#169 - When Passive Real Estate Isn’t Really Passive

0:00You know, the one thing that pilots talk to us most about is paying too much in taxes. And as incomes gone up, taxes have gone up. And so we talk about this on the show all the time, but we're actually going to dive deep into how pilots can execute tax mitigation strategies and investment tactics alike at our passive income pilots conference. Tate, when are we going to have it this year? It's in Las Vegas, Nevada on October 8th and 9th. Everybody's going to fly in on the 7th. It's going to be a jam pack two days of sessions with expert panels and over 250 of your colleagues who are like-minded professionals who are looking for those exact same tax mitigation strategies. Join us in Las Vegas. It's going to be an absolute blast. So if you want tickets, go to passive income pilots dot com or you can go to the link in the show notes. But with that, let's get to the show. Welcome to passive income pilots where pilots upgrade their money.

1:02This is the definitive source for personal finance and investment tactics for aviators. We interview world renowned experts and share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll. Hey everyone, welcome back to passive income pilots. Tate, Doree A. Ryan Gibson here for another week of financial education. A little more on the emotional side today talking about the psychology of investing. Ryan, how are you doing, man? Good. Good. You know, I, you know, it's so funny. Like, you know, people talk about investing and they think that it's not emotional. And I think that is the furthest thing from the truth. I think you need to be emotional. I'm going to be the, I'm going to be the, you need to be emotional. Contrarian. I'm going to be the contrarian. And now what I mean by that is like emotion doesn't check the stock brokerage account every minute and then emotionally make bad decisions when they confuse volatility with some shake up in the market, right? Like that's, that's not what I'm talking about. I'm not talking about the emotion to buy high and sell low.

2:02Like that's just terrible investment decision. But I, you know, I think we were talking a little bit about the show like about Airbnb investing, right? Or short term rental investing and, you know, it comes with this awesome tax advantage and you can actually get a really good tax break if you're an airline pilot. If you do it right, you can actually offset your W2 income. And, you know, I would probably say, take, you know, correct me from wrong, but like, I bet you over 50 people who listen to this podcast have saved at least 100 grand on their taxes. Absolutely. By doing this strategy, but I bet you, I bet you 50% of those people, well, what do you think? I would, I would ask you, what do you think? I bet you a certain percentage of those people regret doing the short term rental. Maybe, maybe, maybe not 50. Maybe not 50, but maybe 20, 25. Yeah. And I'm not saying that you'll regret it, but there's also a lot of people who I think will say that they've gotten more enjoyment than they ever anticipated out of it as well.

3:03Yeah. Yeah. Absolutely. So I think what we're doing today is we're kind of level setting in terms of, you know, some different strategies that we've talked about on the show in the past and doing a little bit of a reality check on what it takes. You know, Ryan and I have been on the passive side on the active side, both have been very active. I think that, you know, when you are leading a company like Spartan or you're leading a company like Turbine, you have economies of scale behind you. You have teams behind you. You're building an organization that manages hundreds of millions of dollars and you just have a lot of zeros behind every decision that you're making. And I think that that's where the weekend warrior landlord gets into trouble is they tend to, they tend to get into deals that are smaller than what is worth their time to manage. And that's one of the challenges with owning small rental properties is that when you hire a property manager, you're like, oh, yeah, it's going to be no big deal. I'll just hire a property manager. Well, long term rentals, typically a property manager is taking 10%.

4:05Well, if you're renting a place for $4,000 a month, that means your property manager is making $400 per month managing that unit. How incentivized are they going to be to do a really great job for you when they're getting $400 a month? They're not. And that's that's kind of the issue. And that's where you get into a lot of better economies of scale when you get into 100 unit, 200 unit, 300 unit plus properties is you can have an on-site management team that actually cares because this is their bread and butter. This is this is what puts food on their table, right? So they care because if they move some knobs and they can really optimize this thing, it actually turns into real dollars for them. And it's kind of the same thing where if you buy a short term rental, there are some things that you're going to have to do to effectively manage that property along the way. And you just want to make sure that it's worth your time. Yeah, I want to take it a different direction. I want to talk about return on life. So ROI, right? And ROL maybe return on life.

