JF1747: Air Force Captain Builds His Real Estate Portfolio For A Side Hustle with Payton Pearson

Typically for a side hustle, people will Uber or work part time somewhere. Payton is taking another route and building his real estate portfolio on the side of his full time job. He’s just getting started with real estate, currently with three properties, with very lofty goals. Hear what his plan is to accomplish his big goals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“To get good loans at good rates, you have to prove to your lenders that you can pay it back” – Payton Pearson


Payton Pearson Real Estate Background:

  • Research analyst, and former Air Force Pilot
  • 1000+ hours of flying experience, owns 3 properties, in process of acquiring 4th
  • Based in Dayton, Ohio
  • Say hi to him at terr547ATyahoo.com
  • Best Ever Book: Rich Dad Poor Dad


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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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Payton Pearson. How are you doing, Payton?

Payton Pearson: I’m doing great, how are you?

Joe Fairless: I am doing great as well, and welcome to the show. Payton is in the Air Force, he’s a research analyst, he’s a former Air Force pilot; thank you, sir, for what you are currently doing and have done for our country. He’s got 1,000+ hours of flying experience. He owns three properties, he’s in the process of acquiring his fourth. Currently based in Dayton, Ohio. With that being said, Payton, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Payton Pearson: Sure. Hello, everybody. As you said, in the military, I’m currently a captain. I’ve been in for about seven years. I went to the Air Force Academy prior… I got my degree in electrical engineering, and then went to become a pilot and decided to come on over here, in Dayton, Ohio, working at Wright-Patterson Air Force Base. I’m also going to [unintelligible [00:01:53].11]

I hopped into real estate back in about 2017, just a little bit ago. I bought my first property, which is the property at which I am living… And really started to figure things out, like — I was looking around at the rental properties that were comparable to the one that I had just bought, and realized “Wow. The mortgage is significantly lower than what they’re renting out the properties for.” And the mortgage was very low for me to begin with, so I was thinking to myself “Well, shoot, this might actually be very profitable.”

My family, especially my father, has been really wanting to jump into real estate for quite some time. It’s kind of the hereditary thing, if you wanna say that, but… Either way, I got in just a couple years ago, and I have a whole business proposal that I developed as a result… And considering my life goals, I have a very, very aggressive growth model set up for myself, which involves something to the effect of buying at least two apartment complexes per year for the next 5-10 years, and then upping the ante a little bit to much bigger properties. So I’ve got an outlook of very aggressive growth, and I’m really just getting started now, but the momentum is going.

Joe Fairless: I think you mentioned you had a business proposal with your father, or you created one… If I heard you correctly, will you elaborate on that and what you did?

Payton Pearson: Oh yeah, so a business model/proposal is what you wanna do if you’re gonna get really serious into whatever venture you decide to go into. If you’re really inspired, it’s gonna just kind of happen naturally, which it did with me. Basically, I wrote up a plan; I literally wrote it up in Microsoft Word, just explaining what my process was going to be, what the tiers would be. I was gonna start off just to get my feet wet and figure out how real estate works, and how to make it profitable, figure out numbers like returns on investment, net operating income, cashflow positive, the cashflow quadrant, and stuff like that, and get a feel of the things that I needed to know prior to doing really, really big things, like buying 100-unit apartment complexes.

That’s what I started up writing in the plan. Basically, the tiered system that I developed was something to the effect of starting off with 4-unit apartment complexes, and then after I’ve gotten at least 40 units, which would be in that case 10 properties, I would then scale to around 32-unit apartment complexes. But of course, this can be kind of an exponential growth model rather than just a staggered growth model, because I’ll be making more income as I buy more properties. And then eventually go into the 32+ unit apartment complexes, then the 100+ unit apartment complexes maybe in 20 years or so, and then once I get really big, get to my ultimate goal… And this is a very goal! [laughter] [unintelligible [00:04:53].21] but you’ve gotta shoot really high if you wanna get really high.

The goal is to build hotels on the Moon eventually, and by about the time that I’m in my forties to even in my fifties is probably gonna be about when humanity is actually establishing a sustainable, permanent presence on the moon, and I wanna partake in that. So it doesn’t have to all be scientific ventures and whatnot.

So yeah, in this plan I developed that procedure, I developed the general plan, so in words what I wanna do, and then step-by-step procedure what I’m gonna do to execute that goal. I also put in the business proposal specific types of properties that were good examples of what I was planning on buying and what I was planning on doing with them. I also put a sample statement of work in the finished business proposal, where I show exactly what I would do to the properties that I would be buying… Because eventually, the purpose of this is to beautify the world.

I don’t just wanna buy properties to make money, I wanna make the world a better place for people who live it, so that frankly – and this might be kind of a dark way of putting it, but I’m just gonna be frank, and I’m gonna be blunt with it… I wanna make the world a less tragic place for people to live in, and the way you do that is you make it more beautiful. And the way you make it more beautiful is you improve the things that you have control over. And the way you improve the things you have control over is you must first have control over them. The way you have control of a real estate is you buy it. Once I have control over the real estate, then I can start making it better, and then I can rent it out to people and make their lives better because they’re living somewhere that doesn’t suck the life out of them.

So I put in that statement of work in the business proposal, and I had actually sent it out to a couple other entrepreneurs just to see what they thought, see if they wanted to work with me… And I also developed an executive summary. I put that all together, put in some sources, and now if anybody wants to see what I’m doing… Oh, my financials are also in the business proposal as well. That’s something that you wanna have to present to get good loans, at good rates. You’ve gotta prove to them that you’re gonna be able to pay it back, type of thing.

But I think I’m probably preaching to the choir to a lot of people, but to all those people who are listening to this podcast who are new, there you go.

Joe Fairless: Did you create that process or that proposal for someone in particular?

