Ebb And Flow



The Ebb and Flow

It’s an interesting phenomenon, the ebb and flow of membership at the Madison REIA.  Turns out, it tracks closely with most REIAs across the country, but it does not track at all with most professional networking associations.  I wanted to understand this curiosity a little better, so I took a closer look.

First, let’s define what this ebb and flow is all about.  Through social media, search engine queries, and referrals from individuals and organizations, people find their local REIA.  The individual referrals are the best because they are person-to-person and all about explaining value received by one person explaining it to another.  It’s like seeing a great movie – you share it with people.

But those organizational referrals can be a double-edged sword, especially if the referrer is a “fly-in guru” that has come to Madison, talked people into parting with their money for a “boot camp” or personal coaching, and then admonishes them to go “find your local REIA” on the premise that this is where you will really learn what this stuff is all about and interact with like-minded people.

While the latter points are entirely true, the problem is that it’s the guru laying claim to having discovered this awesome resource just for you and, consequently, you now deserve to “step up” to a more advanced coaching program where you’ll really get the juice.  But that juice is expensive, as you may already know.

With all these sources funneling into the REIA, a few people will look closely at the value that they might get from being a part of the association, and they sign up as members. This is the flow of membership increases.

The ebb of attrition nearly matches the flow of increases and it’s a real head-scratcher at times; hence my interest in what’s going on.  You would think that once someone got involved with the REIA, they would continually advance their relationships and grow their interests.  But this is not what happens.

It’s regrettable that the world of media has people believing that real estate investing in its many forms is a glam-job requiring only 4 hours of work each week with massive free time.  Rarely does any endeavor worth doing show up this way.  Nor should it.  When you have a passion for something, you should wake up each morning excited for the day and all the things that you will set out to do.

When people don’t see the path to untold wealth and limitless freedoms paved in a smooth, slick surface, they assume that ANY wealth or freedom is out of their reach.  Nothing could be further from the truth; the path is surely there, it’s just not paved so smoothly.

For those that decide to roll up their sleeves, get the training, then do the work, well, those are the people that realize wealth and freedoms.  But they DO the work to achieve that goal.  These are the same people that understand the value of associating with others, resourcing colleagues, and finding a way to be accountable to someone else; a mentor or a coach.

Sure, you can GET that training at the REIA, and we think that we have darn good programs and resources to support that education.  But you can get that education in a lot of places.  What your REIA offers so much better than anything else is LOCAL access to people, services, and accountability.  You can’t get those things with online training programs or gurus from California.

That’s the story.  Many, many people are misinformed about this industry and never take advantage of the primary offerings of the REIA.  And when the rehab fairy fails to materialize and drop a distressed property in their lap, they just fade away and dispense blame.  “Do or do not – there is no try”, a wise old man once said.  Take advantage of your association for its offerings that cannot be duplicated.


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Why Dogs Bite



I’ve had some discussions lately with coaching students about marketing.  One student was perplexed and somewhat upset, understandably, that “nothing is working”.  So, we drilled down into his work to see if we could uncover something.  I asked what he was doing for his marketing.

“Direct mail” was the answer.  Good, that’s a great way to reach out to a lot of people and get decent results; although this was clearly NOT the case for this guy.  Now, I should mention that I have seen his marketing letters and they are really great – to the point, clear, and all about helping the prospect.

So, naturally, I went to “quantity” and found that he was doing about 100 a week.  Not an avalanche by any means, but certainly enough to generate a response or two from time to time.  But, “nothing” is what he claims to be getting.  Absolutely nothing.  Makes no sense, really.

Later that same day, another student approached me with a couple of questions and remarked that he was fielding a “bunch of leads”.  “Wait a minute”, I said with this earlier conversation in mind, “where are you getting these leads?”  Oh, direct mail, talking with REALTORs, and friends.

So, the first thing you could rationally conclude is that he had multiple streams of marketing going on, but with all things being equal, he should have had little or no response from direct mail.  Not the case.  He was getting the lion’s share from direct mail response.  He was having good conversations.

The next thing that you might conclude is the target area.  After drilling down, come to find out that some of these two people’s marketing areas overlapped.  Even more bizarre, because that should mean a big fat goose-egg for both, but clearly this is not the case.

What the heck is going on?  I wish I could say that this was a unique situation, where one person is getting terrific response and the other is getting little or nothing.  Regrettably, this scenario is not that rare, and I am starting to see a pattern when I look at the situation more carefully.

