JF1481: How The New Tax Plan Can Benefit Real Estate Investors #SituationSaturday with Tom Wheelwright

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Tom is back on the show to tell us about the new tax law and how we, as real estate investors, can use it to our advantage and benefit. Without a doubt everyone will find something to learn in this episode, Tom is a tax expert who travels with Robert Kiyosaki to teach people about this, and we get it free today! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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 fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment for you called Situation Saturday, and the focus of our conversation today is how the new tax plan can benefit real estate investors. Whether you like or don’t like the  president – well, there was a new tax plan, so we’ve all gotta deal with the tax plan, and what are the ways we can benefit from that as real estate investors.

We’re gonna be talking to Tom Wheelwright, who has been on the show before; I’m really grateful to have him as a guest again. How are you doing, Tom?

Tom Wheelwright: Good. How are you, Joe?

Joe Fairless: I am doing well, and nice to have you back on the show. A little bit about Tom – he is a CPA and CEO of Wealth Ability. He is the best-selling author of Tax-Free Wealth. What an incredible, incredible book. Please go buy that. Save yourself some money. I highly recommend that book. He’s also a Rich Dad advisor. He specializes in helping entrepreneurs and investor build wealth through practical and strategic ways that permanently reduce taxes… And you might recognize his name from the show, because about 1,000+ days ago – it was actually episode 387 – I interviewed Tom. The title of the episode is “Rich Dad advisor Tom Wheelwright says your IRA plan is wrong, and how to be tax-free till you die.” Episode 387, if you wanna listen to that.

With that being said, Tom, will you give the Best Ever listeners a little bit of a refresher of your background, and then we’ll roll right into the tax plan?

Tom Wheelwright: Yeah. I grew up in Salt Lake City, Utah, I went to the University of Utah, I have a bachelor of Arts and Accounting from the University of Utah. Then I received my Masters of Tax from the University of Texas down in Austin. I spent seven years with Ernst & Young, including three years in the National Tax Office in Washington DC. I actually was there the last time we had major tax reform, back in 1986… And what I did there was teach CPA’s actually how to help their clients reduce taxes.

Then I spent four years as the in-house tax advisor for a Fortune 500 company, and 25 years with my own CPA firm, and then we launched Wealth Ability in January to really expand the number of people we can serve. So we’ve actually created a network of CPA’s that within the next couple of years it will span the globe.

We have people in Australia, we have people in South Africa, and of course, throughout the United States. It’s very exciting; I have the great privilege of traveling the world with Mr. Robert Kiyosaki, author of Rich Dad, Poor Dad. We’re actually headed to South Africa, and then on to Australia. It’s always fun to be with Robert, and be on stage, and talk about taxes, which are pretty much the same around the world.

Joe Fairless: That’s interesting. I’m surprised they are pretty much the same around the world. I just assumed that certain countries would not be as favorable to real estate as United States is… Because I think that United States is very favorable  to real estate.

Tom Wheelwright: I would say it’s probably the most favorable to real estate. All countries are favorable to real estate investing, because all countries use the tax law as incentives for doing what the government wants done, and that includes building housing, that includes building commercial buildings…

Where the U.S.  is particularly beneficial where other countries aren’t is that we get tax benefits for used property, not just new property. Many countries allow depreciation only on new property, and not on used property. We actually take depreciation over and over and over again, which is a pretty interesting benefit when you think about it.

Joe Fairless: I never thought of it that way… Yeah, I could see how it would make sense to only do depreciation on new property. But let’s not say that too loudly, right?

Tom Wheelwright: And in fact, in this new tax law we’ve got additional tax benefits for used property, that we’ve never had before. So we’re actually going the other direction – we’re getting more and more aggressive with real estate. Of course, it helps when your president is a real estate investor.

Joe Fairless: Yes, absolutely. There might be some alignment of interest there with what he was doing. Talking about the new tax plan, what are some ways that we can benefit as real estate investors? What do we need to know about?

Tom Wheelwright: It’s pretty amazing actually what happened. One of the biggest new tax benefits is bonus depreciation. Bonus depreciation means that you can deduct 100% of the purchase price in the year you purchase things that are subject to bonus depreciation. Historically, bonus depreciation only applied to new equipment, so it was really aimed at manufacturing. This year, beginning September 27th, anything purchased  after September 27th of 2017, now what we have is used property… And it applies to more than just your basic equipment.

If you think about when you buy a property… You’re buying investment property, and you’re really buying four things, essentially – you’re buying the land, which we all know doesn’t depreciate; you’re buying the building, which continues to depreciate at the same rates that it has in the past, but you’re also buying land improvements, like the landscaping, the outdoor lighting, outdoor structures, things like that. And you’re buying the content of the building, which might include even ceiling fans, window coverings, a lot of the electrical a building that’s commercial.