Payton Pearson: It was so that I would have it for my own personal reference, but also for my real estate agents that I work with pretty exclusively, as well as my loan officer that I work with pretty exclusively. This is basically to prove to them that I’m not just talking the talk; I actually wanna walk the walk. That I know what I’m talking about and I’m actually gonna execute.

Joe Fairless: In true electrical engineer fashion, you created that process… And I would love to have been in the room when the loan officer was reading through it, and you go through everything, you go through the terminology, you go through the types of properties you’re buying, how you’re underwriting them… And then he sees that you wanna build on the Moon. [laughter] I’m sure he’d be like “Payton, I was with you all the way up to this point, but… Seriously? You’re building on the Moon? Come on…”

Payton Pearson: Well, that’s literally the Moon  shot. [laughs]

Joe Fairless: Well, I love it. You’re the first person I’ve interviewed who has the vision of building hotels on the Moon, so props to you for that. Let’s talk about the three deals you have done. You said you live in one of them, so you’re house-hacking one of them… What about the other two? Tell us the purchase price and the business plan.

Payton Pearson: Absolutely. The first four-unit apartment complex that I purchased was just a nice little four-unit apartment complex in this place called Kettering, Ohio, which is a decent, little suburb. It has some nice school, it’s pretty clean… And I bought it for 143k. That’s the great thing about the Dayton area, at least if you’re gonna buy in a decent part of the Dayton area, because you don’t wanna buy anywhere. You’ve gotta make sure that you’re buying somewhere that you can handle.

So yeah, 143k was the purchase price, and I structured that deal with my parents, actually. They lent me some money, and they get a rental dividend every month, that I pay them. So I pay the mortgage down, I take my share, I pay off all the electrical, and the gas, and the sewage, and the garbage and everything else, and they get their $315/month, and I get my Porsche. So that was the first four-unit apartment complex I bought.

Joe Fairless: How much did they lend you?

Payton Pearson: They lent me $15,000. Just at the critical point where it might not be worthwhile to lend the money; you might just wanna try to raise it yourself and wait a little longer… But it worked out.

Joe Fairless: And how much are they receiving a month?

Payton Pearson: $315/month. They’re going to get all their money back in just about three years.

Joe Fairless: Yeah, that’s good.

Payton Pearson: Yeah.

Joe Fairless: You hooked them up.

Payton Pearson: I did, I did. And basically, the way you make it work – and I know that you know this, but for the audience – the way you give good incentive to the people who are gonna give you money to buy properties is you just offer that you’re gonna pay them a dividend every month, and they give you money so that you can do the down payment, pay for all the bills, pay for all the mortgage and everything else, and take care of the tenants. That way, they get their X number of dollars per month, and then you’re taking care of everything else. You might get a little bit more, but you also have to pay for the mortgage and all the other stuff. That way, their hands are clean and you’ll be able to keep on getting money from these people, and it won’t be a big deal.

Ultimately, my parents wanna do this same type of process with me for about 6-10 properties, which will come to anywhere from $1,800 to $3,000 that they’re gonna be making per month, once they’re done with it. That’s the structure of the first one. I put in about $20,000 for the down payment, they put in the other 15k.

Joe Fairless: Okay. And why did you borrow the 15k? Was it because you didn’t have the 15k, or you didn’t wanna put that in, so you needed to bring on a partner?

Payton Pearson: Yeah, so I had other things where my money was invested, and I didn’t wanna take it out at that time, because those other things are also growing, and they have potential to grow very aggressively… So I wanna leave them where they are.

Joe Fairless: Like what?

Payton Pearson: Well, I have a little bit in 401K, a little bit in a Roth IRA… Those things are not particularly aggressive growth, but nevertheless, I have some in there. I have some in a Robin Hood account, and I have a significant amount in cryptocurrency. That – I’m just gonna let that stay there. I could take it out at any time, it’s completely liquid, but I’m not gonna take it out, because I want that to keep growing.

So I can save with my current job — I also do some part-time jobs on the side, so that I can acquire even more money for down payments, but I can save anywhere from $50,000 to $80,000 a year if I’m really lean with my expenses, which I work hard to be lean. And then at that point, I had about $20,000 that I was willing to put in… And I asked my parents to partake in this with me. I showed them the business model, I showed them the plan, and they told me what they wanted to do, and that’s what we’re gonna do. Right now I have another $10,000 loan that they gave me for the other property that I’ve just bought, and I’m gonna pay them back just straight cash, plus 1k. So that’s not gonna be one where they’re gonna be invested in it with me; I’m just gonna pay them straight back.

Joe Fairless: Let’s talk about that other one. What are the numbers on that other one?

Payton Pearson: The other property I bought was in this place called Oakwood, Ohio, which is the nicest municipality in the greater Dayton area. It’s where there are million-dollar properties and whatnot. But I got a property, a four-unit apartment complex, for $129,900.

Joe Fairless: Wow.

Payton Pearson: Yeah. It was an incredibly good deal. When it was all said and done, the property was appraised (when we were closing) for $179,000. So that was an instant $50,000 to my equity. Plus the $32,000 that I put in the down payment, means that I have $82,000 of equity instantly in the property. So ultimately what I’m gonna do with that is I’m gonna of course let the loan mature a little bit, because it has two, and then in about six months I’m probably gonna take out a home equity line of credit on it, so that I can use that money towards another down payment, for another property. And also for some improvements to the property itself.

The previous owner of it – she’s a nice, old lady, a real estate agent, but she really didn’t take the best care of the property. The property is in decent shape; it’s what you would call “a sound, but ugly property”. It’s got good water heaters, it’s got good HVAC etc. but it’s just dirty, and the carpets need to be replaced, and there’s one or two cracked windows, and the paint needs to be repainted, and stuff like that.

