JF1991: Calculating Risk Like CPA Joel Jensen
Joel is a business owner, investor and a CPA who has completed 80,000 tax returns for clients in all 50 states. Surprisingly, he has yet to do a deal where he’s lost money. In this episode, he shares how he manages risk and talks about why it is important to be more focused on the margin of a deal rather than the top-line revenue figures.
Joel Jensen Real Estate Background:
- CPA, investor, and business owner
- Co-Founder of Tax Sentry, specializing in real estate taxation
- Has completed over 80,000 tax returns for clients in all 50 states
- Based in Provo, UT
- Say hi to him at http://taxsentry.com/
Best Ever Tweet:
“It just kind of reemphasizes that accounting nature in me, that tracking numbers and how you spend your money is probably one of the most important things you can do when it comes to actually doing your tax return.” – Joel Jensen
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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. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Joel Jensen. How are you doing, Joe?
Joel Jensen: Good, how are you?
Joe Fairless: I am doing well and looking forward to our conversation. A little bit about Joel – he’s the CPA and investor and the business owner, co-founder of Tax Sentry; he specializes in real estate taxation; has completed over 80,000 tax returns for clients in all 50 states based in Provo, Utah. So with that being said, Joel, do you want to give the Best Ever listeners a little bit more about your background and your current focus?
Joel Jensen: Sure, I’d love to. So I’ll take it back just a few years to 1994, when I graduated with my masters in accounting from Brigham Young University here, located in Provo, and then from there, I went on to work with Ernst and Young, one of the (they call them) final four now, accounting firms. I was there for nine years and worked with a number of large corporations mostly, in here, to the Bay Area, back and forth.
After about nine years of that, it felt impersonal. I really enjoy dealing with people one-on-one, where I feel like I make more of a difference in their lives… So I had a client who was a real estate company, and they had a fairly large client base of real estate individuals. So I left the firm, formed Tax Sentry, and went on and started to help them with their tax returns and some tax consulting and planning around real estate, and largely with their self-employed businesses as well. That’s was in 2003, and then had been doing it ever since, and really enjoy it actually, because I like dealing with people. So it’s really satisfying for me.
Joe Fairless: Well, let’s talk about your business. So you’re a CPA, you’re also an investor. What properties have you purchased?
Joel Jensen: I had purchased some commercial properties, and as well as – which I have to rent – and then as well as I do some flips from time to time. It’s nice being a tax person because then I have lots of connections with people who are in the real estate game. I deal with lots of general contractors, different suppliers, finishers, so I have clients who run the spectrum when it comes to real estate. So when opportunities present themselves for me to then get involved from an investor standpoint, on the flipping side, and I do that from time to time… I’ve really enjoyed it and it’s worked out pretty well for me so far.
Joe Fairless: You said you’ve purchased some commercial properties?
Joel Jensen: Some commercial properties, mostly office buildings like small complexes, similar to the one I’m in right now for 2000 sqft to 2500 sqft, condos, mostly, office condos. Those have worked out pretty well.
Joe Fairless: So do you manage those yourself?
Joel Jensen: I do. It’s not overly difficult for me to manage, because I’m in one of them. So we have parks and that kind of thing, so it’s pretty easy to do. You would think it would be harder, but it’s not. So we manage this one, and then I have other property managers that look over the HOA details of the other ones.
Joe Fairless: Some people might be presented the same opportunity and not think it’s sunshine and rainbows, as smooth an operator as you are. So what’s your approach to managing those properties? How do you think about it when you buy a new property like that?
Joel Jensen: So one, I’m always looking at the cash flow because I’m an accountant. So for me personally, I always begin there, and I look to see how much cash can be returned on a particular investment. What’s my dollar cost upfront, how much money do I think I’m going to have to put into it to make it usable… So I’m always looking at the hard dollars and trying to be aware of the dollars that are available to me… Whether I can just use personal funds, or whether I need to go out and partner up with someone to go do something. A lot of the flips I do, I’m partnering with other people to go and do those.