Those last two things, the land improvements and the content, are subject to bonus depreciation. If you look at the typical residential real estate, you’re going to be at about 30%. If you do a cost segregation, which that’s what you have to do to take advantage of this – you need to do a cost segregation, which you should be doing anyway… But you do it, and you hire a CPA and an engineer to go out and do a cost segregation on your property, and they come up with a percentage of the property that is content, and a percentage that’s land improvement.

When they do that, whatever that is – and typically, on a residential property that’s gonna be around 30%, and on a commercial property even more… When they do that, that 30% is entirely deductible the year you bought the building.

So let’s say you go out and buy a small million-dollar building. That’s not a big project. You go out and buy this million-dollar project – that means that you essentially could end up with a $300,000 deduction the year you bought it.

Joe Fairless: Just in this one aspect of taking the bonus depreciation, not including operations or anything else.

Tom Wheelwright: That’s right. That is just the depreciation. $300,000 on a million-dollar building. It means this much… The last time I was on the show I talked about IRA’s, and you know how I feel about owning real estate in IRAs. It’s really a bad idea, because you don’t get to leverage like you can, and you don’t get tax benefits. And none of this bonus depreciation — by the way, if you buy in an IRA, you don’t get any of that, because an IRA gets no tax benefits, outside of deferral.

So let’s say that you’ve got money tied up in an IRA and you go “I’d really like to buy real estate, but man, when I pull it out, I’m gonna pay taxes on that, and I’m going to pay a 10% penalty because I’m under 59,5.” Well, look at this… Let’s say that you’ve got $200,000. You pull that out and you go buy a million dollar building, so the $200,000 are gonna be taxed. However, you’re getting a $300,000 deduction. You’ve got a million dollar building and you’ve got a $300,000 deduction, so you’re actually better off pulling the money out and buying the real estate than if you left it in the IRA, and you get the leverage and you get an additional $100,000 of tax benefit, which will more than offset your 10% penalty… So literally, the very first year you’re better off pulling the money out of the IRA. You’re not gonna pay the tax, because you’re gonna get this big deduction.

Joe Fairless: Yup. So  you mentioned the 10% penalty if you’re under 59,5… What are they being taxed at? Does that just depend on what your tax rate is?

Tom Wheelwright: Yeah, so you have your tax rate. If your tax rate is 25%, then you’re gonna get a 25% tax on that $200,000, so $50,000, but then on top of that, you get a 10% penalty.

Joe Fairless: Got it. So we’ve got bonus depreciation, and as you mentioned, you must do a cost segregation to take advantage… So if we’re buying a $100,000 house, does this help us at all?

Tom Wheelwright: Oh, my heavens, yes. You do a cost segregation — by the way, there are really inexpensive, good online technologies for doing the cost segregation yourself on a small property like  a single-family home… So you go and do that, and it’s like $400. Now you’ve got a $100,000 home that you’re gonna get a $30,000 deduction.

Joe Fairless: It’s huge.

Tom Wheelwright: It’s huge. It’s absolutely astronomically huge.

Joe Fairless: Off the top of your head, do you know the online resource for that?

Tom Wheelwright: I do. It’s KBKG.com. It’s a really good one. We’ve just had a number of clients use it just this year, and they really liked it. It only applies to small, fourplex or below, and pretty much under a million dollars… So it can’t be a big property.

Joe Fairless: I own three single-family homes, all worth — they’re around 150k, and they’re long-term holds for me… Should I do this?

Tom Wheelwright: Absolutely. No question. So let’s say you’re not getting the bonus depreciation; let’s say you bought it three years ago.

Joe Fairless: Yeah, I did, long time ago.

Tom Wheelwright: That’s okay, because you get to catch up your depreciation. We’ll take that number, for example; let’s say you’ve got 20% of the property is content, which is pretty typical when you do a cost segregation. So that means for your $150,000 home, you’ve got $30,000 that should have been depreciated over five years, and in fact, you’ve been depreciating it over 27,5 years. Well, what happens is when you do a cost segregation, the year you do it you get to catch up your depreciation. So if you’ve owned that property for three years, you should have taken 60%. It’s actually more than that, it’s closer to 70%… You should have taken 70% depreciation on that $30,000, and what you really took was 10%. So what you’re gonna get is 60% of that $30,000, which is an $18,000 deduction; so your tax rates, what an $18,000 deduction means to you, but it’s a gift from the government, so why wouldn’t you do it?

Joe Fairless: And for a skeptical Best Ever listener, who’s like “Yeah, but aren’t I gonna have to just pay all this back later?”, what are your thoughts on that?