There is a well-known phenomenon in dogs that is called “fear aggression” – it’s when a dog bites a human because the human is exhibiting fear.  It’s a self-preservation response that seems totally contradictory.  If the dog sensed fear in the human, you would think that it would feel some superiority in the situation and NOT bite.  But what happens is that the dog empathetically takes on the human’s  fear and bites the human to protect itself.  Weird, but true.

Dogs don’t bite me.  I always approach a dog with love and confidence and non-aggression, so they immediately feel comfortable and start wagging the tail and assuming a submissive stance.  The dog feels that I will do no harm and appreciates the loving attention.

Could the same be true human-to-human?  Why are some sales people wildly successful while others fail miserably?  If you drill down, you will see that a good salesperson is authentic, empathetic, and really looking out for the best interest of the client - and HAS THE CONFIDENCE to deliver on that.

So, there is a high probability that marketing failures are the result of fear on the side of the marketer.  But how does that get transmitted through a letter – before the marketer even talks with the prospect?  In a word, “I dunno”.  OK, that’s two words, but you see where I’m going with this.

Consider that the energy that you put into your marketing letters while writing and addressing them has a bold impact on the reader, and not so much the words.

My partner and I once sent out 40 (forty) letters because we ran out of stamps, and I saw her blessing the batch and putting a lot of love into them.  We got three (3) responses from the 40 (7%), and one of them turned into a huge rehab for us.  Luck?  Coincidence?  I don’t know, just look at it.

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Legislative Update



Seller Finance: The Seller Finance Coalition has moved its focus to the US Senate with an advocacy campaign requesting Senators to incorporate HR 1360 language into S 2155. Please be sure to send your email advocacy through National REIA's Action Center (on NREIA's website, under the legislative tab). There is a pre-drafted letter is for your convenience.
HUD Lead law update: On August 10, 2017 HUD issued a notice updating its Lead Safe Housing Rule (LSHR). This rule impacts all Public Housing Authorities, Project Based Properties, AND Housing Choice Vouchers, i.e. Section 8 vouchers. The rule increases the responsibilities of property owners who accept vouchers. Be sure to reach out to the Housing Authority to make sure that if you accept a voucher holder, you are working under the most up to date rules for notification and maintenance.
Tax Reform: Tax reform has started! The initial wave of tax reform has been passed, and as National REIA has pointed out there are positives and concerns. I won't say negatives yet, because we have to wait for the regulatory onslaught that is already underway by the IRS in "clarifying" what the House and Senate meant. One of the key areas we are focused on is the definition of full time job versus part time efforts. The designation or distinction could result in the awarding or loss of a 20% tax break for Pass-through entities like LLCs.
Housing Reform: the next wave of welfare reform is percolating in Washington DC and the focus is on limits to generational housing and unlimited housing for the able-bodied. With the economy moving and jobs-aplenty, the Republicans in Congress are ready for another bite at the apple of reform. Needless to say this will be neither quiet nor quick. As yet, only a few key principles such as 5-year limits to subsidized housing have been leaked out. There will be a lot more on this issue once the budget is actually passed and IF the GOP believes it will help them in the mid-term election.
Energy Benchmarking: LEEDs programs have taken on a new life of their own - not just as incentives for developers, but as a standard of efficiency by local elected officials appealing to their green constituents. Energy efficiency is a good thing, but there is a cost/benefit factor that needs to be considered, and that has been over-ridden by the folks claiming the earth is growing hotter, oops, no colder, oops climate change. Well the weather is changing, but in the Midwest where common sense still resides, we call it the Seasons. Needless to say, many of these efforts are on the coasts. There are alternatives to LEED and many are much more pragmatic. Consider Green Globes and Energy Star as examples. In fact, Chicago IL is considering an energy rating system which would require all buildings to have an energy benchmarking - with an Energy Star© system that is under re-evaluation and may be changing its own system. Benchmarking has its set of problems, and while adherents support the process as transparent, the unintended consequences may be decreased property values over and above the cost of the utilities involved.
Rent Control: California may be facing a rent control-style program to its ballot process by a group evolved from ACORN. Several Cities are also considering implementing similar plans. Ironically, even Bloomberg News is reporting on the ineffectiveness of Rent Control! (see article on Real Estate Investing Today.com) Additionally, California property owners are working through the impossible task of "proving the negative" by showing that they no longer have bed bugs if a unit was found to have them by a prior resident.
Inclusionary Zoning Requirements: numerous cities like Philadelphia, have been working on approving new zoning mandates for mixed income housing.
Evictions: Are the hottest issue to "address" by municipalities. The book "Eviction," has set the stage for an argument for making it more difficult to evict a resident. Yes, even if they have wasted their income, or spent their money on drugs - as repeatedly documented in the book, and lied to their landlord, repeatedly... somehow the accountability aspect of paying a bill, i.e. rent, should now be more difficult to enforce. Read the book. Be aware. Be ready for it to come to a community near you! One argument to make is to ask that rental contracts be handled similar to other installment payment agreements, like auto and home loans. If those are worthy of being broken, then the rent payment can as well...