I actually just got one of the units renovated, and it looks sharp. I found a really good contractor that did it for very cheap, and he does really high-quality work. He was recommended to me by my real estate agent [unintelligible [00:14:06].29] who also actually happens to be top 50 in the greater Dayton area. She’s a very good real estate agent, so I basically hit the jackpot with her. So that worked out.

Joe Fairless: How do you do a home equity line of credit on an investment property? Well, I know how you do it, but do you have a lender that will do that? Have you already figured that out?

Payton Pearson: Oh, absolutely. This is something that we definitely wanna talk about, don’t we? Okay, so a home equity line of credit (HELOC), what that is is you’re taking a line of credit out on the selling value of your property. So what happens is a bank will come in and appraise your property. You have to pay for the appraisal, so you need to keep that in mind. But they go in and they appraise your property, and they say it’s worth X number of dollars. In my case, it was $179,000 that the property appraised for. And then, typically they’ll give you anywhere between a 70% to an 85% loan-to-value HELOC.

If my property is $179,000 appraised value, then they might give me $179,000 x 0.8. Currently, I have a mortgage that’s about 97k. If I get the property appraised for 179k, and they’re gonna give me an 80% loan-to-value, or 80% value for the HELOC – I might be messing up my terms here; correct me if I’m wrong – they’ll give you 80% of the value of your property, so it’d be $179,000 which is the appraised value, times 0.8. You can do a calculation on that; it’s something like $150,000-ish… And that value is the value on which you’re taking the HELOC.

I don’t know all the details of it, because I still haven’t done it yet, but HELOCs – one of the great things about it is that they’re simple interest. So they’re not amortized, like your mortgage. They’re simple. If you go to a bank and they say they’re gonna give you a  HELOC for $30,000 and then they say it’s at 6%, then that’s just 6% interest on a 360-day year. It ends up being something like — say you had a line of credit of $10,000. That’d be like $50/day that you’d have to pay back. I haven’t done that yet.

Joe Fairless: But have you confirmed with a lender that they will do that on an investment property?

Payton Pearson: I’ve talked to my loan officer, but we haven’t actually gone through the process. It’s still gonna be a while.

Joe Fairless: Alright. Got it.

Payton Pearson: The loan has to mature first, so…

Joe Fairless: Alright, so there might be some challenges there, but maybe you’ll resolve it. So let’s talk about the four-unit… You bought it for $129,000. What are the rents?

Payton Pearson: The bottom units – one is going for $575; that’s the renovated one. And the one that I’m gonna rent out here soon is gonna be $525. And the two upper units are $450 and $460. Those are way below market right now. The market rents for apartments of similar type and size in that area are right around $575 to $650. They’re way below market rates, and that’s because the previous owner rented them out for way below market rates.

Joe Fairless: Okay. So right now it’s bringing in around $2,010, and you can increase that an additional couple hundred bucks?

Payton Pearson: Well, if I get all the units rented out for $600, that would be $2,400/month.

Joe Fairless: Do you have to do anything to get it move-in ready?

Payton Pearson: No, not really. The downstairs unit that I just renovated was basically the extent of what I had to do.

Joe Fairless: So right now it’s 1.5% on the rent ratio, dividing the rent by the purchase price… That’s solid. And then if you’re able to increase it from $2,010 to $2,400, that’s gonna be 1.8%. That’s a nice cash-flowing deal, and in a  nice area, too. How did you find both of those four-units?

Payton Pearson: The first one I purchased, the real estate agent with whom I work I found through my running group. I’m a distance runner; I run marathons, and stuff like that… And I’ve found her because she’s also a runner, and I basically told her my story and what it is that I was seeking to do. I told her the type of properties that I was looking for… And this was about the November timeframe of 2018. And she said “Yeah, I can help you.”

We decided to go out on one weekend and look at four separate four-unit apartment complexes in the Kettering area. Three of them were pretty horrendous, and then the one that we ended up settling on was just head and shoulders above the other three. The previous owner had bought it for $90,000 – it was a short sale – and he had renovated all four units. He took very good care of the property. He had fixed some of the cracks in the foundation, he had replaced the water heater… He had done a lot of work with it and he made a humungous profit off of it because he bought it for 90k and sold it for 133k. But we did that, and that’s how I found the first one. That’s why I’m continuing to work with my real estate agent. She’s very good.

Joe Fairless: So the first one was that agent, the second one was that agent, too. Right?

Payton Pearson: Yeah.

Joe Fairless: Based on your experience as a real estate investor, what’s your best real estate investing advice ever?

Payton Pearson: What it comes down to, the number one thing, period, end of story, is not just location, but you have to run the numbers. You must, you must, you must, you must run the numbers. If it is now cashflow-positive, then you really strongly wanna consider not buying that property. Now, if you can afford paying more than you’re making off of the property for an extended period of time, then maybe you can consider purchasing it. But that is a very, very strong caution.

Real estate is very forgiving. Inflation rates of properties over the course of several years are pretty consistent at right around 2%-3%, sometimes higher if you’re in Hollywood or something like that, sometimes lower… But they’re pretty consistent nevertheless. Rental rates also go up by about 2% per year. So real estate is very forgiving, but you must, you must, you MUST run the numbers and have them down solid in your mind. You need a net operating income that is positive… At least eventually.

Joe Fairless: Yeah, that’s an important component.

Payton Pearson: It’s the number one thing, because in order to make a business profitable, and therefore solvent and actually last, you have to make money. That’s what it comes down to. Don’t be afraid of tenant screening. If you buy a property that is severely under-rented, it’s probably being rented to fairly poor people. I’m not just talking economically, I’m talking about quality people, poor quality people.

