in on one area, you’re going to develop better expertise and be able to provide much more value. And real estate is a The one thing about real estate, I mean, I know people call it passive income and I know why people call it passive income, but I get a little annoyed when people call it passive income because it implies that you make money when you sleep.
And I’m like, no, there’s work, right? You got to hire or either you have to hire good people and probably both do lots of hard work and in order to make it work. I mean, that’s been your experience I imagine, right? Working with hundreds of real estate pros.
Brandon Hall: Oh yeah, definitely. And I will say in our experience, the people that grow the largest portfolios and build the most wealth are the people that are running their own portfolio.
So they end up vertically integrating property management and acquisitions and repairs and maintenance and all this stuff so that they can scale, scale, scale. And that is not passive. That, that is a bit, they are running real estate businesses that just happened to be rental real estate businesses, right?
But it’s, but that’s very different from like what I’m doing. I have 25 units and I try to make that as passive as I possibly can. It’s not passive, but I try to, because I’m focused on building my CPA firm. But if you really want true passive in real estate, then you need to be buying triple net lease properties.
You need to be investing in syndicates, but each one of those carries additional risk. It carries the, yeah, exactly. Triple net and the triple net. Carries a lower returns, right? So, so anytime that you’re going to move passive, you’re giving up things, you’re giving up returns, you’re giving up control. You know, you, you just,
Daniel Wrenne: but I want the good returns and the past.
Brandon Hall: Yeah. Well, you, you tell me when you figure out how to, how to get that done and I’ll, I’ll follow in your footsteps.
Daniel Wrenne: No, no, it’s, it’s a kind of a, doesn’t, doesn’t really exist. What about the people I’m curious about the difference between like the. One or two properties types and like the 25, it seems like in my experience, there’s a whole bunch of people that have had zero or not.
Well, maybe I guess we could say like zero properties, talk about it a lot. And then 1 and 2 properties and never really get above that threshold. There’s a ton of those people. But then there’s a smaller circle of people that get above that. And it seems like they grow fast. Like they don’t stay around three properties.
It’s like they get to 25 or whatever they get to. And I’m not sure I have theories on what the differences are between those. Two types of people. But I’m curious of your thoughts, like what’s, what’s the
Brandon Hall: difference there? I, well, I think there’s a lot of differences. So we could probably have this conversation.
We could probably talk for hours about this, but, um, I think that the two main things that I see are people who scale their wealth and their portfolios quickly or, and, or to a very large extent. Understand how to use leverage to their, to their benefit and are comfortable doing. So what I mean is you buy one property, you rehab it, you force appreciation, you immediately cash out, refinance, use the funds to buy the second property and you keep renting and repeating as fast as you can.
those people, especially over the past decade have scaled multi, multi million, tens of million dollar portfolios simply because of the way that they used leverage. I would say that the other kind of key aspect here from what I, from my perspective of, of who grows large portfolios. We work with a lot of, a lot of individuals that make a lot of money.
I think our typical client’s going to make like six, 700, 000. and then we work with, you know, people that are making seven figures and eight figures as well. the people that scale portfolios to a significant extent are making good income and they’re laser focused on rolling that income into real estate and scaling it out.
And in their income, their main income stream is typically scalable. So not only are they scaling a real estate portfolio, but they’re scaling their, their main income stream at the same time. And they’re just doing that year over year, over year. And it might take them 20 years to build a large portfolio, but they don’t give up along the way and they keep doing it.
And so if you think about that, if you’re a, I don’t know, a physician and you are making 600, 000 being a physician. And maybe maybe over a five year period that goes to 700, 000. You know, I would say, okay, that income’s not scaling as fast as we would probably like, but you might along the way have opportunities to invest in things like surgical centers office practices and things like that.