Tom Wheelwright: Let me get [unintelligible [00:13:45].18]

Joe Fairless: [unintelligible [00:13:50].13]

Tom Wheelwright: No, you’ve got two things. First of all, the people that say this – the same people put money into an IRA or 401K and they’re deferring their income anyway… So deferral is still good. On the other hand, what you’re doing is you get an ordinary deduction for your depreciation, at ordinary income rates. When you pick it up, the most you can pick up is 25% tax rate, and a lot of it is gonna be at 20%, or 15%. So you’ve got a big difference there; if you’re in the 37% bracket, versus a 25% bracket, would you rather pay 37% or 25%? If you need the cost segregation, you’re paying 25%; if you don’t do the cost segregation, you’re paying 30%. I don’t understand — and here’s the thing, the cost segregation… Remember, when you have that recapture, you’re really only recapturing the building depreciation and you’re gonna get that even if you don’t do a cost segregation. In fact, you’re gonna have more recapture… Listen up, you’re gonna have more recapture if you don’t do a cost segregation than if you do a cost segregation.

Joe Fairless: Why?

Tom Wheelwright: Because you’re content and your land improvement aren’t gonna get recaptured, because they actually go down in value, okay? Now, if you have bonus depreciation – I’m not talking about bonus depreciation. Bonus depreciation, you could have some recapture.

Joe Fairless: Sure.

Tom Wheelwright: But outside of bonus depreciation, just your normal 5-year, 7-year, 15-year rules for content and land improvements… Those things are actually going down in value, they actually wear out. So let’s say that you’ve owned it for three years and you sell the property. What’s the value of the content? Is your carpet worth the same when you sell it as the day you bought it? No, probably not. It’s worth 60% less. Is that realistic? Yes. [unintelligible [00:15:39].12] Yes, that’s realistic. So you’re not gonna have any recapture on that; if you do it right, you’ll have no recapture on that, or your land improvements. The only place you’re gonna have recapture is on your building, but you actually have less building now, so you actually have less recapture if you do a cost segregation. If  you don’t do a cost segregation, you’re gonna allocate 80% to a building and all of that gets recaptured at the 25% rate. If you do a cost segregation, you end up with more capital gain at the 15% to 20% rate. It actually is the opposite of what people think.

Joe Fairless: It is. That’s incredibly interesting, and something we definitely should know, and I appreciate you mentioning that. Bonus depreciation is one benefit of the new tax plan for us as real estate investors… Anything else?

Tom Wheelwright: Oh, yeah. You’ve probably heard about the 20% deduction for pass-through, and most people are thinking that for the small business owner, right? Basically, what happens is a small business owner makes $300,000 of income, then they get a $60,000, just right off the top; $60,000 off their $300,000 in net income.  Well, guess what? That applies to real estate, too.

So if you actually, for some reason, because you’re not leveraging, you’re really not taking advantage of other people’s money, and you have actual taxable net income from your real estate, you get a 20% deduction off of that, under this new law. It applies to real estate, too. So for people who don’t leverage, for people who are [unintelligible [00:17:12].11] of those who say “Don’t use debt”, they’re gonna have positive net income, even after depreciation; they’re gonna have positive net income. So if they have positive net income, they get that 20% deduction off of that… So that’s a huge benefit to the real estate investor.

Another one we don’t really think about is bonus depreciation on automobiles, and how it affects real estate investors… Because bonus depreciation also applies to the automobile that you use in your business. The first year you get $8,000 of bonus depreciation on a passenger car, but if you’ve got a truck or an SUV that is more than 6,000 pounds gross vehicle weight, and that’s the weight on the driver’s side of your car, on the door – it says “Gross vehicle weight on there”, if it’s over 6,000 pounds, you can deduct the price of the truck or the SUV in the year you buy it, up to the percentage that you used it for business.

So if you buy a $100,000 truck and you use it 80% for business, you get an $80,000 deduction in the year you buy it.

Joe Fairless: Section 179, right?

Tom Wheelwright: No, this is bonus depreciation. 179 limits it. Thank you, Joe, for bringing that up. 179 is different from bonus, and for the next several years, we have bonus depreciation, and for the most part, we’re not gonna use 179 very much in the next few years, because bonus depreciation is better. Bonus depreciation doesn’t have the limitations that 179 does… So what we get is we actually get bonus depreciation on that truck. 179 would limit it to $25,000, but with bonus depreciation we can take the whole thing.

Joe Fairless: Is that a box the CPA has to check? How does that work when you’re filing your taxes?

Tom Wheelwright: Your CPA must do it correctly… Don’t think that CPA’s understand this, because most of them don’t, unfortunately. We’re trying to change that, but…

Joe Fairless: Yeah, because when you were talking, I was like “Yeah, I know this, Tom. I’ve got it already…” We actually bought a Grand Cherokee because it qualified for what you’re describing, more than 6,000 pounds, at the end of 2017, so we could get in on that.

Tom Wheelwright: The great thing is you didn’t have to pay any money down. So the bank lends you the money, and you get the deduction. I don’t know about you, I think that’s pretty cool; you get to leverage your tax deductions. And of course, if you have a home office, you have a lot more business mileage, because you don’t have that first and last trip being a non-deductible commute, because your commute is now to your home office. So a home office actually has a much bigger impact when you’re talking about your automobiles.