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Back on the Horse


You’ve no doubt heard the expression that if you “fall off the horse”, the best thing to do is to “get back on the horse again.”  OK, that’s cute, we get it’s “insider meaning”, which refers to anything that you’ve done before that you’ve failed at for any reason, the best thing to do is to try again.

It’s a little subtler than that, too, of course.  It also refers to things that you may have been doing and were interrupted from doing for events outside of your control.  In other words, no so much that you failed at anything, but perhaps you were just stopped, for whatever reason.

So, this is my one-year celebration of pulling myself back on the horse – the horse of life.  You see, one year ago, a team of surgeons, acting as a team of rehab experts that included a framer, a plumber, and an electrician, rehabbed me.  They took my heart out, re-plumbed the feed lines, and put it back.

How I got to that point is anyone’s guess, and the team of cardiologists who looked at my heart muscle and say that it’s a strong as a horse’s, just the feed tubes got clogged.  They believe that there is a large amount of heredity in that equation.  Who knows, really.

I never actually fell off the horse, either.  I stopped the horse, I said “something’s not quite right”, got off the horse, and sought assistance from my health-care coaches.  No one forced me to “do” anything, but what they did do was make strong recommendations for that rehab I described above.

Once that was done, they told me to go home and let the automatic processes of the body rebuild the damage and the trauma caused by the surgery.  Then I got handed off to another set of coaches that guided me back to re-building physically.

They were called the cardiac rehab team, and they did a lot of stuff that I was already familiar with from my exercise and training background.  But this time it was different.  This time I wasn’t just showing up at the gym to get buff and look good – I was rebuilding my systems just to stay on the planet.

That’s a big “why”, don’t you think?  Because my “why” was so huge, I heard every ounce of instruction in a new way – I was completely and entirely coachable, and I took on the instruction with vigor and big intent.  And as a result, I got better faster.  My recovery was fast, and my coaches remarked on that.

One year ago, I discovered the issue that had me “get off the horse” when, after a pretty intense cycling training session, I had heartburn that would not go away.  Today, one year later, I am back on that horse with my bike, getting my proverbial butt handed to me in training sessions.  No more heartburn.

My cycling coach knows all of my health details.  Now she knows what to look for, and exactly how to coach me for the fastest and safest recovery and restoration of my power.  We measure this stuff on a computer, and I have a ways to go to recover the muscle and breathing, but it’s coming.

Because I can’t see it in the heat of the training session, she will come up to me and ask if I am feeling this or that, check my power, my heart rate, cadence – all of it, and make training corrections for me.

All of this had me realize that my swift recovery, my returning excellent health, and my happiness in life has all been at the hands of people I entrusted – my coaches – to lead me down this path of recovery.  And it’s also made me realize that there are a lot of areas in my life that could use a coach.

I am on a quest to fill those gaps.  While I already knew the value, I see it more clearly now from my distinct vantage point back on the horse.

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First, Do What You Love


I’ve had many a conversation with people who believe that they want to step into real estate investing, and the topic of “why” ranges widely.  Many people have seen the shows on HGTV, read Rich Dad, Poor Dad by Robert Kyosaki, or otherwise have been exposed to this real estate thing and got interested.

There’s a real problem with finding what you want to do in your life on T.V.  Realize that the very first priority with a television show is to generate viewership and, hence, advertising dollars.  When that show happens to be one about rehabbing or, as they call it, “flipping”, things can really go sideways.

Real life often does not make for the best television viewing.  For example, talk to health care professionals and ask how much of the T.V. show “Grey’s Anatomy” reflects the real world.  Often, eyeballs will be rolling upwards.  Staff at Grey Sloan Memorial goes through more of their own trauma than they are servicing.  And it makes for great television – I am an admitted addict myself.