And that might give you the boost of one, two, 300, 400, 000. And then the question just becomes, what are you doing with that? Are you going to go and buy your Ferrari? Are you going to go buy a boat or are you going to buy rental properties? Because I guarantee you, if you can defer gratification for a span of a decade and you keep rolling hundreds of thousands of dollars into rental properties, you will have larger.
a much larger nest egg at the end. And I guess I shouldn’t say guarantee because nobody can guarantee anything, but that’s what I’ve seen over the past decade. And you know, the past decade has been an, maybe an anomaly in the market. It’s been a big run up, but man, if you were doing what I was just talking about, you would have a multi multi million dollar portfolio at this point.
Daniel Wrenne: Yeah. lots of appreciation, low interest rates. Leverage was good. And who knows what the future holds. I mean, interest rates have gone up lately and, but real estate still, seems to be doing okay.
Brandon Hall: And it’s going to get harder because the low interest rates cover for people’s mistakes and ignorance.
So when you have higher interest rates, there’s more on the line. Like you’ve got to figure out how to force that appreciation. You’ve got cashflow rolling. It’s not, it’s not as easy as just throwing money down, buying a property. And just across the board, raising anybody’s rent, a hundred bucks a month.
It doesn’t work like that anymore. Or, or that won’t get you to where you need to be in today’s market. So what we’re seeing is our clients that are amazing operators are still finding big success. And our clients that were the kind of mediocre operators sort of just an operator could just be an individual buying real estate, or it could be somebody running a syndication or fund.
They’re the ones that are struggling to continue to add value for their investors.
Daniel Wrenne: Yeah, think another struggle for physicians is the time. A lot of physicians are Have pretty demanding jobs and they don’t have I mean if you’re already working 60 hours a week in your job real estate As a side gig is going to be difficult because you’re going to come home and usually, you know, you got kids and family and everything, and you come home and you’re like, Oh, and I got to go, whatever.
Do the, the RBO or the tenants got the request or blah, blah, blah. And you know, the headaches on top of the 60 hour a week job is unpleasant. So I think it’s not even unpleasant. It’s like unbearable.
Brandon Hall: Yeah. Well, I get it, man.
Daniel Wrenne: when you say yes to one thing, my philosophy is you gotta say, when you say yes to one thing, you gotta say no to the other thing, so you can’t just keep stacking stuff on top of things, you gotta have a plan for like, oh, I’m gonna say yes to this real estate thing, so I’m gonna say, what am I gonna say no to, or how am I gonna, I think it’s
Brandon Hall: hard, especially for physicians because you’re right.
You were working a lot, but you’re also making a lot of money. And what happens is you look at, okay, I could buy this single family rental and do this whole real estate investing idea. It’s going to cashflow 500 bucks a month. Like that’s not going to be life changing for me. So this just is not worth my time.
And I think a lot of people get. Stuck with that mentality. And they just never start as a result. But for me, I’m like, okay, but you buy one, guess what’s going to happen. You’re going to get the bug. You’re going to want to buy a second one. Then you’re going to buy a third. Then you’re going to want to buy 10.
Then you’re going to, then you’re going to want to double that and buy 20. All of a sudden you’ve got 10, 000 of cashflow coming in every single month. This might take you six, seven years to actually get to, but still you’ve got 10, 000 of cashflow coming in every single month. It’s all tax deferred, you’ve built equity through your portfolio, through appreciation and debt pay downs.
Now you can start refinancing everything and using that to buy even more property and accelerate the process. The thing that we have to get in our minds is that we’re starting a snowball and it’s going to roll downhill and it’s going to become a massive snowball. As long as the hill is big enough, right?
And, but it’s going to be really slow at first and that’s okay. But as long as you believe in the process and you believe in the end result, you can keep grinding and keep pushing
Daniel Wrenne: it’s not, it’s not an overnight thing. It’s not a get rich quick thing. I mean, you gotta, it’s a long game and going in with that mindset is as much.
Much better. You don’t have a letdown when you’re like, Oh, it’s been the first year and I’m not rich yet.
Brandon Hall: Right. You know, exactly. And you won’t be feel that way too, by the
Daniel Wrenne: way. It’s kind of like the first year is probably the hardest. And I,
Brandon Hall: you know, the first year, especially like you go into your first property and you immediately are stressed out.