5:08So what is your ROI on the thing that you're doing every day, right? And so my story is, my story is literally just this. I thought it'd be cool to buy a rental property in every layover city that I had because I thought my return on life would be awesome because I would be in my layover doing something that I could invest in and have all that free time on that layover. So it's like, why not just go down and work on your rental property? 24 hours in Philadelphia, like cool. Like I get my 12 hours behind the door and I get 12 hours do whatever I want. I'm going to go look at some property and maybe meet a property manager or two to some facility, whatever it is, right? And what I realized is that I was creating this environment that I absolutely hated. It was a lot of little properties that made a little bit of money that really were inconsequential to my overall wealth. But I was still like really excited about passive income. And this literally forced me into wanting to provide for pilots that were looking for

6:12truly passive investments, right, through Spartan because I was like, I know pilots want exposure to real estate and the tax benefits and the depreciation and the cash flow and the magic of real estate. But I just, I knew that a lot of them wouldn't want to have to go through what I was going through, which was like, it hit me when I was on my day off, tenant called, and I don't know how the tenant got my month number because they had my had a property manager, but the property manager had been ignored, had been ignoring her for months. And she's like, Hey, I've been trying to call in this leaky toilet. And now the leaky toilet is a gushing toilet. And it's gone through on the fourth floor all the way down to the main level. And all your drywalls ripped out. And I somehow got your phone number and I just want to let you know what's going on. So about three hours later, I'm on an airplane going to Philadelphia on my day off, running a hotel room, trying to figure out what's going on. My property managers like completely gone. And but let me tell you something though, here's what's something and this is what I think

7:13is not talked about very much. I enjoyed the experience. I actually kind of enjoyed meeting my tenant and going, you've been wronged and I'm going to make it right. I like that interaction. I like the the like fixer of it, right? Like I came in and I was like, Oh my God, we just need a, you know, this was a simple plumbing fix and like I got a drywall guy. He'll be in here. We'll remediate any mold and like we're on to the neck. And so like it wasn't necessarily like, I mean, I hated the fact that I had to leave my family and be gone for a night on my day off and that the time value of money was terrible, right? Like absolutely terrible. But I kind of liked the operational challenge of it all like, okay. And then to me, I was like, it made me realize like, Hey, you know what? This property manager is annoying me more than he is helping me. And when a tenant calls me, I know how to like find a good crew to come fix stuff.

8:18Like that's actually what I'm pretty good at. And I could just, I could do that easier than paying some guy $400 a month or whatever was to do it. So it turned me off to like the small time deals. I wanted to do bigger deals. But I was like, I'm actually interested in running an operation that like does this in setting up the process of procedures. So I'm just saying, you know, you'll be surprised what people like. I know we had John Wormon on an episode and I, we referenced this episode frequently because it was like, when we pressed him for the numbers on his short term rental, he goes, look, Ryan, he's like, you know what? I get out of this. I mean, in Tate, I get time with my kids teaching them how to run a business. My wife really enjoys like booking and having interactions and picking out the design and the finishes. That is a high return on life because it's bringing you happiness, right? And maybe there's number struggles and things like that. Maybe it's not performing like your stock portfolio or maybe you absolutely are miserable now, right? And you don't want to do it. So you just, I think there is some emotional aspects of like getting like owning hard assets

9:20that you've really got to check in with yourself on. And so I would say measure your ROI in life big time. I love that. I'll share a story with you about a property. You know, I think I've, I've shared this story in bits and pieces on the podcast before. But when I started clawing my way into multifamily, personally, over a decade ago, you know, it's hard, it was hard to find places that cash flowed like it is today. It's hard to find a multifamily deal that's a six, this was a sixplex. And it's hard to find one in a market that will actually provide positive cash flow. So as at a conference and somebody goes, Oh, I live down in South Carolina, Columbia, South Carolina. And it's a great cash flow market. I got a great broker that I can connect you with. And I'm like, great. And I just read a book by David Green. He used to be one of the co hosts of the bigger pockets podcast. And I, this book is called Long Distance Real Estate Investing. And it talks about the core four. All you really need to long distance real estate invest is your broker, your lender, your

10:21property manager. And forget what the other one is, probably a contractor, your maintenance guy. Your therapist. Exactly. So, so I go down there and I buy this sixplex. And I'm like, this is great. I find my, you know, I find, I've got my core four. I got a contractor. Now, I did everything wrong. One of the first mistakes I made was one of the units needed a renovation. And the property manager who I had used, which I didn't interview enough property managers. And I picked one that probably wasn't very good. The property manager goes, Hey, we'll manage the renovation for you for 10% of the budget. And I was like, great. Well, that's how governments sign contracts with like Boeing and Raytheon, right? It's cost plus. So it's like the more they spend, the more they make. And there's one unit renovation costs like $60,000. It's way, I mean, it should have cost a third of that, maybe.