But on the rental side, it’s a cashflow game. So if I can get in where I think the return on the dollar is going to be adequate, then it’s probably something I’m going to try and do. So I’m looking at cash, it’s always cashflow for me.
Joe Fairless: It’s one thing to look on paper and see the cashflow, but it’s another to execute the business plan and actually receive the cashflow. So from an execution standpoint, have you come across surprises once you’ve undertaken that?
Joel Jensen: Probably the better way to answer that – when have I never come across surprises when you go into it…? So there’s always something that’s going to pop up. What I try do is look at, maybe setting aside what I would call, a little slush fund. So for example, if I’m clearing on a particular unit — I know I’m going to clear $800 a month or something like that, I may set aside a reserve fund to meet some of those things that creep up on you unexpectedly… Repairs, maintenance, those types of things. You need to set aside money if you need to resurface the parking lot, which I actually had to do this summer here locally at the one I’m at.
So I’m always trying to set aside some money to meet those requirements that I know are going to pop up, essentially, because they’re going to. I don’t think I’ve ever been involved with anything that hadn’t had them.
Joe Fairless: What deal have you lost the most money on?
Joel Jensen: Have I lost the most money on?
Joe Fairless: Yeah.
Joel Jensen: Honestly, on the real estate side, I haven’t really lost any money yet, and partly, it’s because I think it’s my accounting background, so I’m always measuring risk. Especially when you deal with tax returns and you’re dealing with people coming in and you have to sign a particular return, you take on a certain amount of risk with that particular client, and the higher the dollar value or the more money that they make, the higher your risk is.
Joe Fairless: Really? Educate me on that real quick.
Joel Jensen: Yeah. Okay, let’s say someone who makes $50,000 a year and there’s an error in their tax return, when it comes down to the tax consequence, penalties and interest, it’s probably not going to be that great, because their tax rate is lower.
Conversely, I have clients in Los Angeles who make a significant amount of money, and they have a few rentals that they Airbnb down that way… So when you have someone that makes three, four, five million dollars a year, you make an error on their tax return because they’re in the highest tax bracket, then your liability can be hundreds of thousands of dollars.
Joe Fairless: How are you liable? How does that work?
Joel Jensen: So I’m liable based on if I make mistakes in a tax return, if I fat-finger a number or something like that. So I can be on the hook for that. So we have insurance policies, and we carry those types of things, which are required whenever you’re putting a firm together, but that’s the risk you look at. So that’s why if you’re doing a tax return, prices can vary so much from person to person.
So I look at the risk if I’m going into real estate. I had an opportunity to do a flip with someone. It was in the Salt Lake City area. I don’t know if you know much about Salt Lake City, but over the last three or four years, it’s really boomed as far as prices go. You have lots of people from California who are exiting, and lots of them are coming to Utah based on good job markets, housing was affordable as compared to California; not quite as much anymore, but at the time it was. So we went up there to do a flip.
We found a home that was undervalued. We probably got into it at about $400,000. As we dug into the numbers and what had to be done to the home, to where we could make an adequate profit, we realized that some of the water lines had to be replaced, and that was going to be a $30,000 or $40,000 hit for us to take as part of our rehab. That made it so the deal wasn’t as favorable. Maybe we could make some money, but the risk in that became too high, so I backed out. It’s looking at the risk factors…
Joe Fairless: Did your partner move forward?
Joel Jensen: No, they didn’t. They all backed out as well. I’m like the conservative one of the bunch, and so if I’m looking at it, starting to [unintelligible [00:09:15].11] a little bit about the risk of it, then people start to take notice a little bit. So we backed out and then we ended up not doing it. So on that deal, very possibly I could have lost money. But on the other ones that I’ve done, I haven’t – up to this point – lost any. So knock on wood…
Joe Fairless: From your accounting background, you mentioned first thing you look at the numbers, and you just gave an example of something that you found and you backed out. Any other examples of where you were presented an opportunity, you assessed the risk, and for XYZ reason you said, “No, thank you”? I know that’s vague, because you presented opportunities a lot, or you see deals come through… I’m talking about where you were further along in the process, where it was more than just a broker sharing a deal with you. It was, okay, now some team members are interested and now you take a look at it, and ahh! It just doesn’t fit.