There is another benefit out of the new tax law… You were talking about 179 – first of all, now it applies to residential real estate; it didn’t apply to residential real estate previously. And on top of that, for commercial real estate – this is office, industrial; this is not retail… Some people think of commercial real estate being because I’ve got a commercial loan, and a 200-unit apartment building is commercial real estate to them… No. From a tax standpoint, we’re not talking about 200-unit apartment buildings; we’re talking about retail, back-office, what we’d really think of as commercial property. They actually get 179 for things like roofs, HVAC, security alarms, fire alarms… That’s brand new, that you get 179 on those.

Joe Fairless: And when you say they get 179 on those – I know what it is because I’ve done a lot of research on this particular section, but will you elaborate for the listeners?

Tom Wheelwright: Absolutely. So let’s say you put a new roof on your commercial building, and let’s say that roof costs you $300,000 to put on; it may cost that much if you’ve got a big building. You get to deduct the full cost of that. That’s in lieu of depreciation, you take what’s called a 179 deduction. Now, it’s limited to a million dollars. So the limits for 170 went up from 500k to a million dollars, and then they expanded what qualifies under section 179. So for commercial property, you have additional things that qualify, and for residential property for the first time 179 now applies to residential property, under the new rules.

Joe Fairless: And just so the Best Ever listeners aren’t thinking “Oh man, I wish I could have got in on that…”, even though I did buy my vehicle that was over 6,000 pounds – actually, for Coleen, my wife; I still drive my Corolla. But even though we bought that prior to the end of 2017, the listeners can still take advantage of this now in 2018, right?

Tom Wheelwright: Of course. It applies for the next 5-6 years. This is really the government saying “We’d like you to go buy new cars.” That’s what they’re saying. “We’d like you to go do this, and we’re gonna give you incentives.”

Even passenger vehicles though, the depreciation rates for new passenger vehicles are much better. So you get an $8,000 bonus depreciation, plus you get $10,000 regular depreciation. You used to get $3,100 the first year of depreciation on a passenger car; now you get $18,000. The second year you get $16,000; you used to get $5,000. So they’ve massively increased the depreciation of cars.

This is, by the way, one place where we’re different from the rest of the world. Most of the rest of the world considers cars to be luxury items; they don’t consider them requirements for business, whereas we do consider them requirements for business. So a lot of countries don’t give deductions for automobile expense. We’ve just expanded our deductions for business automobiles substantially.

Joe Fairless: So if we’re not able to, or the listeners don’t go to your people at Wealth Ability, and they have a current CPA and they love that CPA, but they wanna get in on this, what do they ask the CPA to do or look up in order to make sure that they are getting the right bonus depreciation deduction on a new automobile that they purchase?

Tom Wheelwright: Well, first of all, [unintelligible [00:23:13].22] we updated; we have a new second edition of Tax-Free Wealth that’s out now…

Joe Fairless: Oh, good!

Tom Wheelwright: …available on Amazon. It’s updated for the new law, and it includes a free eBook on the new tax law; so we talk about this. So that’s the first thing I would tell them, is go tell your CPA to go read Tax-Free Wealth. The second thing I would do is tell your CPA “Well, maybe you ought to think about joining the Tax-Free Wealth Network and actually become one of these guys.” [laughter] We’re actually seeking for CPAs who are interested in learning how to do this the right way and to be better CPAs.

We’ve just decided, you know what, we’re gonna give other CPAs all the knowledge that we’ve gained over the last 35 years, so we’re very excited about that. Outside of that, they just need to do the research. If they can’t do the research, you really need to find a different CPA. I’m not kidding about that.

Joe Fairless: Yeah, that’s true. Good point.

Tom Wheelwright: If you point them in the right direction, you go “Really? That’s your job. You should know how to do that, and if you don’t know how to do that, you’re not qualified to do my tax returns.”

Joe Fairless: Fair enough. So keywords for them – “bonus depreciation, automobile, hook me up, buddy!”

Tom Wheelwright: [laughs] There you go.

Joe Fairless: Tom, how can the Best Ever listeners learn more about what you’ve got going on?

Tom Wheelwright: You know what, just join us at WealthAbility.com. We have a new podcast, The Wealth Ability Show.

Joe Fairless: Oh, cool!

Tom Wheelwright: And certainly I’d like you to get on the Wealth Ability Show. I’m actually interviewing Robert Kiyosaki this week.

Joe Fairless: Nice!

Tom Wheelwright: That will be out in a couple of weeks. We pre-record them. And we’ve got a number of guests that are on, and we talk about how to make way more money and pay less taxes… So the Wealth Ability Show – it’s fun; it’s actually just brand new, and it’s been extraordinarily, gratifyingly successful. We have a lot of listeners, thousands and thousands of listeners, and we’re always looking for new listeners, because we just wanna share what we know.