This is not me trying to be mean or anything, but you’ve gotta be realistic. There are people that are gonna damage your property and whatnot, and you can’t work with them; don’t be afraid to find a way to kindly get them to leave, because you’re trying to improve the properties and make the business profitable. It has to be profitable, otherwise you can’t do anything with it.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Payton Pearson: Yeah, sure.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:21:51].26] to [00:22:35].15]

Joe Fairless: Best ever book you’ve recently read?

Payton Pearson: That’s a tough one, I’ve read several… I’m just gonna go with the classic here, Rich Dad, Poor Dad.

Joe Fairless: If you had to start over with no capital, what would you do?

Payton Pearson: What year are we talking here?

Joe Fairless: Right now.

Payton Pearson: Okay, alright. Wow… I would probably look deeper and research more of how to raise funds with private lenders.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Payton Pearson: The property that I am currently living in. It’s a single-family home. It is in a blue-collar neighborhood. I bought it for higher than I probably should have, and I’m probably not gonna be able to sell it for a profit.

Joe Fairless: Best ever deal you’ve done?

Payton Pearson: That would be the Oakwood property that I’ve bought for $50,000 below appraisal.

Joe Fairless: Best ever way you like to give back to the community?

Payton Pearson: With the profits that I make from my real estate work, as well as my job, I give 10% back to my church, and as we were talking about earlier, build up the properties that I own, and increase people’s wonder and set a positive example for everyone else to follow, of not giving up, working your butt off, and achieving anything that you set your mind to.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Payton Pearson: You can find me on BiggerPockets.com. My name is Payton Pearson, and I’ve got quite a bit of information on there now.

Joe Fairless: Well, Payton, thank you for being on the show, talking about the way you intentionally set up your business very thoughtfully, putting together that business plan, and your vision for where you’re headed… And how you were able to find the deals through relationships, groups that you’re in, and then also the numbers on the deals, and how you navigated some of the tricky parts of those. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Payton Pearson: Thank you! Thanks for having me.

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JF947: You’ll Lose MILLIONS If You Don’t Understand These Tax Principals

The IRS is merciless, and if you don’t understand how real estate investments and the tax laws work together, you could be at a loss. Focus on understanding self-directed IRA’s and the entities you use in the purchase and sale, and don’t just rely on a cheap custodian to help you. This is a great episode!

Best Ever Tweet:

John Hyre Real Estate Background:

– Tax attorney, accountant and real estate investor
– 19 years of experience as a tax attorney/accountant and 14 years of experience as a real estate investor
– Investor in low income rentals and small mobile home parks
– 95% of his clients are real estate investors
– Prior to owning his company, he worked for two of the Big Five accounting firms and for several Fortune 500 companies
– Based in Columbus, Ohio
– Say hi to him at http://www.realestatetaxlaw.com
– Best Ever Book: Grit by Angela Duckwork

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tax principals with John Hyre


Joe Fairless: Best Ever listeners, 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. We only talk about the best advice ever, we don’t get into any of that fluff.

With us today, a tax attorney, an accountant and a real estate investor, John Hyre. How are you doing, John?

John Hyre: Very good, thank you much!

Joe Fairless: Nice to have you on the show, my friend. John has 19 years of experience as a tax attorney/accountant and 14 years of experience as a real estate investor. He’s an investor in low-income rentals and small mobile home parks, based in Columbus, Ohio. With that being said, John, do you wanna give the best ever listeners a little bit more about your background and your focus?

John Hyre: Sure. My focus is making sure you keep it, because you earned it. Most of my practice is tax-oriented, it’s mostly real estate investors, small businesses and self-directed IRA investors. I do the attorney part now, I refer the CPA work, meaning the tax returns and the bookkeeping out.

I also invest on the side, just sort of building a little bit of wealth on the side, mostly high cash flow, low income, which is a whole separate podcast and story onto itself. Those are the basics.

The client base is nationwide, and I’ve been at it for a little while now.

Joe Fairless: What’s the typical client hire you for?

John Hyre: That’s a hard one to break down…

Joe Fairless: Top three categories for why they hire you.

John Hyre: The top three categories… I’ll tell you, the self-directive IRAs, the self-directed 401k practice is absolutely exploded over the last three years. I won two tax court cases and word kind of got out there on that. So I do a lot of that work, and a lot of people call in and say “Look at my whole structure, top to bottom.” Entities, books, taxes, everything. And usually we figure out a fixed fee and then I save them a ton of money.

Finally, a very specific question – someone might call in with a very specific, very pointed question, which I will of course keep the discussion to the parameters that they define. I would say those top three define it.

Joe Fairless: What do people hire you for with self-directed IRAs and 401k’s? Because I’m under the impression – but obviously, it sounds like I’m wrong – that you can just go to a custodian, like iPlan or Pensco or something, and then they’ll handle everything for you.

John Hyre: They don’t handle everything. They won’t do planning advice or structuring, or at least they’re not supposed to. If you read their paperwork, it says they don’t do it, and if they do it’s not their fault if it’s messed up. A lot of the people you talk to on the phone there, while they mean well, are also salespeople and also just don’t have the expertise.

I get a lot of referrals from those custodians that send me people. For example, people will ask “We wanna setup a checkbook LLC. Can we lend money to our uncle? Can we invest in such and such project? How do we avoid prohibited transactions?” Those are a lot of the questions that I get, and I’d say about 70% of my referrals come straight from straight from the custodians, questions they really don’t wanna answer.

Joe Fairless: You won two tax court cases… What was the case about, if you can talk about it?

John Hyre: I’ve actually won more than one, and by winning, we didn’t go to trial. The IRS decided instead of going to trial, they would just tell my client they no longer owed them any money, and could we just call it even and walk away… Which I consider a bigger victory than going to trial, because you avoid the expense. The two cases are specifically self-directed IRA cases.
The first time we had a guy that was a rehabber mostly, with his IRA, and he had done some things in there that were questionable; they were grey, but we convinced the IRS that “No, that’s okay.”