So, what’s “off” about the HGTV rehabbing shows?  Well, they only show the three most exciting things about a rehab:  1) an awful distressed property, 2) construction that goes smoothly, usually done by one star of the show (Chip Gaines comes to mind), finished on time (yeah, right), and 3) a completed project that blows your mind.  Throughout, they find points to add extreme drama, like when the mold is detected, or they need to add a $5,000 furnace -  the music gets ominous and we break for commercial.

Oh, and they always seem to net about $70,000.  “On to the next one”, the star barks.  It’s no wonder half the country thinks they can do this stuff and be a millionaire in under a year.  What you don’t see is the dozens of regular craftsmen and trades that descend on the property off-camera and do the work in a day that would take Chip over 6 months to do alone.  And have you ever seen one property that is not shown gloriously decorated and staged?  No, you have not.

As for cost, most of it is underwritten by HGTV sponsors like The Home Depot and other big-box stores and suppliers.  If Chip utters “go to Home Depot and pick that up”, it’s worth tens of thousands to them.  And most of these shows are not HGTV productions – they are massive advertisements PAID FOR by the stars’ production companies, because at some point, they will send their minions out to the Sheraton in Madison to sign you up for coaching to do this rehabbing yourself, “as seen on TV”.

Reality in this industry is far more boring.  Acquiring properties at the right price can be difficult, rehabbing can be challenging (don’t get me started on dealing with all the trades), and the finished product, while usually pretty great in comparison to the start, doesn’t blow your mind and cause potential buyers to wet their pants.  And, no, Joanna Gaines is not coming to decorate.

All in all, it’s still a rewarding business to be in, if you enjoy aspects of this stuff.  You can generally hire out those things that are not enjoyable, and tailor your own personal involvement to fit your needs.  If you are crazy enough, every so often you can strap on the tool belt and do some of the work yourself.  I do this every so often when the memory of the last project I worked on has faded.

You can also make a good living from it, and the nature of the work gives you a lot of flexibility in your schedule.  It takes someone who is self-disciplined and will get up every day and do what needs to be done.  Sitting on the couch eating Bonbons and watching Oprah is not the best use of your flexible time.

So if you’re someone kicking the tires about this, hang out at the REIA more, ask questions and maybe even come to our first property tour to get a live taste of things.  We’ll help you figure out if this is a good match for you.


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What’s Next for You?


Used to be that when you found what you did in life, that was that.  The cobbler was a cobbler until he died.  The blacksmith was a blacksmith, the engineer was an engineer, the doctor was a doctor – all until they retired or died.  Well, it’s just not that way anymore.

Some years ago, I knew somebody who was a great electrical engineer.  He was a whiz at circuit design and worked for a company around Chicago that designed and built small controllers.  One day I met up with him and he told me he was back in school.  I assumed he was going for his masters in EE.

Quite the contrary, he was in pre-med and had already arranged for an internship at a hospital across the country.  Wait, what?  No, seriously – what are you up to, I asked.  That was it – he was serious, and he actually did it.  Years later I heard from him and he was a surgeon somewhere out west.

You see, something called to him and he acted on it.  He didn’t allow himself to be pigeon-holed into being an engineer forever, even though he excelled at it.  As a surgeon, the hours were long, the disappointments huge, but the successes were massive – for him.  And if you think about it, those two worlds are not that far apart.  He spent a lot of time diagnosing and fixing circuit problems before.

What really struck me was the conversation he had around money.  It figured somewhere near the bottom of the list for him; his happiness was up at the top, and he was fully prepared to take a position at a rural hospital in a poor area of the country or even practice in a far-away land where money was no object because there really wasn’t much.  And still he would survive – probably thrive – on his joy.

What about you?  Do you feel stuck where you are?  Think that you’ve invested too much educational or life capital in what you’re doing to make a change?  Reconsider that position.  Open your mind to the wild possibilities that exist that you might like to do.  I did it, and I’m having fun.

I started out as an electrical engineer myself, with a specialty in software development.  I did some hardware work, even some power systems work, but gravitated toward software.  This eventually led me to starting a software company with 2 other guys and we thrived during the internet boom time.

While at that company, I went to a local fitness center to stay healthy, and became fascinated with this new indoor cycling craze called “Spinning”.  Somehow, I found myself becoming an instructor in this national program, then really got into outdoor cycling.  Loved it, had no idea where it would take me.