11:21And granted, you know, when I bought it, that one unit was taken down to the studs. But the reason I had to do that is because I lived so far away. And it, I didn't want to spend multiple days of my off days flying across the country to South Carolina. I don't know anybody in Columbia, South Carolina. I have to get a hotel. So now I'm dumping money into a hotel room on my own dollar. I mean, it just made absolutely no sense. So fast forward years later, when I eventually sold it, my wife and I actually flew out there. And we were grappling whether we, whether we wanted to, you know, kick everybody out, do a renovation, tear the thing down, build a, you know, 16plex on the property, and then sell it or if we wanted to just dump it. Well, we toured the property in its current condition. And there was a unit where the tenants were breeding pit bulls. Yep. And they're all called people's are called American Terriers. There you go. Thank you.

12:22Okay. And I'll never forget. As you might said, it said to me when I got to Philadelphia, and there was a pit bull staring me down when I walked in. She, I go, what? I go, give a pit bull. She goes, no, no, no, it's an American Terrier. I'm like, right, right. I'll never forget the smell. The smell was awful. And at that point, I'm like, I don't care. I dumped this thing. Just get rid of it. And that's where the right buyer in that market, it was actually one of the partners at the brokerage firm that had sold the property to me years and years ago, that bought it, but he lives in the local market. He's a broker. He knows, you know, he's got all the relationships. He lives there. He can drive down the street. So don't get wooed into this idea of, oh, it's going to be passive. It's like, no, it's not. So it's work. And actually, the IRS, if you want the tax break, the IRS explicitly says, and we're not going to cover that in this show, but you can go back to our former episodes. We talk about exactly what the requirements are. Like you actually have to do more work than anybody else, right? And so correct.

13:23And it's hard to do when you don't live there. So yeah, exactly. So like you've got to actually put in the effort and do that and actually, this isn't to slam on STRs. Well, and this wasn't a short-term rental. So I will caveat, this was a long term, you know, small commercial real estate deal. If you're going to get into small multi-family or any other commercial real estate, you know, make sure it's something you really want to dedicate time to and something you enjoy. Because shortly after that, I found passive investing and I figured out that I could be a limited partner and someone else's deal. And everything changed for me. I spent a lot of years investing as an LP and then decided I wanted to be on the general partner side of things and actually build a firm. But again, because of the number of zeros behind it, an hour of work goes a lot further than an hour of work managing that little six plaques. And Tate, there's a lesson in there on your unit renovation. Like as pilots, we don't do this stuff every day. And so sometimes we confuse the convenience of having somebody to do something with the

14:25right person to do the thing. Yes. In other words, sometimes it's better to not have anybody at all than somebody in the seat. You know, you may think, oh, that guy is a renovation specialist. And if they're really bad, it's literally better than not doing anything with that apartment. And we're, oh, this is so convenient. There's already somebody here. I appreciate the convenience. But what we overlook often is that ability, that person to actually do their job correctly. And I think when we get in and we're new and we're just so appreciative of having bodies in the seats to do the work that we need done, that's a mistake. I think we all make, which was I was sort of handed this property manager. He had a construction crew. Oh, wow, this is so convenient. You know, I didn't know a lot about construction. But when I showed up in his renovation, I know what mold looks like. And I know what a painter painting a paintbrush over mold spots look like. And I'm like, you're here and you've got your crew, but you're painting over mold right