Joe Fairless: It’s a necessary topic. A lot of the time, we focus on making income as the primary way we put money in our pocket, but we don’t focus on the number one expense, which is taxes… And that’s a way to actually increase an income, and really increase our wealth and set us up for generational wealth… So thank you so much for being on the show.

We’re talking about the new tax law, how it benefits real estate investors. Three things you’ve mentioned: bonus depreciation, 20% deduction for pass-through, and bonus depreciation on automobiles… And you also mentioned some differences between the U.S. and other countries; in the U.S. we actually get depreciation on used properties, which now doesn’t quite make sense, but I’ll roll with it, I love it… And deductions on automobiles. And you’ve mentioned a lot of other stuff.

Thank you so much for being on the show, Tom. I hope you have a Best Ever weekend, and we’ll talk to you soon.

Tom Wheelwright: Thanks very much, Joe.

JF1383: Picking The Best Location, & Dealing With Zoning For Residential Assisted Living Investing #SituationSaturday with Gene Guarino

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Gene has been on the show in the past. Today he’s back for a Situation Saturday and tell us how he is able find great locations, and deal with zoning so you can change a single family home into an assisted living house. The benefit here is obvious, make a lot more money, but in order to do so you may have to jump through some hoops first, but Gene can help! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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 fluffy stuff.

I hope you’re having a best ever weekend. Because it is Saturday, we’re doing Situation Saturday, where if you come across a situation like the one we’re going to be discussing, then you’ll know how to approach it. If you already know how to approach it, then perhaps you’ll pick up some tips that will help you enhance your approach.

With us today to talk about residential assisted living, Gene Guarino. How are you doing, Gene?

Gene Guarino: Doing great, Joe. Good to hear you.

Joe Fairless: Well, nice to have you back on the show. Gene was actually on this show’s episode #678, titled “Earn twice the fair market rent from an assisted living single-family rental.” So we won’t get into his best ever advice; if you wanna hear that, go listen to #678. But we’re going to be talking about a specific situation as it relates to zoning and location – and doing “it” meaning residential assisted living – in your area.

Gene, first, will you give a refresher for the Best Ever listeners, just a little bit about your background and your focus, that way we have some context?

Gene Guarino: My background – I started when I was 18 years old, which is a long time ago, with my first piece of real estate. I was a musician in a recording studio, music school, renting a property, and that was as a teenager. So when I was 18, it was either shut down the business, or buy your own place. We bought our own place, no money down, and that’s where I started, years ago. I did my first commercial at 25, and I’ve been doing real estate ever since.

Right now I do one thing, and that’s called residential assisted living. We take single-family homes in great locations and convert them into the assisted living for seniors.

Joe Fairless: Okay. Single-family homes, great locations, and convert them into living situations for seniors – why do you do that?

Gene Guarino: Well, there’s lots of reasons. One, it is very lucrative, let’s not deny it… I  mean, when you can make 10k/month from a single-family home, it’s a beautiful thing. But it’s also helping other people; there’s a lot of people that age that need help, and they can’t live alone. They don’t need a nursing home, they need something in between, so we provide a solution and we profit handsomely from it.

Joe Fairless: Making 10k from a single-family house – and that’s profit, not income?

Gene Guarino: That’s all net, yeah. That’s kind of the average home. Some of our students are doing that times two, and from a single-family home, that’s a really cool income to get.

Joe Fairless: Yup. I make $250 from my homes every month, so that would be pretty significant. So again, Best Ever listeners, you can listen to the other episode if you want to hear more about the specifics of the business model… Today, we’re gonna be talking about one laser-focused aspect of the business model, and that is location and zoning, and doing it in your area.

For example, I have three homes that I own in Texas. How do I convert my $250/month profit to 10k?

Gene Guarino: Well, do you wanna get right into the zoning part of it? Or show me how to do it and I’ll be happy to do either one.

Joe Fairless: Well, talk about how I could do that with one of them, and then we’ll focus more time on the zoning.

Gene Guarino: Good, so I’m gonna give you the short version, but like you said, listen to the show #678 so you’ve got it. In that home itself – it depends on the area and the home, so there’s a lot of detail that goes with it; I can teach you all about it. But that home itself, if you’re renting it to somebody and netting that $250/month, which is pretty good, Joe… A lot of other people aren’t making that much; good for you. But if that single-family home could be rented to somebody else that is not a family with two kids and a dog, but it’s somebody who’s operating a residential assisted living home (in Texas they call it something different), where they’re gonna be operating that group home for the elderly like I do, they’re the ones who are going to be doing the business, but you may be able to lease that same home to them for, let’s say, twice the market rent you’re getting now.

So if you’re renting it for $2,000 and making $250, if you rented it to them for $4,000, you’re making $2,250. So the obvious question is “Why would they do that?” and the answer is because they’re gonna be making 10k or 15k net per month even after paying you twice the rent. That’s one way to do it on that side.