I loved the notion of cycling and teaching others to do it safely and well, so I kept learning and growing in the practice until eventually becoming a USA Cycling Coach, a division of USOC, the U.S. Olympic Committee in Colorado Springs.  While coaching with the U.S. Youth Triathlon Team, I met lots of new people, and the owner of that team and I became good friends.  He was a real estate investor.

Oh, yes – I still had my day job at the company I started, it just didn’t involve the technical heads-down work anymore, so I had lots of time to pursue this new passion.  Flying all over the country with the kids’ team and helping to grow a group that eventually because the U.S. National Champions. Eventually a few went on to be world champions, and one competed in the 2016 Rio Olympics.  I helped do that.

What I found is that I absolutely love coaching.  So, as I grew in this new real estate investor practice, getting educated, doing deals, and still working the tech side, I saw that I loved showing others how to do that and, for some, how to ride a bike efficiently.  It’s a long ride from circuit analysis.

What about you?  What do you love?  What could you do, WOULD you do if you didn’t worry about the money?  Consider it, because there’s an old saying: “Do what you love, and the money will follow.”  I can tell you that this is true.  You just have to step off the curb.

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Tax Reform Was Passed, Signed & Delivered


As there has been a great deal of hype on all sides of tax reform, let’s see if we can dig into the issues with more light and less heat.  Hopefully you find this helpful and instructive on items that will no doubt have lasting ramifications and unintentional consequences for many years.  The summary: The reforms should be good for real estate, with tax advantages for pass-through entities improving.  Before making decisions based on tax reform, please be sure to speak with a tax accountant up to date on the all real estate rules, as those will be coming fast and furiously from the IRS!  To start, let’s get a quick understanding about “the process” and how we got here:

The rules in the Senate, specifically those about budget reconciliation drove the GOP Tax Reform process; or more perhaps accurately, hemmed it in.  The Senate rules would not allow not budgetary items to be included in the bill, though somehow the opening of the ANWR for oil drilling was deemed appropriate.  I say that not to be tongue in cheek or sarcastic, but to highlight that the rules of the Senate can be rather extensive and somewhat archaic.  Nothing illustrates that more the Byrd Bath, or Byrd Rule, named after Sen. Byrd of WV, who was prolific in his ability to ear mark projects (and have them named for him throughout the state).  This provision limits a budgetary item from being either “extraneous” to the budget or would significantly increase the federal deficit beyond a ten-year term.  Those definitions, and the reference to the 10-year life span of legislation for the Senate, are key.

Second Amendment advocates may remember that the “Assault Weapon Ban” approved by the Senate had a 10-year life, as do many bills passed they pass.  This is especially true of bills that would expand the deficit beyond the 10-year time frame.  So…a budget item must have sufficient financial offsets, per the Senate’s staff accountants, The Congressional Budget Office.  Which then leads to a trade-off of budget items.

Think of it this way, your budget includes travel, car payments, shelter, clothing, school fees, etc.  In December you decide to set your car payments & mortgage/rent for 12 monthly payments, but you’re only going to spend on travel for the first 3 months, clothing once a quarter, and lastly school fees only twice a year.  If you increased any of those, your budget goes out of whack – ignoring that the US is already deficit spending 30%+ of its budget.  So you may make the trade-off (gamble?) that spending for travel will drop to the first two months and you will increase the mortgage/rent – permanently.  That works for this year, budget-wise, but next year (or the next ten-year Senate cycle) you still have to live with that “new” base-line expense.

With that understanding, it is important to note that the deficit restriction, self-imposed by the GOP, was $1.5 Trillion.  Each tax cut has its own “expense” or cost to the budget.  As the dust settled, some were set to start immediately, others like the quarterly clothing expenses in our example above, start at different dates.  Additionally, some of the items, like the travel allowance, are set to expire or sunset on specific dates.  Is your head spinning yet?

Now that we know those details…let’s dig into the specific details of the bill.

The flagship piece of the puzzle is the reduction in corporate tax rate.  This rate was reduced from 35% to 21% – and it is permanent.  This reduction moves the US from one of the highest rates in the world to among the lowest.  The Trump Administration’s goal, in sync with Congressional GOP leaders, is to make the US a haven for Corporations world-wide.  (click here for more details charts – prefer table #1.)