15:28now. You know, like you don't know what you're doing. And I don't know. So, so, you know, you kind of got to inspect what you expect a little bit and you don't have to be a construction guru bit again. You got to be ready to like move on from bad people. And I think that's another thing you're going to find when you're doing this is you're going to run into bad people and you got to figure out you never save money by waiting a little longer to do something. You know, Tate, I wanted to get into cost seg because I know this goes hand in hand for the STR people that are still in the room who still want to do this, right? Yeah. And I think before we get into cost seg, we should really bifurcate the conversation between you know, long term rentals that are out of state to the short term conversation because obviously if you've been listening to this show for any length of time, you understand that the short term rental loophole is extremely powerful. A lot of wealthy people do this, especially high income earners do this because they can take the tax benefits, the cost segregation bonus depreciation against W2 income. But before we get to the mechanics of cost seg and bonus depreciation, that sort of

16:31thing, I think that we should stay on this, this thread of the emotional purchase. Now short terms are kind of a different beast, right? Because a lot of times it's going to be somewhere that you want to own anyway. And I think that if we can give you any wisdom, it is don't buy a short term rental on a place that you don't want to go and visit where that's really far away from you, right? Because that was my lesson was I had to go and get a hotel room every time I wanted to pay attention at all with boots on the ground in South Carolina. If you're looking at this lake house, let's say, or a ski house that you wanted to buy anyway, but they allow short terms and it's a way for you to get some great bonus depreciation against your W2 this year. And it's an asset that you just want to own long term, long term, we'll get into that for in a second here. But that might be something that fits into your overall plan. Would love to get your thoughts on that run. Oh, I've got strong. I literally have spent like an hour this morning talking to somebody about this.

17:32I would measure it this way. Think about it like two semesters in a college year, right? First semester you get a C, maybe the second semester you get an A, it blends to a B. Okay. Here are your two semesters. One is this a good deal. Like never mind, you know, like you can include the tax break and all that. But how is this investment going to do? I ran the numbers. I took out the 30% ridiculous management fee that they're going to take for booking the ridiculous $150 cleaning fee. I've put all my vacancy in there and my spreadsheet says I'm going to make 5% right to you. What is that right for the quality of the investment you're buying? I'm not going to judge if that's a A or B or C for you. That's up to you, right? You decide that. If you're buying some dumper in the middle of nowhere, a better cash flow. Pretty good. Right? You're buying a brand new, you know, seaside town, perfect house. Okay. Maybe in cash flow less because it's a quality facility and it's quality of everything,

18:34right? New inside and out, warranties and all that. Are you expected to appreciate what letter grade is that though from an investment perspective? And then emotionally and functionally like you just said, take like, do I want to go there and enjoy it and there's anything, any other like benefit there? How is the emotional grade, right? And then average the two together and what's the grade? What's the letter grade? And you might find like, dude, this is a terrible investment, F failing grade, but like emotionally, I love it. A, but you're still like averaging to a C minus or a failing grade, right? So don't do it, right? And maybe that's kind of my wisdom there. So like I would measure the two competing factors, right? I was talking to a really good friend about buying a ski, ski condo and it was kind of like that. It was like, man, the tax breaks amazing and I've kind of calculated that I would lose $10,000 a year, but I would get a quarter million dollar tax break. So now for 25 years, I could lose 10 grand a month, you know, a year, right?

19:34And you know, and I've got the tax savings, right? And emotionally very high, but like realistically, am I really going to go there all that much? And then it was in a condo H.O.A. situation. So you still got to deal with the cleaners and booking it and there's some fees involved. And so it's not like you're just going to some empty rustic cabin that you can just sort of access whenever, but also it was a very highly managed property. So like there's extremes here that we just want you to think about and then really weigh the emotional piece because you might have a spouse or you as the pilot, you might want to like deal with bookings. You know, I used to run crash pads back in the day at two crash pads. And I kind of enjoyed the transactional nature of 25 pilots that I was dealing with all the time and finding a new one and welcoming them and giving good customer service. That was kind of fun for me. I mean, as an F.O. making 18 grand a year, it was nice to collect an extra couple of grand a month on that. Today I have no interest in that. But you know, at the time, like that was kind of fun. I got to know people, but you know, how is that going to relate to you?