Joel Jensen: I don’t know if I’ve ever had that happen. But I will say this that’s been similar, is that oftentimes when I’ve gotten involved in a rehabilitation, and you go through the numbers, and as good as you think those numbers are… Llet’s say I’m thinking I’m going to spend $150,000 on this rehab – again, it is only a budget. I’m looking at it and I’m thinking I know what the numbers are, and being a numbers guy, I usually get pretty confident, but it’s still just a budget.
What happened on one particular one is we have an overrun of 50 grand on it. So what I was thinking was $150,000, the overruns, just based on everything that had to be done… Sometimes in rehabs they snowball. You have that snowball effect – oh, we should fix this, which means fixing this and fixing that, and it snowballs into something much greater than you’re anticipating… So the $150,000 turns into $200,00, and that extra $50,000 really is just completely eating into your profit.
So I would say when you go into rehab in particular, just go in with the eyes wide open, and do the best number evaluation you can. It’s not that that $50,000 may have eaten into my profit and on the surface, you say, “Oh, that’s horrible”, but in my mind what really happens is I take the information I learned off of that particular job, and then I roll it into maybe the next rehab I want to do. So I always look at this as an educational process. It’s a wheel that keeps turning and turning and turning. So what I learn on one – it helps me do my budgeting for the next one, which then gets me closer to the realization of what those numbers were, and then pushes me into the next job with a better ability to be more accurate with numbers, and then that process just keeps going and going and going. So even on a shortfall like that, I’d say, I probably gained a lot of experience coming out of it on the other side.
Joe Fairless: Over 80,000 tax returns…
Joel Jensen: Yeah, that’s a fair perspective of what we’ve done here as a firm, between all the prepares… But we routinely do now roughly 10,000 tax returns a year.
Joe Fairless: What are a couple of things you’ve learned from looking at everyone else’s finances that you apply to your own?
Joel Jensen: That I apply to my own? Well, one thing I’ve noticed when it comes to dealing with clients is the better the records, the better the returns. So we often say garbage in, garbage out when it comes to tax returns.
The people who don’t pay particular attention to documentation and how they’re spending their money – it makes it really hard for people like us to do a better tax return, or allow us to meander through how they’re spending money and do better planning and trying to save them dollars. So it just reemphasizes that accounting nature in me that the tracking of numbers and how you’re spending money is probably one of the most important things you can do when it comes to actually doing your tax returns… Because the better those numbers are also allow me to plan better with you.
When it comes to a tax return, like the physical tax return itself, that’s all just compliance. So the IRS sends out these compliance rules for forms we all need to fill out and submit to them… But really, the savings comes during the year when you have your numbers and we can sit down and start going through it. Especially like December, at the end of the year, when you can say “Should you be spending money right now?” because everything’s on sale when it comes to the self-employed, and what you can save just from a tax perspective on what you have to buy. So for me, it’s just getting to a good place with your numbers. You’ve got to be able to track what you’re doing.
Joe Fairless: When you take a look at the returns of clients that you’ve worked with, anything else stand out from, “Hey, this business sounds good, but they’re really not making much money” versus “This business sounds very innocuous, but man, they’re killing it and they’re bringing in the dough”?
Joel Jensen: Yeah, I think sometimes it’s funny that people really get caught up in the top-line revenue figures. This company, for example, makes $500,000 a year; this company makes $2 million a year. Naturally, everyone would think, well, the $200,000 company is far more successful than the $500,000 company. But that’s not necessarily true, because expenses play a huge part in how much money me as a business owner gets to take home. So if I’m running a 5% margin on that $2 million business and I’m only taking a 100 grand home, yet the $500,000 business has a 50% margin and taking $250,000 home, the $500,000 is actually the much better deal. So I would say people shouldn’t get caught up with the top-line numbers; really it’s your margin, how much money you’re making on a dollar. For me, that becomes really, really important.