The next key item is that of the Individual tax rates lowered for 80% of tax payers.  There are 7 tax brackets (listed below)

2018 Income Tax Brackets

The goal was to simplify the system so that with standard deductions, which were nearly doubled: Singles from $6,500 to $12,000 and for Couples from $13,000 to $24,000.  Part of the reason for the increase was to remove the personal exemption line item and consolidate the process.  Ideally, most taxpayers will be able to use a post card format to submit their taxes…needless to say, we are still always away from that goal.

The child tax credit was doubled to $2k and a non-child dependent was added for elderly parents, but then only at $500.  Additionally, these tax reforms are to sunset in 2025.  The goal of the current Administration and Congress is to make these permanent and even improve on them, but alas that will need to wait for the next bill.

SALT anyone?

The State and Local Tax deduction (SALT) was one of the most hotly contested and philosophically charged issues.  The argument is that if those deductions are allowed, then low tax areas are subsidizing high tax areas, because people in high tax areas don’t pay as much to the federal government due to local and state taxes creating such a large deduction.  Most of the Republicans come from low-tax areas and Democrats from high-tax urban areas, so the political divide was substantial.  However, there were some Republicans from high tax states, and a concern for low-income workers who would be harmed by the elimination of the deduction.  So, a $10K cap on deductions was implemented.  For comparison, the average New York City tax payer deduction exceeds $50K.  The cap helps low income workers, but doesn’t soften the blow very much for those in areas that have decided to tax, tax and tax again!  Corporations are still allowed to deduct SALT, while individuals with pass through entities are capped at $10K.

Pass through entities – Where Real Estate Investors Live!

The vast majority of real estate investors utilize pass through entities like Limited Liability Companies.  There was a lot of hype on these entities, the rates and various proposed modifications. In general, Pass Through Entities received a tax cut as well.  The details are a bit more complicated.  Bloomberg News, stated it this way,

“The bill sets several restrictions for the type of pass-throughs eligible for the deduction and how much they’re allowed to claim, based on the wages the entity pays, the amount of equipment the entity purchases, and how much the owner earns. It excludes many service businesses from the tax break.”

During the tax reform debate, there was significant concern that if the separation between corporate rates/benefits and pass through entities became too great there would be a mass conversion from pass through entities to corporations.  Experts (economists) do not believe that is the case presently, though as numerous wealth, finance and business outlets have noted, this will be a conversation to have with your CPA, as there are still significant benefits to the flexibility of pass through entities, especially with the capturing of depreciation, expanded expensing provisions and the lack of corporate tax layering.

While there is a 20% tax reduction in the reform for pass through entities, there are provisions to limit active owners who receive a salary from re-characterizing their income so as to avoid taxes.  Passive investors are treated a bit more friendly – and in this area more than any other, they will need to have a specific conversation about their situation with an up to date tax consultant.  Click here for more information from Alistair Nevius and The Journal of Accountancy.

Pass-through income deduction

For tax years after 2017 and before 2026, individuals will be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. (Special rules would apply to specified agricultural or horticultural cooperatives.)

A limitation on the deduction is phased in based on W-2 wages above a threshold amount of taxable income. The deduction is disallowed for specified service trades or businesses with income above a threshold.

For these purposes, “qualified business income” means the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. These items must be effectively connected with the conduct of a trade or business within the United States. They do not include specified investment-related income, deductions, or losses.

“Qualified business income” does not include an S corporation shareholder’s reasonable compensation, guaranteed payments, or — to the extent provided in regulations — payments to a partner who is acting in a capacity other than his or her capacity as a partner.

“Specified service trades or businesses” include any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of one or more of its employees.

The exclusion from the definition of a qualified business for specified service trades or businesses phases out for a taxpayer with taxable income in excess of $157,500, or $315,000 in the case of a joint return.

For each qualified trade or business, the taxpayer is allowed to deduct 20% of the qualified business income for that trade or business. Generally, the deduction is limited to 50% of the W-2 wages paid with respect to the business. Alternatively, capital-intensive businesses may get a higher benefit under a rule that takes into consideration 25% of wages paid plus a portion of the business’s basis in its tangible assets. However, if the taxpayer’s income is below the threshold amount, the deductible amount for each qualified trade or business is equal to 20% of the qualified business income for each respective trade or business.

An article on CNN-Money also points out that, “The 20% deduction would be prohibited for anyone in a service business — unless their taxable income is less than $315,000 if married ($157,500 if single).”  So, if you separate the service, maintenance, or management company responsibilities, a global review may be in order.