I remember, I remember doing this. I did this twice with my, with one of my longterm, my first longterm rental and my first short term rental, even though I carry them. Even though I was financially sound, you buy it. And the minute you take ownership, you’re just immediately stressed because you’re just like, okay, the mortgage has started and I have to get this thing rented out right now for top dollar, but like, it’s just, it’s, it’s just you having, but anyway.
You keep building and you start realizing there’s a, there’s a pattern to this. There’s a game to this. There’s an art and a science to this. And as long as I play the long game, I will win over a long period of time. And that’s what real estate investing is. There are people that do this full time and if you follow them, On social media and you see their results, you will feel inadequate, but you have to separate yourself from them because they are doing it full time.
It’d be like trying to go and in trade stocks for two hours a day, when there’s people on wall street doing it for 10 hours a day, before you get up in the morning and after you go to bed at night, right? It’s like those guys are going to win every single day. So don’t try to compete with them.
Just buy your rentals, build that wealth. And over time give you exit options. And I know, I know being a physician has been really tough over the past few years. That’s what the number one thing all of our physicians say. We always ask everybody, why are you investing in real estate? Our physician clients are saying, because I don’t want to be tied to this job.
I love helping people. I love saving lives. I love, I love medicine, but I hate the hospital. I hate the practice. I hate the fact that I’m tied to this. I don’t have any say over my hours or over how much I have to work. And I want to see my family, my kids grow up and I want to spend more time with them.
If that’s you. Start building opportunities that give you flexibility later. Real estate is one of those opportunities. If your net, if it takes you seven years to build a cashflow stream of 10, 000 a month, that still gives you flexibility to either reduce your hours, to find a lower a better work life balance gig, like.
Like, doing this over time will, will provide you with later in life opportunities to, to create the work life balance
Daniel Wrenne: you’re looking for.
Yeah, and, and I think educating yourself, physicians are great at educating, at they’ve been through a lot of education and they’re, they’re like the smartest guys in the class.
once you start educating yourself further and like, listening to Brandon’s podcast and there’s a bazillion, that’s the thing. There’s a million podcasts on real estate. To the point where it’s overwhelming, but like, listen to Brandon’s podcast and look at the guests that you’re bringing on and like, listen to their podcast.
Typically an approach I would use because you at least are in like a circle of trusted people, but you can educate yourself in that, you know, you’ll start to feel more confident and, find your first property after educating yourself quite a bit. And then you learn from experience and then you can kind of build on that is a great approach.
It’s not for everybody, but, it’s a heck of a business to build and, it can be that ticket out of, or at least partial ticket out of medicine. And I agree people are struggling in health care. It’s it’s a very challenging job and they’re looking for some, a little bit of freedom outside of medicine.
Brandon Hall: Yeah, I mean, I love real estate and I started a real estate c p a firm back in 2016 because I wanted to see behind the curtains of what I presumed to be were, were rich and wealthy people. And my main, my main question was, does real estate actually make you rich? and I can confirm that if you play this game long enough and you learn from your mistakes and you always try to improve yeah, it definitely can.
I mean, we have. incredibly wealthy clients that have been at this for decades. and like I said, the, the snowball effect is very real. It might feel so slow for the first 10 years and then it’ll speed up for the second 10 years. And then it’ll be like light speed for the last 10 years. You know, it’s just.
That’s how this game works. So it’s a, it’s a constant grind the American way. Right. But the rewards can be very compelling. So, yeah. And it’s all tax deferred.
Daniel Wrenne: Yeah. I mean, this is coming from the tax pro. So, cool. Well, I appreciate it, Brandon. It’s, it’s been fun chatting about taxes and real estate and Definitely go and check out Brandon’s podcast.
You can dig in deeper. There’s, there’s all kinds of good nuggets in there and check out his tax firm. If you, especially if you’re buying real estate or getting into it yourself. and, as always, it’s, it’s been fun. Brandon, thanks for coming on. it’s been a good time.
Brandon Hall: Appreciate having me on Daniel.