20:37emotionally on like having to deal with these like little things that pop up. That might be really fun for somebody in your household, including yourself. So I would just weigh the two grades and just make sure that it's a great investment and great emotional. And hey, if it's an A and a like you better run and buy that property. That's a good idea. Yeah. I would highly recommend reading optimize your B and B by Danny Rustin, Daniel Rustin. You could look it up on Amazon. You know, we don't get anything for that. It's just a book that my wife and I read ahead of starting our first STR. It's an asset that we absolutely love. We go and stay there. We actually, I didn't want to jinx this before we had 105 star reviews, but we're batting a thousand on five star reviews. We got over 105 star reviews. And a lot of that has to do with how you deal with things when things go wrong. I got a fun story for you. Two years ago, we were on our wedding trip in Greece. And we got back after one of the nights of the week. We were sailing for a week for our wedding. And in Greece at 230 in the morning, it's check in time.

21:42And Lucy, my wife had what seven miss calls from this group that was that was checking in. The house hadn't been cleaned. And they had, it was two families. They both had kids. The house was a disaster. And we spent an hour booking a hotel for them, making sure that they were taken care of, getting our cleaners in there. We gave them a partial refund and they ended up giving us a five star review. So and those reviews are critical, right? Because now you, you can, once you have five star after five star after five star and people were raving about the property and the service and whatever, you can jack up your prices. We can afford to be 30% more expensive than anything else in the neighborhood because when people look at our reviews, everybody just raves. And Tate, let's get real for a second. You just talked about the financial upside, but didn't it bring you some joy? Absolutely. Yeah. Yeah. You're taking care of people. You're in, yeah, you are in hospitality with a short-term rental. People need to know that when you're buying a short-term rental, you are in the hospitality business.

22:44Right. And we take pride in pilots in delivering people on time, safely to their destination. You know, when we reroute, save some fuel or just make a better, smoother ride, like these are things that bring us emotional joy, whether pilots want to admit it or not, you know, I'll be the first to admit that like I get enjoyment out of that. I get enjoyment completing the mission safely and getting to the destination. And you get the same sort of things in business, right? And I think that's where this emotional fulfillment comes. It's not always about the money, but, but now, like to your point, like, yep, now I got the five star review. Now everybody loves this place. Now I'm like one of those, what do they call it? Like super rare rare finds or, yeah, super host, guest favorites. Yeah. So like, it kind of goes to your values of like just doing the right thing when no one's looking and good things will come your way. You do have to be prepared though. If you're going to self manage, of course, in the first year, you have to self manage. And then of course you can pitch it off to a property management firm after you use it for the bonus appreciation in the first year. But if you are going to continue self managing, which I honestly think if,

23:45if you're doing it as a, a spousal team, it's very manageable, especially with the automated guest communications that automatically, you know, you get, you get Wi-Fi connect door locks and, and you know, we have, I don't know, 12 messages that deploy from the time you book to three days prior to a day prior to a couple hours to check in to after check in. You know, one of the things we do is we say, Hey, we have taken great care to stock the house with everything that you might need. But if you're missing something, let us know and we'll have it delivered. And we just use InstaCart and someone, somehow the ironing board disappeared and they go, Hey, well, there's no ironing board. We said, no problem. We'll have one to you within a half hour. It's just like a hotel, right? We just had InstaCart deliver something from Target. But you have to be prepared to, you know, be on it because when you get those, those communications, you know, you're in hospitality, right? And that's why I think there's so many crummy Airbnb's out there is because people think, I'm just going to, you know, throw an air mattress in my flat

24:48and just rent it out. And it's like, here you go. I hope you like it. It's like, no, you know, in order to be successful. I think that's the, the whole Airbnb and bust narrative is around all of those hosts that just don't care. And they buy the cheapest sheets they can find at Ross. And that's why people hate staying in Airbnb. Is why I hate staying in Airbnb. I can't stand it. Yeah. I mean, my, my wife and I have had it to our wood side because I mean, we've done the same thing where you, there's automatic check in, but you show up at 1030 or in some weird neighborhood and I can't get the door to unlock. And, you know, I mean, you're just limits. Yeah. I mean, you don't, I mean, it's 1030 at night. Like what do you expect? You know, yeah. Well, pilot stay in enough hotels. It's like you know what places are nice to stay and what places you love to stay. So I think the pilots are actually in a very good position to really have a, a good radar in terms of what people will enjoy and what people want. So 100% 100%. Yeah. So I mean, I think one thing you said to about this book, you know, and you