Live-in Home remodeling?  If you and your spouse take on the task as a daily effort, or they put up with your ongoing renovations, please know that this tax reform still has a carve out to protect up to $250K for Singles and $500K for Couples in capital gains from selling a house, as long as it was a primary residence for two of the last five years.

Landlords were thrown a bone in that moving expenses are no longer tax deductible, except for certain military exemptions.  One less incentive for renters to move about and cause turn-over costs.  Why moving expenses were ever deductible in the first place is the real question!

A couple of final items worth noting for investors, if your lofty goals of becoming a wealthy land baron come true, know the new estate tax exemption has been raised to approximately $10M for singles and $20M for couples.  Additionally, if you are on your own for insurance you will no longer be penalized for not purchasing a federally approved plan – the ACA mandate (aka Obamacare) was removed.

There will be plenty more written about this as the accountants breakdown each phrase, the IRS issues regulations and “clarifications” and of course the occasional tax precedent via the courts.  In the meantime, enjoy a rousing conversation with your partners and adapt to the new tax scheme.


Charles Tassell is the Chief Operating Officer of National REIA.

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Must Do, Should Do, Could Do


When you’re rehabbing a house for re-sale, you’re faced with deciding which approach to take to make that house sellable without overbuilding.  How do you do that?  Well, largely, it comes from experience and mentorship, but there are some general “rules-of-thumb” that you can employ to help you choose.

We break our rehab lists into three categories; the “Must Do” list are those things that would prevent a retail buyer from obtaining a loan (FHA restrictions), or something that will surely be caught on a house inspection that we would have to fix anyway.

These things include an old (15+ years) furnace, an old (10+ years) water heater, a fuse box or a breaker panel manufactured by Federal Pacific Electric (FPE) or Wadsworth, a decaying or “frito-ing” roof, broken or damaged components such as doors, walls, windows, flooring, cabinets, or countertops, or certain “handyman special enhancements” that are clearly code violations, just to name a few.

The next list is the “Should Do”, and it includes things that are likely to sway buyers into the “buy it” camp.  Since kitchens and bathrooms are the biggest factors in house-buying decisions, these are things like updating the kitchen and bathroom cabinets and countertops, faucets, sinks, and lighting.

This is where things get a little fuzzy.  Depending on the current market, some of these things can slide between the “Should Do” and “Could Do” list.  If the market is strong and houses are flying off the shelf, you don’t have to do quite as much, although doing so can cause a house to move fast.

This is, of course, where your mentors and REALTOR partners come in – they can help advise you on what is appropriate in the current market in the neighborhood where you are working.  Keep in mind that you’re not trying to do the least amount of work to get by; you’re trying to do the appropriate amount of work to have a good product without overbuilding.

The final category, the “Could Do” list is reserved for markets with high competition and/or low retail sales.  These are the things that, when done, make a huge difference in the property.  And, like I talked about above, some of these could slide into the “Should Do” list in certain situations.

For example, removing a wall to create an open floor plan is potentially a pricier option that has the possibility of creating a big “wow” factor and thus selling the house quickly.  Or you could use higher-end finishes in the kitchen and/or baths, adding unexpected features like a steam shower or a beautiful backsplash in the kitchen.

All of this, of course, is subjective.  Each investor needs to analyze the situation to determine what is necessary for the rehab, and considering the time of year that the property will be entering the market.  But how can you be sure of any of this?

Until you’ve gotten the experience under your belt to just “know” the answer, you must rely on your REALTOR partner and your mentors or colleagues to help you understand.  Even more accomplished investors are always checking-in with others on this point, just to remain neutral.

The final word on this is to make sure that YOU are the one ultimately calling the shots on what’s needed for your rehab.  While builders can be awesome assets in the design department, remember that their price goes up right along with features.  So don’t let “feature-creep” crater your budget.


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Market Condition


I was talking with a friend the other day, and she said something I hear a lot: “oh, you must be having a tough time in real estate with this market”.  I’m not quite sure what aspect of the market that she was referring to, but I assured her that in my area of the real estate market, there’s never a tough time.

How can that be?  Interestingly, where people get their “data” is from news reports, and we already know that the news outlets love nothing more than bad news.  It’s sooooo dramatic and sometimes sad, but somebody’s got to get the word out there, right?

Well, we know that the RETAIL real estate market has its cycles.  First, there’s the micro-cycle of local seasonal conditions where a lot of real estate is transacted in the spring, and not so much in the fall and winter.  Of course, this seasonal cycle depends on where you are in the country, too.