I’ll give you an example… His IRA ran out of money on a rehab, so he put some of his own personal money in there, which is usually a no-no, but we managed to show the IRS some rulings and some case law that indicated, “You know, we have a fighting chance. Do you really wanna go to court with this?” so they decided to back off.

The second guy had a very large Roth IRA and did a lot of investing. We’re talking rentals, buy and sell, lending, a private equity investment… He did all sorts of things, so there was a lot for them to look at. We spent a lot more time on that one because of the number of transactions. We went through a lot of different things, but ended up in the same position. It was kind of like the Obi Wan Kenobi moment, “These are not the droids you’re looking for.” “These are not the droids we’re looking for” – they agreed with that, and so ultimately we got a very happy ending. There was a half a million in taxes at stake, and we got him out for — I think my fee on that one was in the very low five-figure. He was extremely pleased.

Joe Fairless: Just so I’m clear on that second one… It was the same issue that was being discussed, mixing personal money with IRA money?

John Hyre: That one had a multiplicity of issues. For example, he had a trust that the IRA invested into, that he controlled the trust through a friend who was the trustee, so the IRA was arguing the trust was illegitimate, they argued that you can’t have a friend act as a trustee, which – yes you can, as long as it’s done correctly… They also tried to argue that certain transactions were illegitimate based on the details. Those I won’t go into. Bottom line is we persuaded them that they were wrong.

It took a while. The auditor didn’t wanna listen, the appeals people, who are usually pretty good, didn’t really understand IRAs, which is normal, so we didn’t really get any traction until we talked to the lawyers. I do audit and tax court representation all over the country, but what we do is we bring the cases here to Ohio, we have the trial in Columbus, and the attorneys are actually out of your hometown, Cincinnati. So I know who they are; they come up here, and I’m used to dealing with them. Actually, I have to say, they’re pretty reasonable, the IRS lawyers. They can be aggressive, but they’re pretty reasonable.

The client was in Florida, and ultimately we went through the transactions one at a time until they decided “This really isn’t a good case for us, never mind.”

Joe Fairless: Does that mean that we can mix our own personal money with a self-directed IRA and be okay?

John Hyre: You can, I don’t recommend it. If it’s done, it has to be done in a very specific way. It creates complexity and it creates subtle traps, which is why I recommend people, if they can, just not go there. Keep your IRA and personal investments separate. That’s ideal. With that said, can they be mixed if it’s done in a certain way? Yes. Typically, either an undivided interest, especially if we’re dealing with a note, so maybe the IRA lends 70k, I lend 30k, and it’s 100k total.

I’m oversimplifying… There are some tricks and traps in there that we have to watch for. The biggest one is we have to prove that we did not need the IRA money to enter into a personal deal. You can never use an IRA as assets or income to benefit yourself personally, no matter how small or indirect that benefit. So if you needed the IRA to get into the deal, for example, that would be an example of using the IRA to benefit you, so the first thing we do is try and create a record that “Hey, I could’ve done this deal myself. The reason I brought my IRA in was not because I needed it – I have other sources of money – but because it was a good deal for the IRA.” That’s one example.

Sometimes we’ll do joint investment of personal and IRA money through an LLC. Really, it just depends on the nature of the investment and how much time we’re gonna be in the investment and how much liability there is. For example, I’m more inclined to use an LLC where low-income rentals are concerned, because those are high-liability items. But if there’s a loan, lending money is not really high liability. People don’t tend to trip and fall on notes, so usually just a cheaper joint investment, the same way you might invest in a house as tenants in common is a cheaper, more efficient way to do things. Because we don’t wanna overcomplicate or over-bill the client if it can be avoided.

Joe Fairless: What are some issues that you see your clients or prospective clients have from a tax attorney standpoint that can be avoided?

John Hyre: Tons. That’s two or three podcasts right there.

Joe Fairless: You’re booking me up for the month right now.

John Hyre: Yeah, we’ll fill you up. Let’s see here… In terms of IRAs, it’s not getting help ahead of time, listening to the custodians and being cheap and thinking that you know it. The IRA rules are complicated, and the penalty for the IRA for screwing up is death. The IRA dies if you commit a prohibited transaction; that can be horribly expensive. So usually, even if you do some research, get a little bit of help; get an attorney, talk to them about what you can and cannot do. Put some time in up front.

With general taxes, I would say the biggest issue by far that clients have is horrible record-keeping. They’re entitled to deductions, but they never back it up. They never do what they have to do to make it legit in the eyes of the IRS to be able to prove it. I happen to be married, and I can tell you there’s a big difference between being right and being able to prove to your spouse that you’re right. That second step is where investors mess up. They don’t do what it takes to prove to the IRS that they’re right. Scanning receipts, keeping a good set of books, especially for QuickBooks… And it’s normal; entrepreneurs are normally gunfighter/cowboy/can-smell-a-deal-a-mile-away, and they’ll do the bookkeeping work maniana. And maniana becomes maniana-maniana-maniana, and there’s the issue.

Joe Fairless: I’d love to learn a little bit more about the proving — well, I wrote my notes “Prove to your spouse that you’re right…” [laughs] The intention behind that, which is make sure that we can prove to the IRS that we are right and that we have accurate books… You mentioned scanning receipts and having a good set of books. Let’s say we hire a bookkeeper; he or she is taking a look at our credit card transactions, our bank accounts, and putting them in a spreadsheet. So we have that allocated. What do we need to do with the receipts? And do we need receipts at all if we have them in the credit card statement?

