JF1191: This Is How A Financial Planner Invests In Real Estate with Brent Sutherland
As a full time financial planner, Brent had a good W2 income to show the banks. With financing easily attainable, he bought 8 houses in his first year! He’ll give us great tips on how to use our savings/retirement accounts to buy real estate. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Brent Sutherland Background:
– Owner of his own CPA firm, Ntellivest
– Certified Financial Planner and have worked in financial services for nearly 12 years
– Real estate investor who currently owns 8 rentals
– Works to help individuals think outside the box and better plan for financial independence.
– Based in Pittsburgh, Pennsylvania
– Say hi to him at: http://www.ntellivest.com/
– Best Ever Book: Behavior Gap by Carl Richards
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.
With us today, Brent Sutherland. How are you doing, Brent?
Brent Sutherland: I’m doing fantastic, Joe. Thanks for having me on the show. First off, I have to admit I noticed on some more recent podcasts that you’ve had some heavy-hitting athletes on board, so I’m worried that your listeners might look at the podcast theme, see my name, and be rather disappointed here.
Joe Fairless: Get down and give me 50.
Brent Sutherland: [laughs] That’s right…
Joe Fairless: We have had some football players, and actually a couple of Pittsburgh Steelers recently. I know you’re in Pittsburgh, Pennsylvania… A little bit more about Brent – he is the owner of his own CPA firm, Ntellivest. He is a Certified Financial Planner and has worked in financial services for nearly 12 years. He’s also a real estate investor who owns eight rental properties. With that being said, Brent, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Brent Sutherland: Sure thing, Joe. I like to refer to myself as a financial planner, rather than a financial advisor. First off, I am a Certified Financial Planner, but the reason being most people who I know who are financial advisors, people that state themselves as financial advisors, they tend to be more focused on just investing your money, as opposed to looking at your whole picture and making unbiased recommendations on what you should probably do to get you to what your financial objectives might be.
So I consider myself more of a coach instead of a money manager, but this was an evolution that occurred over time, because I did come from the traditional advisory world, but along the way I got tired of the long work weeks under someone else’s system, so I started looking for ways to get myself a little bit more financial flexibility and freedom, to do something that gave me a little bit more fulfillment. It was neat working on a traditional road – you get to meet some interesting people, successful people, but I wanted something else with my life.
So I reached out to a guy at that point locally, who was my same age, but he was already retired financially, and he did that through real estate investing. I sat down with him, I picked his brain, he gave me a lot of good pointers, but then I started educating myself on real estate investing, what that was, what it entailed… I got caught up a little bit, I have to admit, like a lot of people do, in that analysis paralysis stage for a couple years, but I finally jumped in and started buying properties in the beginning of 2016, and it’s been really snowballing ever since.
From there, I got that bug, I wanted to help out others who were kind of stuck in their journey towards more financial independence, on that similar path as me… So I started my own company at the beginning of this year, to do just that. I feel like I have a unique set of skills, knowing the traditional planning world, and how it can be integrated into real estate investing with a passive income focus, and I feel like that can really benefit other people in their journey towards financial independence.
So I’m not a hands-on investment manager, as I stated. Instead, I like to charge a per-session fee that’s very transparent, understandable, and I think it fits most people’s needs at a reasonable cost. So that’s kind of where I am today and what my focus is.
Joe Fairless: How do you take the planning skills from your professional background and apply it towards real estate investing?
Brent Sutherland: Well, it’s interesting because you start looking at some of those creative aspects of financial planning, and what happens is most people who I’m talking to now, they wanna get started in real estate investing but they come to me with this question and this challenge that “Hey, I’ve been on this path for probably 10-15-20 years of saving in traditional investment accounts (usually the 401k or the Roth IRA).” These types of accounts have rules set in place where you can’t really access that money without paying a penalty, or other rules that [unintelligible [00:04:50].02] “All my money is here… How do I get started in real estate investing?” That’s where some of the traditional planning aspects can come into play, because there’s some workarounds you can really think about.
One, the first thing I always bring up to someone is I ask them, “Do you know what types of accounts you have? Let’s talk about what your current investment picture looks like”, and 99% of the time they’re gonna say “Well, I have the 401k at work, I have a Roth IRA on the side”, so then we start digging into what are the rules and the [unintelligible [00:05:14].14] with some of this money if you wanna start converting those into money that you can actually put towards a real estate property.
I think it’s important for people to know the traditional IRA, which is more of the one that you put in money now and you get tax deduction upfront, then that money grows tax-deferred, but it has rules in place where you can’t really take that money out until age 59,5. Now, I don’t know about anyone else, but to me, early financial independence doesn’t mean saving into an account that you can’t access until age 59,5, so we have to start talking about how can we pull that money out so you can utilize those funds for the investment products today.