Then there’s the macro-cycle of the housing industry at large.  The best recent example of this was the precipitous descent we took around 2008 when prices crashed through the floor.  People were trying to dump their houses left and right – some from fear, some for legitimate reasons.  Didn’t matter.

And that visibility is about the retail side of real estate – the buying and selling of homes by people who occupy those homes.  That’s not our side of real estate, where we look at a different cycle and different market conditions.

Now, it would be folly to say that those retail conditions have no impact on what we do – they surely do.  But those conditions don’t dictate an “up or down” market for real estate investors.  When you tell that to people, they don’t understand how that could be.

The reason is simple – we look for properties that are in a distressed situation.  Not necessarily that the property itself is distressed, although they frequently are, but the situation is distressed.  What exactly does that mean?  Distress is created by many factors – loss of job, death, divorce, unwanted rentals, inheriting a property – just to name a few.

These factors are not exclusively related to the state of the economy, either.  There are external forces that come to bear on people that create untenable situations.  And when selling their property is key to them moving forward, that’s where we can step in and help.

And while it’s true that more distressed situations are created with economic downturn, the fact is that these situations are constantly happening, and with good marketing, a real estate investor will come across more than he or she needs to eke out a good living.

Some people accuse real estate investors of “preying” on people who are down.  Nothing could be further from the truth.  The truth is that we offer a service that can bring immediate financial and emotional relief to people when no one else can.  Banks would happily foreclose on these people, and selling with a REALTOR is expensive and can take a long time.

Like with any profession, you need to be steeped in the practice of what you do to truly understand the intricacies of the process.  I hope this brief explanation has you understand a little better.

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What About the Sellers?


There’s so much to write about in the world of real estate investing, I could go on forever.  But the one aspect that we don’t talk about too much is the impact we have on the seller of a property.  Many people assume that the seller is a faceless bank and that this is just a financial transaction.

In fact, most of the property sellers that we work with nowadays are just normal folk, and their need to sell ranges from “I am desperate and need to sell NOW” through “I’m looking for a more easeful way of getting this done” and everything in between.

For example, last year we purchased from someone in Baraboo that had listed her property twice over the prior 18 months, got plenty of offers, and even got two of them accepted.  The first one fell through at the bank, then the second one did the same thing.

The problem was viability/insurability.  While it was of little or no immediate impact to her, the furnace and water heater were on their last legs, and the electric panel was all fuses.  These are things that, when the bank does its due diligence, can cause the deal to fall through during underwriting.

Clearly, she was frustrated and a little worried.  There was no way that she could afford, or even want to afford, replacing those things.  And to make matters worse, the house used to be a duplex and had two (2) electric meters.  She got two electric bills each month, one for upstairs and one for downstairs.

We did our numbers, made her an offer in March and, while she would have liked more money, she was OK with it.  However, her kids got emotional about the property and convinced her to keep it.  I told her that I understood, and that we would be here to talk again should she ever want to.

Well, come September, she wanted to talk again.  Regrettably, I had to lower the offer because of the time of year, and she would have needed to bring $2,000 to the table to close.  Again, I apologized and told her that I completely understood, but it was the best we could do, given all the circumstances.

She called back in a day and said that she could make it work if my offer was still on the table.  When you have someone over the barrel like this, you can either take advantage or be straight.  We teach all our coaching students to be 100% on the up-and-up and to NEVER take advantage of anyone, no matter how “plausible” or how easy it would be.  Of course, I chose the high road and honored my offer.

We closed about 10 days later and, even though she had to bring 2-large to the closing table, she was so extremely grateful to just be done with that property.  She had purchased something better outside of town and couldn’t be happier.  She sent a thank-you card and everything.

My partner and I spent some time and dollars on the place, replacing the furnace, water heater, and the electrical panel, painted every wall, replaced every window, sanded the maple floors, carpeted the stairs and bedrooms, replaced woodwork, and sprayed out the basement.  With a lot of sweat equity, to boot.

We felt pretty good about the whole project; it became a great house for a family within walking distance of downtown Baraboo, and it sold quickly because of the attention that we had given it.  Most of all, we felt great about the former owner that we helped get out of a situation that would have cost her twice as much to fix as it did us.

In our experience, for most sellers that need help, how much money they make is lower on the list of priorities than just getting out of the situation.  Ultimately, it can be about the money; about how much is being lost daily just holding on to a property that they don’t want anymore.  But mostly, we alleviate emotional distress for people; providing a service that few others are able to do.

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