John Hyre: You do need the receipts. In fact, because the IRS has had its budget cut and audit rates are down, they’re getting sneakier and trickier. They’re sending out letters that say “Show me February and May receipts for this business.” And then let’s say you’re missing 60% of them, they just allow 60% of all your expenses on the return. You need to have receipts. The best way to keep them – scan them.

What we do is we pay our children to do it. There’s a tax angle in paying your kids. You get a tax deduction; your kids almost certainly will not pay any tax on the income, because their standard deduction is bigger than what you’re paying them, and if you pay them through not a corporation, so any entity, but something that’s taxed as a corporation… If you pay them through not a corporation and they’re under 18, they also don’t pay social security tax. So you’ve shifted money within the family. You still have indirect control of the money through the kids, you’ve gotten a tax deduction… Once they scan your receipts, save them in three or four different places, and name them by the date. I name my receipts – today would be 030117A, 030117B. I don’t even put what it was for, because I will never look at them again unless I get audited, but I can find them by date. If I get audited, I’m gonna show my QuickBooks to the IRS, and they’re gonna say “Show me February receipts for car expenses”, and I can just pull all the receipts for that month and have a VA or somebody go through the receipts and figure out which ones were for cars, and hand them over to the IRS.

Joe Fairless: Do you use a particular app for that?

John Hyre: I don’t. I probably should, and I suspect that kids are out of the picture… The cheap, easy labor of those kids are my app. I don’t even know what app they use to scan things, frankly. They deal with it. So once I don’t have the kids around, I will probably have to discover one of the better apps. I know there are a ton of them out there. Same thing for tracking mileage. There are a ton of apps that will doing if people would just take the time and implement it.

So once you’ve got the receipts, ideally you keep things in QuickBooks; I’d prefer that to a spreadsheet – it’s a lot better record keeping system. As long as the receipts tie to the QuickBooks that tie to the banks statements – man, that’s gonna be a short audit.

Just last year I had my shortest, cheapest audit ever. I charged a guy $1,300 to do the audit and it made me sick to charge that little. But he had a flipping business — more really an assignment business on the side… So he had a day job, he had a side business on schedule C; he was an engineer, he listened well to directions, he took directions well and he was detail-oriented. That audit lasted about 15 minutes of me showing the IRS agent the receipts, and about an hour and forty-five minutes of me flirting with her and passing the time.

Joe Fairless: [laughs] Let’s say you get the letter that states “We need to see your receipts for February and May” and you don’t have the physical receipts. Have you heard of a case where the IRS is “Well, really? Then how about you show me for the rest of the year, too?”

John Hyre: Absolutely. The whole point of those audits is to see if they’ve got an easy target. The faster and the clearer you respond to that letter, the more likely they are to be done and gone. So first rule with the IRS is “Never lie.” The second rule is “Don’t answer questions that were not asked.” The third rule is “Don’t let the audit metastasize”, and that is precisely what you described, how an IRS will metastasize. They smell blood, they spot weakness, they expand the audit.
Joe Fairless: What was the second rule?

John Hyre: Don’t ever answer a question that wasn’t asked. People do that all the time, that’s why we don’t like clients talk to the IRS. They wanna talk and show the good faith and how innocent and wonderful they are, and the IRS agent shuts his mouth and listens, and gets a lot more information than you want. When they ask a question, no matter how stupid or irrelevant you think the question is, you answer the literal question, with the truth, nothing more, nothing less. You don’t expand.

Joe Fairless: Alright, let’s switch gears to your investing in low-income rentals. What’s the last low-income rental you purchased?

John Hyre: It’s not really a rental… I got one I’m about to flip. The last low-income rental – I bought one if my 401k back in May. I am so busy with the practice I’m not out actively looking, but some of my clients are wholesalers and they bring me things. A wholesaler brought me a low-income rental here in Columbus… It’s not a war zone, but it’s not a beautiful area either… But this was a great deal.

It was 15k. I think he made 5k on it. The lady had been in there for 12 years, the rent is 620/month; it needs about 10k to rehab, but not today. I’ve had this thing now for almost a year, and we’re now getting ready to replace the roof with about how half of my net cash flow.

It’s been a great property. The only real quirk with the property is the tenant has been there so long, she’s hard to train. I have a property manager, because when you have something in an IRA or 401k you don’t wanna run it yourself; there are tax problems with that. You really need to have an outside manager.
For her, the manager needs to show up on the third Thursday of the month, and text her on the third Wednesday of the month. She gets her government check the third Wednesday. You have 24 hours, and she will pay you in cash. If you wait 48 hours, that money will be gone. So you have to show up and pick it up from her. She’s incapable of writing a check. That’s the only real quirk. But if you do the numbers, it’s a sweet deal, and it’s perfect in my 401k. I don’t pay tax on it, I’ll continue to reinvest the money.

Joe Fairless: And you’re using the money from the rental to improve the property? Is your goal to sell it in a certain amount of time, or is this a long time hold?

John Hyre: This is a cash flow property. I could sell it right now in this market for probably 30-35. Maybe if I had a California or a foreign investor maybe 40. It’s funny, I tell my California investors “Be careful, don’t tell people you’re from California, because if they hear that, they charge you more, and you pay.” But no, I’m gonna hold that for the cash flow. I am cash flowing about 5k/year on that property, which if you figure I had 15 in it, that’s great.

For the first four years I’m gonna reinvest about 2,500/year into updating the property. For example, the roof really needs replace. It’s still functional, it’s not leaking, but I can tell it’s gonna go, and I’d rather just deal with it now. Plus, keep her in there. If she’s been in there 12 years, le’s make the place a little nicer. It’s a swell return.

Joe Fairless: Based on your background as a tax attorney, is there a particular reason why you choose to do fix and flips, or low-income rentals versus other opportunities?