Now, there’s a couple different methods we can talk about; I don’t know if you wanna go into detail here now, but it’s something that’s more of the typical conversation that I have with people, and that’s how we start.
Joe Fairless: Yeah, sure. Please.
Brent Sutherland: Great, we’ll kind of dig in then. The IRA – one thing you can do with that is that you can actually convert money into the Roth IRA each year, but you have to keep in mind that when you do this conversion, you have to pay ordinary income tax rates on that money that you converted from the IRA to the Roth IRA. Now, the reason why you’d wanna convert to a Roth IRA, and for people that don’t know what the Roth IRA is, it’s something that you put money into today, you don’t get tax deduction today, but it continues to grow tax-free, and you can pull out money later in life tax-free, whenever you hit the retirement age.
But another beauty and benefit of the Roth IRA is that you can always access that money that you contribute. You can’t access the growth on that money until age 59,5, but you can access what you’ve put in. Now, when you make this conversion from the traditional IRA to the Roth IRA, that acts as a contribution. So there’s one specific rule that’s in place when you make that conversion – you can’t access that converted money until five years from that point of conversion. So people have to keep this in mind – if they’re converting, a lot of people make the mistake “I’ve converted that money into the Roth IRA, now I can access that money right away towards a real estate investment holding.” No, you’ve gotta hit the brakes a little bit; five years need to go by before you can access that money… But it kind of works out, because if people are going to go this path, [unintelligible [00:07:20].27]
One year you convert a little bit, so you don’t get hit too hard with taxes. The next year you convert a little bit more, and do this over a period of maybe 5, 6, 7 years to convert that money. Then you’ve got this kind of trailing contributions that you can access five years from now, six years from now, seven years from now, and kind of buy properties down the line.
Now, for a lot of people – they say “I don’t wanna wait five years.”, I get it. If you catch this real estate investing bug and you wanna invest today, five years is a long time to wait, but IRS also allows you, in accordance with the rule 72(t) of the IRS code – it’s called the SEPP, the Substantially Equal Period Payments – where you can take a traditional IRA, you can basically annuitize it, so you can start converting money today… It just means that you have to take a certain amount each year, for the rest of your life, if you do this and [unintelligible [00:08:13].16]
There’s three different calculations they have in place for this annuitized method, but it allows you to pull money out penalty-free; you still have to pay the ordinary income tax rates when you pull it out, but you can start using this money when you annuitize it today, and start utilizing that towards savings, towards investment property or whatever you’d like to do.
So again, that’s another tool that you can use towards your path, towards buying investment properties or just buying some other assets that might generate passive income for you, to help on your path towards financial independence today, rather than traditional retirement ages of 60, 65, or what have you.
Joe Fairless: So one is the traditional IRA to a Roth IRA, and the other is the SEPP? Did I get that acronym written down correctly?
Brent Sutherland: That’s correct. If you wanted to find the calculation for that – and it’s called Substantially Equal Periodic Payments – you can just google search “72(t) calculation.” There’s a number of different calculators that come up that show you what your amount would be if you decided you wanted to convert some of that money into annuitized form today. Bankrate has a really good one, and there’s a couple others that really do a good job of making it simple for these calculations, so you can kind of see what that would look like today.
Joe Fairless: That is a new term that I have not come across before, thank you for sharing that. Which of these two methods do you use?
Brent Sutherland: I think it depends, and I hate to give that answer, like “it depends on the unique situation”, but sometimes planning can come into play here, too. In my particular situation this year, when I started my own company at the beginning of the year, there was a lot of startup costs involved, and my income streams are probably gonna be lower, that if I do the Roth conversion this year, so I take some of that IRA money – which I did – and convert it into Roth format, I have to pay ordinary income tax rates on that, but my income tax this year is gonna be low, so I encourage someone who’s listening, if you’re going through a period of transition or maybe you lost your job and you’re thinking about going into real estate investing, this year when you particular tax rate is gonna be low would be a great time to convert money from a traditional IRA to Roth IRA; it gives you a little bit more flexibility with that money down the road, and since you’re not gonna pay that much on taxes, you won’t get that penalty either by pulling out before age 59,5… So it depends on the situation.
If someone is in a higher tax bracket and it looks like their job is safe, but they still wanna start pulling some of this money out, I would probably recommend a Substantially Equal Periodic Payments – annuitizing that to pull that money out, so that way you’re not getting hit too heavily on taxes, and you’re probably gonna be working for a few more years, so it just doesn’t make sense to do that Roth conversion today. Does that make sense?
Joe Fairless: That does, for the most part. Based on my brain, yes, that makes sense, and I’m sure there’s many sub-bullets underneath each of those, if a Best Ever listener wants to learn more about it. On that note, in addition to googling “72(t) calculation”, which I did, and it came up with some searches that explain the SEPP, what about the traditional to Roth IRA if someone wants to learn more just about the benefits in that process, where should they go?