On the other side, if you wanna own the real estate and own the business, now you operate that business, and that business simply put in a 30-second overview – the average person is paying $3,750/month; in Texas, as you mentioned, you can have up to 16 people in a single-family home… They call that a small facility in Texas; everything’s bigger in Texas. It depends on the size of the home and so on, but let’s just say you had 10 people – $37,500/month is the gross income. Your expenses for operating the business, renting the home or owning the home, insurance, taxes, food, everything… You’re still gonna net about $10,000/month from that one single-family home operating that residential assisted living.

Joe Fairless: So one of the questions is how do we make sure that our house is able to have that type of zoning? How do we approach this conversation?

Gene Guarino: Got it. So let’s go right into this, because it’s one of the questions I get all the time, Joe – “Can I do it in this home, in this area?” and so on. Number one, every state [unintelligible [00:06:40].12] has certain rules of what you can and can’t do. Texas – we’ll just go there because that’s what you mentioned – they have rules that say in the state of Texas you can have up to 16 people (unrelated at all; some of you are wondering about that) seniors in a small facility, in a single-family residence… Not multifamily, not a commercial location, just a house in Texas.

Now, the rules and regulations they require is you need to have a certain amount of space per person, but frankly, you could have 16 people in a 2,000-2,200 square foot house. Don’t do that. That’s not what I’m suggesting, everybody who’s listening. I’m gonna give you a rule of thumb that we use – 300 square feet per person in the home. Very comfortable. So maybe that’s a 5,000 square foot house.

Now, I’m gonna pause before I go into zoning. That’s a different house than most people have for a rental property. They stay away from that big house because they can’t cash-flow it. In this case we can, by leasing it to an operator and doubling the rent, cash-flow it and make more money. But if you operate the business, if the average person is paying (in your area) probably 4k-5k – let’s just go to 4k/month… That 4k/month – very lucrative, but… Zoning – can I do it in my neighborhood? That’s the point I wanna make with the start of this conversation – it’s all about local.

The state allows something, but what is it locally allowed? I’m gonna get specific – let’s assume you’re in Dallas, and let’s say you’re in the city limits of Dallas. In the city limits of Dallas, they allow you to have 8 people in a single-family home for this purpose. Now, frankly, I could fight and now win, based on the Fair Housing Act; that’s discriminatory, you can’t limit the number of people, type of people, race, age, creed, color – you can’t do that. But let’s just go with the rules. I always say “Pick your location, find out the rules for the game, and go. Decide if you wanna play, and go for it.”

So in the city of Dallas they say 8. If you’re only allowed to have 8 people in the city of Dallas in that home, we don’t need as big of a home, we don’t need as big of a staff. Well, what do we have to do for the zoning?

Every place is a little bit different, but it’s still single-family, so you’re probably gonna have to apply, which means fill in paperwork, and it may be going from a zoning of R3 to R4; still single-family residential, but it allows you to have this group home. Now, in some locations your listeners are in, it’s literally just filling a piece of paper, $50, you get it. Stamped, approved. Other states may require that you make an application, you let your neighbors know what you’re doing, but they’re still gonna approve it.

Other locations will require you to get input from neighbors and say “We like it or don’t like it.” So we need to know what the rules of the game are, and then we need to know what those rules are, and then just follow the process right through it.

Joe Fairless: What’s an example of a location that made it so difficult to do this process, that you said “Let’s not do it here”?

Gene Guarino: One of my students in Alabama picked a beautiful house, beautiful location… And by the way, when I say location, it’s not “It’s a big forest, it’s on the mountains, it’s on the ocean…” It’s all about the demographics. That’s what our location is chosen on. The people that live nearby, because they are the residents for the house – that is what we’re choosing it on. So beautiful house, beautiful location – everything was perfect.

When he went to fill in the paperwork – it’s Alabama, keep in mind… He filled in the paperwork, and there was an uproar in the community. Now, the uproar in the community is the good old boy network of every community; not everyone, but networks… When somebody’s saying “Well, I don’t want something like this in my backyard.” So filling in the paperwork is one piece, now dealing with the humans involved is another.

Now, to be blunt, he would have won the battle if he just fought it, but it would have taken a lot of time, effort and money to do it. We just decided “Hey, let’s just pick another location where the rules are the same, but the attitude of people around you is different.”

I wanted to bring that up, Joe, because we can get through it, but that was one where that neighborhood, specifically – too difficult, let’s just move on to something else.

Joe Fairless: It’s the neighborhood, it’s the state or it’s the city? Which one in that case?

Gene Guarino: That was the neighborhood.

Joe Fairless: Neighborhood. So then the city – what city was it?

Gene Guarino: Boy, I can’t even tell you what city… It’s Alabama someplace…

Joe Fairless: That’s alright. So have you or someone you know tried to get that approved in the city, but in a different neighborhood?