25:51mentioned, we've mentioned a lot about you and your wife or you and your spouse or whatever. You and your significant others should listen to the Airbnb book together, right? Like you should, you should get audible, listen to it in the car when you're going on a road trip or vacation. And like you should really get bought by and from your spouse. I think you're going to get a lot more mileage out of about whatever you're doing in your life because I think if they're not on board or if they're not least aware, you're going to, you're going to run into problems. And, you know, because they're going to be spending time on something and it is kind of worthwhile, I think, to do something with your spouse that like a super engage like you have to like, I think that's really cool. Like I, I started my business with my spouse and like, I don't recommend like everyone go work with their spouse. That's not what I'm saying. But like if you are going to like at least dabble in some kind of investing, like you probably want to at least inform them of what you're doing and maybe having a little bit of background, they, who knows? Maybe your spouse might be like, Hey, that sounds really cool. I actually want to be involved in that part of it. So get a lot more mileage out of it. Take, let's talk about like the million dollar question, which is, okay,

26:56we're going to assume on this show that everyone knows that bonus appreciation and cost segregation is, you know, you get a huge tax break. We're not going to spend an hour on it. We've got other episodes that do that. But, you know, I think it comes down to like when we buy our Airbnb, who does or you buy your short-term rental? Who does your cost seg like who's going and doing the study? And we've had a litany of guests on the show today or in prior years and over the course of years, who will charge you a bunch of money to do a study? And I think, you know, listeners have probably been quoted anything from 500 bucks to $10,000. And everything in the middle and every cost seg person is going to tell you the same thing. Oh, well, mine is better or mine is certified or, you know, the IRS requires you to go to the, you know, and all this. And let's just kind of clear the air on that. I let's have an open conversation about like, A, you don't need an engineer to go to your property period, right? Like that's not a thing, right? And of course, do your own due diligence and check with your CPA and all that

27:56and all that. Number two, if you're having a CPA do your taxes, please call them and say, I'm buying a short-term rental. This is what I heard. Do I have that right? Yes. Right? Because the last thing you want to do is like surprise your CPA with a bunch of nonsense during tax time and say, Hey, I bought it. I bought the short-term rental and I heard on passive income pilots. All I got to do is all these things. And then I get all this depreciation. I do this cost seg study. You know, here you go. Make it happen and your CPA is like, what are you doing? Dude, you didn't do any of the contemporaries like logbooks. You didn't do, you didn't do all these things, right? So just talk to your CPA, make sure they're like in the loop and what's going on. I'll also say that, you know, your CPA, whoever your tax professional is that you work with is going to be the one who is fielding any sort of audit. So having them on board ahead of time and having them in the loop on your cost segregation study, you want to make sure that whatever cost segregation firm that you're working with, there are some CPA firms that offer them in

28:58house. When that is the case, that's probably the best route because they're going to be super familiar with the cost seg study. And if an audit comes up, they're going to be very prepared to defend it. It's not going to be some third party engineering report that came from outside. But if it is, that's fine. Just make sure that they can see an example ahead of time and that they're comfortable with that cost seg. If your CPA has no idea what a cost seg study is, you might want to think about working with a different CPA if you're going to use this strategy. 100%. It's a well known thing. The tax preparer that does my taxes for over 3,000 investors of our knows about cost seg and we work with a top five accounting firm. That does our cost seg study. So if your CPA doesn't know, they're just, it's not, I don't want to trash your CPA's abilities, but they're just not a real estate CPA. They don't know, you know, general accounting rules on real estate. Precisely. Yeah. So, so how do you get your study? Where do you go, Tate? Because I heard your stuff on bigger pockets to go on.

29:59There's a calculator. You can go a free website. You know, what's, what's, what do you use? Well, we've talked about cost segs. Let's see, on episode 32 over three years ago, we've talked about it on episode 85 on episode 144 and 145. So there's plenty of information on our show on it. And, you know, I'm missing one from John. Let's see if I can find the episode number on that one. That is, well, that must be 145. In any case, there's a lot of different firms. If you just type cost segregation study into Google, you'll come up with tons of firms. And so what I would do is any time you're, you're interviewing anyone to the sun, just cast a wide net. So obviously, you know, you've heard about cost segregation studies in the past. We know about bonus depreciation. They're incredibly creative because if you self-manage that property for at least 100 hours during the calendar year. And of course, that counts furnishing it, any renovation.