Brent Sutherland: You can just do a Google search, too; there’s tons of information about that. Investopedia is one, and there’s a couple of other individuals who do a lot of writing about those different rules. A guy who’s a rockstar in the financial planning industry is called Michael Kitces, and he has a website, kitces.com. You can search on his website… He talks a lot about the rules involved with Roth conversions, so if you went to his website and just searched “Roth conversion”, you’re probably gonna get quite a few hits. He goes into great detail…
Depending on how much you wanna know about this, I think a standard Google search will probably suffice, but if you wanna get into the details and the nitty-gritty, he has some fantastic research on his website.
Joe Fairless: Cool. Yeah, I am on it right now, and that search within his website comes up with a lot of posts on that topic. Alright, you’ve got eight rental properties… What was the last one you bought? Can you give us the details on it?
Brent Sutherland: Sure, absolutely. And actually, I’ve just purchased one here at the end of August, and that one has yet to start producing for me, so I’m just gonna go back to the one prior to that. That was last October. It was in the Cleveland market; I purchased it at $88,000. It is running for $1,125/month. I was measuring the actual performance of that particular property… For me, last year it took a couple of months to have it rented, but once it started running, it looks like this year the total cashflow is about 12%, up to the end of the second quarter. But $88,000, and like I said, about $1,125 on rents… I do pay a 10% management fee. I bought this property through a turnkey provider.
I know there’s tons of different ways to invest in real estate, but for me, I wanted to focus on the financial planning aspect and helping other people. I wanted to do something that was almost completely passive on the side, so that’s why I went towards the turnkey property provider for this particular one.
Joe Fairless: Who did you use?
Brent Sutherland: They’re called SmartLand. They work the Cleveland, Ohio market.
Joe Fairless: Okay. How was your experience?
Brent Sutherland: It’s been fantastic, quite honestly. I’ve built up good rapport with these guys; they’re young, they’re hungry, they’re eager, and since my connection to them – at the end of 2016 is when I first touched base with them – their team has grown substantially. It’s like everywhere else in the country – I think that the rental real estate investing and real estate market has gotten fairly hot. They’ve seen a lot of inquiries from the coastal regions, so buyers on the East and West coast and Canada come into their market as well.
So the Cleveland market – I got into that location just because around Pittsburgh I felt like for what I was looking for… I was looking for at least a 10%-12% cash-on-cash return net of all fees; I had a hard time finding that here in Pittsburgh, but Cleveland was a bit more reasonably priced, so I went that direction.
Now, just looking at properties today that they’re offering, that same company, it seems like the appreciation has been about 15%-20% since last year, so it doesn’t make even as much sense for me in Cleveland as it did just a year ago. I don’t know what you’re seeing in the marketplace, but even here in the [unintelligible [00:14:33].18] there’s a lot of demand from buyers in Canada and from the coast, too; they’re driving up to new prices here [unintelligible [00:14:40].07]
Joe Fairless: What about the other seven properties, how did you come across them?
Brent Sutherland: One was through a [unintelligible [00:14:49].01] called Home Union – I’m not sure if you’ve heard of them; they’re a turnkey provider as well. They have mainly an online platform. The other seven that I’ve purchased last year were all through SmartLand.
Joe Fairless: You bought seven homes last year?
Brent Sutherland: I bought eight last year and one so far this year, and the only reason I’ve purchased only one this year is because I had a fairly nice-paying job last year, so the W-2 was good to banks and lenders locally, so I’ve had a bit of a hard time finding lending like I did last year when I going through this purchasing spree. But what happened was I was living in a condo in Pittsburgh – and this was before I really caught on to real estate investing and the benefits of it… And my idea, like a lot of people’s idea, was “Okay, I’m just gonna save everything I can towards paying off this condo.” So when I had a bonus, when I had extra money in the savings account, I would just throw it at the mortgage.
I got to the point where I built up a lot of equity in the condo, and there was some appreciation on it as well. When I started looking at what I could get by investing in real estate properties just from an investment standpoint, as opposed to just putting my money into this really dead asset, with a condo that had a high [unintelligible [00:15:55].03] on it, it just made sense for me… I was like, “You know what, I’m gonna move out, I’m gonna rent, I’m gonna sell off the condo and use all the money I had to build up an equity and put that towards these investment properties.” That’s where I got the funding to buy all the properties the last year that I did.
Joe Fairless: Based on your experience with these eight properties – seven of them you’ve had for a year – what’s a deal that hasn’t gone according to plan?