John Hyre: You know, some of it is based on the tax law, but some of it — it’s a long story how I got into it. Bottom line is I bought a book called Deals On Wheels by Lonnie Scruggs, almost 20 years ago. And to experiment, I started buying mobile homes really cheap and turning around and selling them on payments, and I got to know the low-income way of doing things. It was a hard lesson… I used to be a really nice person, and dealing with low-income tenants will fix that problem quick.

I learned you have to be really firm, you have to be careful with those guys… But I love the cash flow. I love the cash flow – that’s the real reason I do it. One of these days I may look at other types of rentals, but as long as I can find decent management — because I have learned I don’t wanna manage that. I will probably get arrested if I manage for too long, and they’ll find bodies everywhere. “Who’s the tax attorney that took [unintelligible [00:19:41].13] the water tower in this low income neighborhood?” “Oh, that was Hyre.” So we can’t have that. We make sure that other people manage them for me.

Joe Fairless: [laughs] The number one challenge, at least from what I’ve heard, with low-income rentals is the maintenance and the high tenant turnover. Have you experienced challenged in either of those areas?

John Hyre: Definitely. We’ve gotten better at picking tenants. Now, I’m if Hispanic background. I grew up speaking Spanish, my wife’s from South America, so we do like dealing a lot with immigrant tenants, especially of Latin background. Politically incorrect as it is to say it, the first generation comes here to work, the second generation – not so much. So we really like first-generation… They’re gonna bust their butts, and if you take care of them, by and large they’re gonna take care of you. I do find you get a better result when a woman is present. If it’s all guys, that’s really hard on the property.

You’ve gotta get a feel for their job history and background, are the kids in the local schools…? How itinerant are they? Because they can be very itinerant, but if you take care of them, it’s a good property, they tend to stay, they tend to be very good about referrals… You have to be careful with in particular Latino immigrants. They fix the property up for you — and put that all in quotes, “they fix it up for you”… They think it’s nicer and they think they fixed it up, and you look at it and think, “Oh dear lord, I’m gonna have to tear that down and just start from scratch on whatever it is they did.”

They have a different way of looking at saving money, and they really believe they’re saving you money. And based on my experience overseas, living in Chile, for example, that may work there. That approach just doesn’t work here. You really have to control what they do with the property, drive by it periodically, make sure that half their extended family isn’t living there.

Joe Fairless: John, what’s your best real estate investing advice ever?

John Hyre: Tax-free investing. Don’t pay taxes. Do it through an IRA, an HSA, a [unintelligible [00:21:35].09]  savings account, a 401k… There are not deductions that are bigger, and we’ve gotten a reprieve. There was a bill in Congress – in the Senate, specifically – that showed the Democrats game plan for taking apart IRAs. They don’t like Roth’s in particular. And seeing those, how they figured they’re gonna win and they laid out their game plan – everybody was of course surprised by the result – we’ve gotten a reprieve, and we have some time to use this technique and this device before Congress decides it’s losing too much money. It would be lunacy to pass it up.
And I walk the walk. I invest in my properties whenever I can through one of those devices. I don’t wanna pay the tax.

Joe Fairless: With the 1031 exchange you can continue to defer the gains until you die. Help me clarify something… Whoever picks up your property after you die – it can continue to be up until what… Is it 13 million dollars in there…?

John Hyre: We’re mixing taxes, and it’s easy to do. On the income tax side, if you 1031 till you die, which I think is a great strategy, your kids inherit property – or whoever it is that you have inheriting – and you get what’s called “the basis step up”. So let’s say you bought it for 100k, depreciated it like crazy for 28 years or more down to zero. They inherit it, and let’s say when they inherit it it’s work 300. The day they inherit, they have a basis of 300. They can sell it that day and not pay income tax. So that’s the income tax side.

Then what you’re talking about is the estate tax. You can have up to 11 million in your estate with no planning. This is assuming you’re married – otherwise it’s about five and a half million. You can have 11 million with a little bit of planning in your marital estate and not pay estate tax – which is very high. Estate tax is up there around 50%, so you don’t wanna pay any.
Once you get past that 11 million, you need to do some planning in order to not pay estate tax on the remainder.

Joe Fairless: Thank you for clarifying. Are you ready for the Best Ever Lightning Round?

John Hyre: Hit me!

Joe Fairless: Alright, first a quick word from our Best Ever partners.

Break: [00:23:44].12] to [00:24:26].07]

Joe Fairless: Best ever book you’ve read?

John Hyre: Let me think a minute. Best ever book I’ve read? I read so much that I’m starting to smoke through the ears. The best most recent book I’ve read, the one that comes to mind – there’s a book called Grit, and it is about persistence and toughness and just pushing through. That was a brilliant book.

Joe Fairless: Best ever deal you’ve done?

John Hyre: Probably that little rental I’ve just described. I really like that deal. I’ve done stuff that’s close to that, but not quite that cheap.

Joe Fairless: What’s the best ever way you like to give back?

John Hyre: Two things: volunteering as a debate coach. I coach kids debate; I teach verbal violence, and it’s just fun to see the light come on and the confidence in their eyes. Second, there’s a school here in Columbus, St. Charles School For Boys that we like to give to. I plan ultimately on funding a scholarship; they’re a wonderful school, they change lives.

Joe Fairless: What’s the biggest mistake you’ve made on a deal?

John Hyre: Partners. I’ve almost never bought a bad deal, but I’ve gotten involved with bad partners, I didn’t do my due diligence. In one case I didn’t do the due diligence on the spouse, and it turns out that she was two scoop-fulls of crazy, and it caused a lot of problems, big time. It cost me way more money than they property ever could have.

Joe Fairless: I enjoyed the two scoop-fulls of crazy. I haven’t heard of that, I have a good visualization, so thank you for the metaphor. How do you qualify partners and partner’s spouses now for future stuff?