Gene Guarino: Yeah, exactly. That’s exactly it, because here’s the thing… And let me come back to my neck of the woods, because I can tell you some exact examples. I’m in Arizona. In Phoenix, Arizona there’s a rule that says actually in some cases you can’t have more than four unrelated adults, but for residential assisted living, you can have up to ten. So the rule is in Arizona – Phoenix, specifically – you can have up to 10 unrelated adults if it’s senior assisted living. They have paperwork, you fill in the paperwork.

Now, they also say you can’t be within a quarter mile of another 10-bed facility. So another home that’s being used for this can’t be within 1,320 feet (a quarter of a mile). How did they choose that? Totally arbitrary. PFA – pulled from air.

So it was January of 2016, the city itself realized – I talked to the city council myself and they realize this is totally unenforceable; we’ve got a rule on the books that we’re saying you can’t do something, but it’s totally wrong, you can. It’s against the Fair Housing Act, federal ruling.

In January of 2016 they even put a moratorium on their own regulation, saying “We can’t enforce this, so we’re not gonna.” So they allowed people to do it in a house next to another house, or within a quarter of a mile. So in certain locations they have rules on the books, but if there’s an unreasonableness to it, you can battle it and you’ll win. The question is “Do you wanna take the time and effort?”

In Phoenix we have a student who has a home, and when that rule was relaxed, he bought literally the lot next door. So it should be a quarter mile away, but he bought the lot next door and got the application in to put the next home right next door… Which is awesome for a lot of reasons for the business, but when you think about that, the state had nothing to say, they approved it, and so now he’s got that second location right next door to his other location. And now a year and a half later they took the moratorium off and said “We’re gonna enforce our rule that’s totally unenforceable”, but he got in under the wire; that was a good thing to do… It was paperwork that had to be filled out. He did not need to ask for permission from neighbors, and so on.

Joe Fairless: We’ll use one of my homes as an example – it’s in Duncanville, Texas, South of Dallas. It’s a 4-bedroom, 2-bath, around 2,000 square feet. In that case we’ll say six? Will you do six people, just using your rule of thumb?

Gene Guarino: Well, if you’ve got four bedrooms, you could do two people in each bedroom, so you could have eight people. And more than likely, just like the city of Dallas, most places – if it’s not a city-by-city basis – eight is kind of the number… So you probably could have eight people in there.

Joe Fairless: Even though you need 2,400 square foot with your rule — I was going with your rule of thumb, 300 square feet per person; that’s why I came up with six.

Gene Guarino: I gotcha. That makes it for a very comfortable home. The state minimum would be half that.

Joe Fairless: Okay. So 6 to 8 people. I see the opportunity, so I decide “Okay, I want to do this.” So then I need to know the state, the city… So the state of Texas, the city of Duncanville, and then the neighborhood, which – I couldn’t name the neighborhood that it’s in… And I would then go to where to apply for it to be the group home?

Gene Guarino: Good. So you gave me three steps, and I’m gonna suggest that state first – we need to know what the rules are, and that’s a key point, I’ll come back to it. Two, it’s the local zoning; let’s say they say we can do eight people… And then I’m gonna say forget about the neighborhood. You just go forward. You know what the rules are for the state, you know what the rules are for the city. You go right to zoning and say “Here’s the house. Can I do it in this location?” They say “Yes, you can. Here’s what you do. Here’s the paperwork, here’s the process, here’s what you do” and then do it. Don’t hesitate, don’t sit around, don’t wait, take action, go.

By the time you’re up and running, the neighbors won’t even know what’s happening. The neighbors have no clout, they have no say, but if you give them voice, they’ll just make noise and so on. So don’t worry about the neighborhood. It’s “What are the rules of the state?”,  go right to the local, what are the rules there, and then go.

Joe Fairless: And what’s the question I ask the local city contacts? What city office do I go to to ask those questions?

Gene Guarino: The city office would be the zoning… So the zoning and building department are usually all in one, or they’re separate and nearby. So I would go to zoning, and zoning is gonna tell you what you can and can’t do and what the rules of the game are.

A key point, Joe, and for everybody else who’s listening, is it’s important that you know what the words are. Words are important. So you mentioned Texas a number of times; in Texas there are certain rules. There’s small facilities, there’s large facilities. There’s type A, type B, type D… You need to know that in your case it’s going to be a type B, small facility, and that’s how you would say it in Texas. A little different. In Arizona it’s called an assisted living home.

And this is why it’s important, Joe. If you were to go to the zoning board and say “I wanna open up an assisted living facility in Duncan, right here in the middle of the neighborhood”, they’re gonna say “You can’t.” That’s like saying “I wanna open a gas station in the middle of the neighborhood. But if you say it with the right words, “I wanna open up a small assisted living facility, type B.” “That you can do, here’s the paperwork for it.”

Joe Fairless: Okay. Yeah, that’s really helpful. That makes sense. You’ve gotta use the terminology. Even though it’s semantics, it’s not to them.