Brent Sutherland: I’d say the one I touched on that was probably more recent – last October. I expected that one to be rented from the get-go, but it didn’t; that wasn’t the case. In fact, they didn’t get a tenant in until very early of this year. So that was an issue I had… The company is gonna rectify the situation – they gave me free property management and a reduced rate, but when it does kick into play, they gave me [unintelligible [00:16:42].21] for a year, but that’s something I didn’t expect. I would say that that’s been the only real issue so far. I’ve had a pleasant experience to this point in time.
Joe Fairless: Based on your experience as a real estate investor combined with being a certified financial planner, what is your best real estate investing advice ever?
Brent Sutherland: You probably have someone said this before, but I think you just have to jump in. I went through the stage of analysis paralysis, and I kind of regret it, because I wish I would have got in earlier, but I think there’s definitely a period where you need to educate yourself. If you don’t feel like you have the expertise, reach out to someone else you know who is doing this and just get some pointers. Do a little bit of education, but don’t get into the stage where you’re almost frightened to jump on board. It can seem scary, but I’ll tell you what – once you take that jump into this marketplace and you see it working, it’s gonna be addictive.
I have one friend who’s been talking about this for four years, and he literally makes offers on properties, low-balls them because he admitted to me he didn’t want them to be accepted. He said he’s kind of terrified that they might get accepted, so he’s intentionally low-balling the offers, and it drives me crazy.
Don’t get into the stage where you’re just pushing it down the road and you wish you would have done it. Just bite the bullet. Once you get involved, you’ll realize it’s not as scary as you might have anticipated.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Brent Sutherland: Sure.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Brent Sutherland: I would have to go with The Behavior Gap from Carl Richards. It’s a very simple book. He does a lot of back-of-the-napkin drawings to break down more complicated financial concepts to make them understandable to all. It doesn’t matter if you’re looking at portfolio investing or real estate investing, I think it applies across the board. It’s fantastic.
Joe Fairless: Best ever deal you’ve done?
Brent Sutherland: It would have to be at the beginning of last year I bought my first property in a lump sum of four properties at the same time. It was just by luck that the Cleveland market turned around and appreciated pretty substantially over this past year, but it cash-flowed really nicely and I’ve seen about a 15%-20% appreciation on the price as well, so I’d have to say just that first initial bulk buy of those four properties has to be the best.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Brent Sutherland: Well, I don’t know yet if it’s gonna be a mistake, but I’ve kind of been kicking myself that the more recent (the ninth) property I bought this past month, since I’ve had a hard time finding traditional lending to put in place, I bought it in cash… And I wanted to use leverage; that’s kind of my principle – always use leverage on these properties to get the most benefit… But I paid for it in cash. My goal now is to get a line of credit out on some of the equity to use that towards some other stuff, but we’ll see. It’s yet to be determined how this kind of pans out, but I’ve been kicking myself a little bit for buying this in cash.
Joe Fairless: What’s the best ever way you like to give back?
Brent Sutherland: I think right now what I really enjoy, and I found I enjoy it more than I thought I would even, is that with my new business I feel like I’m really providing value to people. There’s people out there who are stuck, and with the model I’ve set up, I feel like I’m not [unintelligible [00:20:47].25] and I’m providing them value to give them confidence to go forward in their journey towards financial independence.
I’m a big believer in providing free resources, so I have some calculators on my website, I provide a lot of content… But aside from that, I’m involved with two charitable organizations around town that I really believe in, and they give back to the community. All those as a whole I feel like they really sum up [unintelligible [00:21:10].27]
Joe Fairless: What’s the best place the Best Ever listeners can find you?
Brent Sutherland: I think the best place to contact me would be through my website, ntellivest.com. You can schedule an appointment there for a consultation, or you can just reach out to me, just send me a question and whatnot through the portal there.
Joe Fairless: Best Ever listeners, that website will also be in the show notes page, a link to it and you can just click on it.
Brent, thank you for being on the show. Thanks for talking about how you acquired seven properties last year, one property this year, and the numbers behind one of them, which sounds like that is a typical deal that you’ve done – the 88k purchase price, $1,125 in rent… That’s on average what you’re doing with your other seven?
Brent Sutherland: Exactly. They’ve been in-between 77,5k and on the high end 88k was the last one, last October.
Joe Fairless: And those rents are around 1,1k or so?
Brent Sutherland: Yeah, on average.
Joe Fairless: Cool. Well, thanks for being on the show talking about that, as well as how you apply your certified financial planning background to real estate investing, in particular two ways to get access to the cash that you’re building through your real estate investments… One from converting a traditional IRA to a Roth IRA, and two is the SEPP, and two resources for those. One is the Kitces website, searching on there, and then two is just googling “72(t) calculation” and learn more about that, that way you don’t have to wait until you’re 59 years old to get access to that money.
Brent Sutherland: 59,5, correct.
Joe Fairless: 59,5. Well, Brent, thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Brent Sutherland: I appreciate this, Joe. Thank you very much.