John Hyre: I don’t partner anymore. I don’t have the need to do so, and for now I don’t. If I were to qualify them, I suppose I would do more due diligence, asking around, looking at history, ask for credit record… This one would have been pretty hard to spot. In hindsight, the only way I could have spotted her condition was talk to enough people who dealt with her, because what’s funny is after the feces hit the rotating blade device, a number of people came up and said, “Oh yeah, she’s nuts!” I just wish I would have talked to those people, but it’s the only way I think I could have discovered it, because she was kind of like high-functional crazy. It’s not like I came home and there’s a rabbit’s head boiling on a pot of water on the stove… You really had to dig to figure her out.

Joe Fairless: What’s the best place the Best Ever listeners can get in touch with you, John?

John Hyre: Two places that go to the same website: iralawyer.com or realestatetaxlaw.com. It’s a primitive little website – I’m so busy I haven’t had time to make it nice. One of these days I will.

Joe Fairless: Well, we will have that link in the show notes page. John, thank you for being on this show, thanks for talking through the tax issues and challenges that investors will come across… Keep our receipts, and also the three rules for dealing with an IRS audit – number one, “Don’t lie”, number two, “Don’t ever answer a question that wasn’t asked” and number three, “Don’t let the audit metastasize”, so don’t let it snowball into something; immediately address it.

And the 15k flip, flip/hold that you’re doing, where you’re getting $620/month in rent; it’s worth about 30k, so it’s really not about the money you’re making on the sale, it’s more about the cash flow, and why you invest in low-income producing properties. Thanks so much for being on the show, I hope you have a best ever day, and we’ll talk to you soon.

John Hyre: Take care!


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JF869: How to Jump into a PARTNERSHIP with NO MONEY

Napoleon Hill spoke of partnerships in his book Think and Grow Rich, and today we hear about another incredible partnership that took place utilizing the same principles. Our guest brought hard work and hustle to the table without a dime in his pocket and eventually became a partner. It took many hours, learning, and extreme hustle to accomplish this, but it can be done. Hear how he did it and how you can sit side-by-side by your next millionaire partner.

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Coleman Nelson Real Estate Background:

– Co-Founder and Director of Finance and Administration of SNS Capital Group
– In 2 years went from 0 to 65 rental units, worth $3.6 million, with no money, while working a full-time job
– Previously worked for a big 4 accounting firm, with majority of his time working with one of its Fortune 25 clients
– Based in Cincinnati, Ohio
– Say hi to him at https://snscapitalgroup.com
– Best Ever Book: Cash Flow Quadrant by Robert Kiyosaki

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JF849: How to Leverage Brokers to Hustle for Deals

Brokers are gatekeepers to many deals whether they be single-family or multi family. Our guest love the multi family sector and has found clever ways to incentivize brokers, organize leads, and convert them over time. Hear how he did it and what he’s doing now!

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Stash Geleszinski Real Estate Background:

– Managing Director at Capstone Apartment Partners
– Certified Commercial Investment Member
– Specializes in multi-family investment real estate in Cincinnati, Dayton, Columbus and Kentucky
– Involved in the syndication and disposition of thousands of apartment units worth more than $100M
– Based in Cincinnati, Ohio
– Say hi to him at www.capstoneapts.com
– Best Ever Book: Think and Grow Rich by Napolean Hill

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JF762: How to Assess, Address, and Fix While Keeping Your Tenants

Never had a big issue that needs to be fixed while keeping a multiunit building? This episode will show you how, or at least what our guest did. It all worked out well, here’s his solution to a very common problem in buying homes.

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Roan Yarn Real Estate Background:

– Founder at HomebuyerPool.com; A real estate exchange portal that connects buyers and sellers
– Over 15 years experience in real estate, which began as project manager of 46-unit building in Miami
– Based in Columbus, Ohio
– Say hi to him at www.homebuyerpool.com
– Best Ever Book: The Art of the Deal by Donald Trump

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JF680: Your “Foot in the Door” Approach to REI and How to Find Your Path

Today, Joe’s book author partner, Theo Hicks, shares his story and how he jumped into real estate. He shares his first encounter with Joe at Joe’s meet-up in Cincinnati and offered help. He took advantage of an FHA loan to purchase a duplex which would be his first investment. Hear about it here!

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Theo Hicks Real Estate Background:

– Co-author of the Best Real Estate Investing Advice Ever Book Volume 1
– Chemical Engineer Major from Ohio State University
– Host of the Unplugged podcast
– Based in Ohio
– Say hi at theohicks.org

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JF618: Where She Found a $60,000 Duplex that Yielded $1,500 a Month!

She is the TOP female real estate agent in her area and sells luxury properties with multi million volumes year after year! She purchased a duplex for $60,000 and earns a fabulous cap. rate. She speaks of gratitude and passion while being smart and investing in excellent school districts. Pull out a notepad and tune in!

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Victoria Valle real estate background:

  • Been a real estate agent since 1999 and has been voted best realtor in 2015 by the Toledo City Paper
  • In the top 1% of all agents in NW Ohio and top female agent in the area
  • Say hi to her at luxuryhomesintoledo.com
  • She invests in residential real estate in the Toledo area
  • Based in Toledo, Ohio
  • Best Ever book: Halftime by Bob Buford

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JF613: Should You Hire Employees or Independent Contractors to Grow Your Business? #situationsaturday

A most important decision you will make when it’s time to expand the business is whether to hire an employee or an independent contractor. They are both very different in terms of pay, taxes, and legal safety. Hear this episode to prepare for your business’s future expansion plans.

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Randall S. Kuvin real estate background:

  • Is managing partner at Flagel Huber Flagel and been there for 31 years
  • Call him at 513.583.4041 or visit website at http://www.fhf-cpa.com/
  • Based in Cincinnati, Ohio

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