Gene Guarino: [unintelligible [00:16:41].03] follow every rule; you’ve gotta know exactly what it is, so you can say it to them properly… Or take the other route, Joe – go in there saying “Look, I don’t know what this is called. Can you tell me? I don’t know how this is done, will you tell me?” Even if you know, if you go in there playing dumb and let them be helpful, they’ll give you the right information. But I always like to know the answer to the question before I ask it if I can.

Joe Fairless: Anything that we haven’t discussed as it relates to zoning that you think we should discuss during this conversation?

Gene Guarino: Two points. One is that the Fair Housing Act, for most of us that are in real estate investing and rental properties and so on – that’s kind of like a thorn in our side. Fair Housing Act… We have to let this tenant in… This is actually a good thing for us in senior assisted living, because the Fair Housing Act does not allow others to discriminate against us. So know what the Fair Housing Act is and how it applies.

The second thing is that if you get pushback from anybody on anything, there’s always exceptions to rules. I always look at things like not “You can’t”, but “How can we make this work?” That question itself is very valuable; always asking yourself “How can I make it work?” From a legal term, if I’m gonna go to a zoning board and ask for an exception, it’s called a “reasonable accommodation.”

Reasonable accommodation. The city of whatever – they say they’re limited to eight. Well, I’m looking for reasonable accommodation for this one house in this one case to have ten. “Well, what is your reason for it?” “Here’s why… In this community, they need this; we have a big house, we need to do more, we wanna pay the caregivers more in order to do that. We need more residents.” But that concept, from a legal standpoint, or reasonable accommodation, is the key.

So whether you represent yourself or have somebody else, that’s the argument. Understanding what the fair housing act says you can and cannot do… Because no city wants to open themselves up to $200,000 worth of legal fighting, knowing in the end they’ll lose. So if you can show them in advance why you will lose this argument – city council, or whoever it may be… “All I’m asking for is reasonable accommodation.” They don’t have to change the rules for everybody else, just for me.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Gene Guarino: Two things: RALAcademy.com is our website, and we have a free training if they’d like it at RAL101.com.

Joe Fairless: I loved how you went deep into one of the areas that we were planning on, and that is zoning, and knowing the zoning laws, as well as the types of questions to ask. One, state, then also city, and how to approach that with the individuals at the zoning and building department. Ideally, you know what those laws are, but if you don’t and you wanna just get going as quick as possible, then just go in and say “I’m not sure what it’s called, but here’s what I’m doing. What paperwork do I need to fill out?” and having them help you along the way… That’s another approach.

Thanks again for being on the show, Gene. I hope you have a best ever weekend, and we’ll talk to you soon.

Gene Guarino: Thank you.

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JF 691: This Hassle Free Trick Creates HUGE Cashflows with Seller Financing

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Today’s guest is a pro when it comes to seller financing! He shares a tip with us on how to avoid a foreclosure when selling a home via seller financing. He is a powerhouse investor in the Phoenix market in his creative niche. Be sure to pay attention!

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Nate Tanner Real Estate Background:

– Owner of Hassle Free Houses; A seller finance company that currently has 60 homes  
– Full time real estate investor since 2006
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JF524: New Investor Finding Her Way to DEAL #1

She attended the classes, works a full time job, and took massive action! Our Best Ever guest found her way through all the normal complications of getting started in real estate investing, including bad partnerships, contractual misunderstandings, and a lack of buyers. We all feel the growing pains which she surpassed and is now a little more well rounded, hear her story!

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Are you committed to transforming your life through Real Estate this year? If so, then go to http://www.CoachWithTrevor.Com and claim your FREE Coaching Session.  Trevor is my personal real estate coach and I’ve been working with him for years. Spots are limited, so be sure to do it now before all the spots are gone.

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JF387: Rich Dad Advisor, Tom Wheelwright, Says Your IRA Plan is WRONG and How to be Tax Free Till You Die

Love Rich Dad Poor Dad? How about Robert Kiyosaki? Well you are about to hear from his accountant, Tom Wheelwright, the author of Tax-Free Wealth. He unfolds the complications and misunderstandings of IRA’s and how they would NOT benefit all forms of real estate investing. Want to avoid capital gains tax? Hear his advice on 1031 exchanges! Other topics including tax brackets, depreciation, and cost segregation are clarified by our Best Ever guest. This is one of the MOST important show’s available…don’t miss it!

 

 

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Tom Wheelwright’s background:

  • Author of Tax-Free Wealth
  • CPA and CEO of ProVision Wealth based in Tempe, Arizona
  • A leading tax and wealth expert and author of Tax-Free Wealth and a Rich Dad Advisor/Speaker for Robert Kiyosaki
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  • Make taxes fun, easy, and understandable

 

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JF368: Crazy Floorplans Are Hard to Sell #situationsatuday

Don’t judge a house by its shiny objects! Today’s Best Ever guest tells how he overlooked a few “deal breakers” in a Phoenix purchase because the numbers appeared to make sense. Tune it to hear his follies in the acquisition that wouldn’t have been terrible if he only changed a few things…

 

 

 

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