31:01Travel does not count. But 100 hours is very realistic between yourself and your partner. You, you're able to take that against W2 income. Now, something I want to talk about, which I think doesn't come up enough is what happens if you want out. And this is one of the criticisms that I hear about cost-ex studies is, yeah, yeah, yeah, that's all well and great, but you got to give it back when you sell. If you're a true real estate investor, you don't sell. You either keep it forever or you 1031. And I think this is one of the areas that we wanted to touch on today in this episode is that, you know, a lot of people jump into this for the tax benefit. It's just just because of the tax benefit. And they get into it and they realize, I don't like owning this property or it's a pain in my rear. It's a place that I don't want, I don't want to go. Yeah, just like your property in Philadelphia, my property in South Carolina, we just want to get rid of it, right? Well, the issue there is that if you've kept it for, let's say, year to years, whatever,

32:07you have to give back that tax benefit that the IRS let you take, right? Because you're basically writing down the value of the asset. And if you sell it for your basis or more, you're going to have to recapture that tax benefit. So again, this, this is sort of your, you're neutralizing that tax benefit a couple of years down the road. If you sell the property and you don't 1031. So what are your thoughts on that, Ryan? Yeah, I mean, I think you nailed it. I think when you have wealthy individuals, I would say rich people want to see that money turn over every few years. Well, the people want to 1031 and the ultra high net worth will figure out a way to hold on to that property forever, right? And I think that 1031 is a great example. I think, you know, I think there's wealthy people listening to the show. And you want to be thinking about deferring your taxes until you die.

33:08And you want to be thinking about how can I buy real estate? Get a fantastic deduction today, right, against my delta income or my American income or whatever it is. And then buy a really nice piece of property. And then maybe if you feel like you have to sell it, maybe you want to sell it in upgrade, maybe you're just kind of sick of going to that area of the country, whatever it is, 1031 exchange, allows you to roll all that equity gain into your next real estate transaction. I would just, you know, the thing that I don't like about 1031s is when you sell your under this timeline of pressure, right? You, you, you like, I always say I love when 1031 buyers are trying to buy my properties because I know they have no choice but to close. Right. So, so always build it, you know, always kind of keep that in mind. That's why I prefer just not to sell. Right. And so unless that property has got some crazy thing wrong with it, like try to hold on to it for do a cash out refinance. That's better to a cash out refi exactly.

34:09Yeah. That's a better option in my opinion than doing a 1031 because in a 1031, you're going to have, you know, you're going to have to identify new property and find that property and get a new loan and all those things. So you're getting a new loan anyway. So you might as well just do a cash out refinance, pull the money out, not pay the taxes on the property and go get something else, right? Absolutely. And, you know, and maybe, maybe you decide that, you know, that's not a place you want to go anymore. So then you convert that short term rental into a long term rental. And now you're just putting long term tenants in there and you're not really worried about the management. You've already got the depreciation benefit. And now you're just getting steady cash flow on that asset. But the reason why people really sell is because that just means they don't have liquidity to do the next thing. Right. It's typically it or or that property is in such disrepair, the market's turning. It's bad. You're forced into doing something you really like don't want to do, but you got to sell because of some circumstance. So at the end of the day, like, I'm a big believer in like, don't sell anything completely agree.

35:10If you don't have to, don't sell it. You know, that's, that's one of the things I would have told my younger self with a lot of the properties that I had bought along the way. And I was selling and 1031ing and sort of bouncing up the chain and it went instead. I should have been re leveraging and keeping all of those assets. That's how you build true wealth. But this feeds into why you want to buy if you're looking at utilizing this short term rental loophole, which by the way, perfect time of year for it. We're recording this on September 10th. You know, if you're buying, if you're putting something under contract in, let's say late September, it means you're closing in late October, you have two months to log 100 hours furnishing it and getting it listed and getting at least two bookings before the end of the calendar year to take that tax benefit. This is the time to do it. But don't rush into something that you aren't going to want to own long term because then you're just going to end up being forced to 1031 into something else or you're going to be forced to give back the tax benefit.