Joe Fairless: Very true. Based on your experience, what’s the best real estate investing advice ever?
Joel Jensen: Best real estate investing advice ever – take advantage of the tax code. It’s coming from a tax guy, so maybe that was the anticipated answer… But with the new laws that just came out, your tax– actually, we’ve only had one year, but there’s all kinds of advantages that you can take to actually put dollars back in your pocket.
Joe Fairless: What are some top ones?
Joel Jensen: It’s like the qualified business income deduction. Everyone thinks that’s just for your self-employed people who do active sources of income, but the IRS did release something that was called the Safe Harbor Rule, and it actually got released late, at the beginning of this year, that allows you if you have rental properties to take that 20% deduction on your income. So those types of things.
For example, you can also elect for what we call the Safe Harbor Rule, de minimis rule. If I have a bunch of rental properties, that allows me to deduct far greater amount of my repairs and maintenance that I may otherwise be able to do, and that’s an election you need to do every year on your tax returns. Not lots of people know about it. It allows me to expense all that stuff off instead of capitalizing it. So I would really look at what is afforded to me as a real estate owner from a tax code perspective, and see what dollars I could put back into my pocket, and not overpay the IRs.
Joe Fairless: We’re going to do a lightning round. Are you ready for the best ever lightning round?
Joel Jensen: Okay, go ahead.
Joe Fairless: What’s the best ever deal you’ve done so far?
Joel Jensen: Best ever deal I’ve done – probably a flip where I had made about 35% on my money.
Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about already?
Joel Jensen: Not investigating well enough the people I was doing business with.
Joe Fairless: Please elaborate.
Joel Jensen: I’m going to go through all my shortcomings… But this has been about 11 years ago, where I went in and did some investing with a certain group who, let’s just say they weren’t quite as forthright with information. At the time, I was still new enough not to ask appropriate questions to get more into the detail of what was going on. In that case, that didn’t end very well. It wasn’t in the real estate game, but it was still an investment that went south.
Joe Fairless: What are some types of questions that, if in a similar position in the future, you would ask?
Joel Jensen: What’s your background? Looking at the information that they’re giving you and seeing if it really makes sense. People like to over-exaggerate quite often, to spike your interest… So I would always take a few days after someone gives you something and then take a real look at it with fresh eyes, to see if something actually makes sense from a return perspective for what they’re doing, to how their operations look, to how they’re dealing with clients. Yeah, I would always take a look, a couple of days, and then take a second look.
Joe Fairless: What’s the best ever way you like to give back to the community?
Joel Jensen: Because of my job, I do a certain amount of returns for free every year. So I’ll go out and sometimes people tell me about someone who’s having a hard time or money is an issue in my local community of people I hear about… I try to save them a few bucks and I do a certain amount of tax returns for free every year.
Joe Fairless: What is a best ever resource that you use or novices who are not CPAs could use to stay current with some tax laws, that would be beneficial for us to know?
Joel Jensen: Well, I use a lot of software that’s for CPAs, for example. But I would say Nolo is a pretty good resource when it comes to a legal and tax perspective, and they’re always putting out new books. So if you go to Amazon or Barnes & Noble and still like hard copy books, look up Nolo and go to their textbooks and it’ll give you a basic idea of what’s happening in the tax world. I’ve never tried to make someone a CPA, I just like people to have a working knowledge of questions that they can ask when they sit down with someone like me.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?
Joel Jensen: They can always give us a call. You can go online, you can see our website www.techsentry.com, or just call us at 866-856-0829 and we’d be happy to help.
Joe Fairless: Enjoyed our conversation, Joel. Thank you for being on the show, talking about the commercial properties that you’ve purchased, your approach to managing them, underwriting them… Also, the different tax code items that we should make sure we’re taking advantage of, and lessons learned after looking at a whole bunch of tax returns. So thanks for being on the show. I hope you have a best ever day, and talk to you again soon.
Joel Jensen: Yeah, you too. Thank you. Have a good one.