36:10And of course, you can lazy men 10th, 1031, which is, you know, you sell it, you take the tax hit and then you take those proceeds and you put it into something else that generate new losses. You know, you could put it into oil and gas, you could put it into a new short term rental or if you have real estate professional at that, at that stage, you could put it into any sort of real estate. But that's a pain. So by legacy assets, by things that you want to own forever. And if you keep it long enough, when you die, your kids can sell it the day after you die, your kids get this step open basis and they never have to pay the capital gains or the recapture. I love it. I'm going to do hard shift. We're going to talk about IRAs for a second. Just want to remind you, if you are thinking about getting IRAs for your kids, if they get income, if they produce income, if they have a job, you can set up their IRA. And I know this is a hard shift into IRA stuff, but you know, if you're thinking about doing this, if your kid is just getting that, if they just got that summertime job or, you know, I guess we're in the fall now. But if they're getting out of school and getting their first kind of, make sure they set up an IRA, right?

37:15We've all seen the compound graph, right? Where people invest a hundred bucks a month and before you know it, they've got, you know, over a million dollars in that account versus somebody who starts in their 40s, when we put in 400 bucks, they're going to put in like four or five hundred dollars a month to make the same compound interest. So I want to leave you guys with that. But before we wrap up, I did want to kind of transition us to our conference, which is coming up and less than a month, which we're really excited about. Actually, a month almost on the day of recording. We've got over 200 people coming, which means there's only 50 seats left. So if you're one of those guys like me and Tate, who wait to the last minute to buy your tickets, which is exactly the type of guys mean data. Always wait to last minute. Always wait to the last minute. Guess what? I've talked to a lot of people who are in the same boat. They're like, oh, I was waiting to, you know, see if I could make it or whatever and I'll book it. I do plan on going, make sure you do because those tickets we have capacity at 250 and we only got 50 more seats left.

38:21So make sure you book your ticket. It's going to be fun. If you've enjoyed this conversation, this is the type of conversation we're going to have for two days jam packed with people who know way more about this stuff than we do actually. Up on stage talking, meeting you, having consultations with you, whatever it is, great hallway conversations and just a fun pack day. We actually, we're actually going to go from like, when do we start Tate eight in the morning to like six at night or something? I mean, we're going all day long. Just jam packed. Yeah, we're going to breakfast from 7 30 to 8 30. We're going to start the keynotes at 7 30 in the morning and it goes all the way till 5 PM for two straight days. So it's going to be a little exhausting, but it's going to be like ground school. It's going to be a little exhausting, but yeah, but we want you to be able to fly in and then get the heck out of there and go back home and do your thing. And that's why we wanted to have your spouse gets to go for free. We wanted, we wanted to highly encourage you to bring, you know, your significant other. And then we backed it up to a weekend. So if you guys want to go, okay, I just took my kids to Vegas and we went and saw the Wizard of Oz at the spear.

39:26That was awesome. They literally take the entire movie and they kind of cut it into like the cool parts. And then it feels like you're actually like spinning around in the tornado in the movie. It's like it was wild so cool. And then we went to Cirque Salay, saw the Michael Jackson show, which was fantastic. So my daughter's nine, my son is six and they had an fantastic time in Vegas. So I highly encourage you like it's a business right off. You're going to spend more than 50% of your time learning about things. So you can do that and then enjoy a little bit of time in Vegas. Absolutely. It's going to be October 8th and 9th in Las Vegas, the end resort. Because you know, we are going to be there on Wednesday the seventh. We'll kick off with a happy hour. You're more than welcome to come in that night. I think most people will fly in that night and book the hotel for Wednesday night, the seventh and Thursday night. The eighth checking out on the ninth. You can store your bags at the front desk or down to the conference room while you while we get through day two. And then we'll wrap up at about 4 p.m. on Friday the nights. And of course, you're in Vegas, you know, bring the family and and tag on a weekend in Vegas while you're there.

40:29Yeah. Well, great everybody. Uh, thanks for tuning in this week. Catch you on the next one. Well, thanks again, everybody for listening to the show before you leave. Don't forget we're meeting for the pip live events in October 8th and 9th in Las Vegas, Nevada. If you enjoy our content, what you're hearing, what we're talking about and you want to network with other pilots, or doing what you're doing, tax and legal and investment professionals, see you in Las Vegas. Go to passive income pilots dot com to get your tickets ticket prices. Do go up in August. So jump on that as soon as you can. Thanks, everybody.