Invest Like The Super Wealthy – 221

What kind of investments do the super-wealthy invest in?

What are some ways you can “partner” with the IRS, and get the tax advantages as an investor?

Join Cash Flow Expert & Anti-Financial Advisor, Chris Miles, as he talks with Paul Moore of Wellings Capital about what are some great investments right now, and how you can get some tax breaks.

Tune in now!

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Paul Moore Bio

After working for Ford, Paul later entered the real estate sector, where he flipped over 50 homes and 25 high-end waterfront lots, appeared on HGTV’s House Hunters, rehabbed and managed rental properties, built a number of new homes, developed a subdivision, and started two successful online real estate marketing firms. Three successful developments, including assisting with the development of a Hyatt hotel and a very successful multifamily project, led him into the commercial multifamily arena. Paul is an author and co-hosts a wealth-building podcast called How to Lose Money, and is a regular author for Bigger Pockets. Paul is married with 4 children and lives in Central Virginia.

Chris Miles Bio

Chris Miles, the “Cash Flow Expert,” is a leading authority on how to quickly free up and create cash flow for thousands of his clients, entrepreneurs, and others internationally! He’s an author, speaker, and radio host that has been featured in US News, CNN Money, Bankrate, Entrepreneur on Fire, and has spoken to thousands getting them fast financial results.

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Listen to the podcast here

 

Invest Like The Super Wealthy

In this episode, I want to bring on a special guest here, Paul Moore. One thing that’s amazing about him is that he graduated with an Engineering degree and an MBA from Ohio State, but he started on this management track at Ford Motor Company in Detroit. After several years, he left that and started a staffing company with a partner. They sold it to a publicly traded firm for $2.9 million five years later.

Along the way, Paul was a finalist for the Ernst and Young Michigan Entrepreneur of the Year for two years straight. He later entered the real estate sector, where he completed 85 real estate investments and exits. He appeared on HGTV special real estate episode, rehabbed and managed dozens of rental properties, developed a waterfront subdivision, and started two successful online real estate marketing firms.

Three successful developments, including assisting and developing a Hyatt Hotel in a multifamily housing project, led him into the multifamily investing arena. He’s also a cohost of his podcast, which is How to Lose Money, and a writer for BiggerPockets. He is the author of The Perfect Investment: Creating Enduring Wealth from the Historic Shift to Multifamily Housing book.

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I’m grateful to have you on, Paul. Welcome to our show.

It’s great to be on, Chris. Thank you so much. I love your show, and I’m excited to be here.

I love some of the topics that we have. I want to talk about, from your angle, how the real ultra-wealthy attain wealth, especially how people can start partnering with the IRS. I’m thrilled to be able to talk to you about that.

You don’t want to do something like that.

If it means I pay less, I don’t care. I’m sure my readers are in tax brackets like myself, which are not low tax brackets. We’re all about tax savings too. Beyond your bio here, tell us more about you. What got you to do this?

I made many mistakes over the years. I’ve got a podcast called How to Lose Money. I used to confuse investing with speculating. I thought I was investing for years. I would tell people I’m an investor. I was gambling. Investing is when your principal is generally safe, and you’ve got a chance to make a profit. Speculating is when your principal is not at all safe, and you’ve got a chance to make a profit.

I made a lot of profit doing that, but I made a lot of huge mistakes. I lost a whole lot of money. I didn’t want to do it anymore, so I was looking for something I could do, which is Class B value-add multifamily and now storage units. I don’t want to do any more ground-up development. When I’m in my 50s, I’ve lost enough money. I don’t want to look my family, myself, and my investors in the eye and say sorry for years. I wanted to do something that was a lot safer. That’s how I got started in this in the last several years.

One thing that is cool is a lot of our readers are entrepreneurs, but there are also a lot of them that are either doing real estate or interested in doing real estate too. What’s been your experience? What did you do specifically that took you from that gambler to that investor or speculator to that investor category?

There is a lot of stuff I’m skipping over here, but around 2010, a lot of people started hearing about the Bakken oil boom in North Dakota. I had a petroleum engineering background before I got my MBA, and I’d never used it. I always wanted to. I thought, “Real estate is down right now. I was depressed with real estate, and I think I’ll go invest in an oil well.” It was a little more thoughtful than that, but we did. A bunch of us jumped in on this well, and we lost our money.

That’s talking about speculation. What great tax benefits it was as we lost all that money. I realized and my partner, who had a small jet, would fly there, and he couldn’t ever find a place to stay in North Dakota. There were trucks parked all on the side of the road and the rest stops, etc. We said, “We’re both involved in real estate development. Why don’t we build a man camp or quasi-hotel multifamily and serve this oil region here?” We did.

If you’re investing with the right syndicator, sponsor, or commercial real estate investor, you’re part of an LLC that owns that entity where you get the most benefits. Click To Tweet

We were charging thirteen times the going rate in the heartland of America, which is roughly $1 a square foot for rental real estate. The $800 apartment might be 800 square feet. We were charging $4,000 a month for a 300-square foot, nicely furnished apartment, and we were full. That was ground-up speculation that went well. Oil prices dropped from the 90s to the 30s, and we sold that for a nice profit. We took that money, and we were already way underway at this point when oil prices dropped to build a beautiful Hyatt Hotel, also in oil country. It was dependent on the oil revenues and the oil people being there to drill wells and all that.

That did not go well. I realized, “I want to be in multifamily. I know I want to be in commercial real estate because that’s where the real wealthy play, but I don’t want to do it with oil.” That’s when we decided to get into the value add space. My goal overall, Chris, was to stop swinging for the fences, stop trying to hit home runs, and start hitting singles and doubles.

I always tell people the ambition of my 20s cut up to me in my 30s. It leads to the question I had mentioned earlier, which is how do you see the super-wealthy attaining wealth?

A lot of the super wealthy now are attaining wealth through tech-related businesses. If you look at the Forbes 400, that’s number one. Real estate has dropped a second, but a whole lot. I don’t know if it’s 90%, but it’s a whole lot of the people on that list and other wealthy folks have real estate and use real estate to maintain and perpetuate their wealth.

The super-wealthy get into opportunities that most of the rest of us have never even heard of or have the opportunity to get into things like a commercial. In the old days, it would have been investing in a mall, and now it might be a hotel, large-scale multifamily, or large-scale storage unit. The average investor is not getting access to this, and the wealthy are happy about that because they are.

There are tremendous barriers to entry to keep somebody who’s flipping 1, 2, or 3 houses at a time to keep them out of getting to that big level of 100 unit apartment. You have to convince the seller, broker, lender, investors, and many people that you’re credible. As the old advertisement said, “How do I get credible if I don’t have any experience?” It’s hard, and the super wealthy are keeping it that way. I don’t think it’s intentional, certainly, but it’s a great benefit of having access to large capital. You can get access to deals that have tremendous returns and are safe and stable overall.

It’s funny when you mentioned that because a lot of people either don’t know they exist or don’t even believe that those kinds of opportunities exist. That might have been the number one reason why the wealthy keep getting wealthier. I’ll run people all the time. People have a couple of million sitting in 401(k), IRAs, and things like that. They’ll say, “I don’t trust the stock market, but is there anything that could be better?.” I laugh because I’m thinking, “The stock market is a joke. It’s not that impressive at all compared to what’s out there right now.”

That’s exactly how I see it. I haven’t had money in stocks in a long time, except for that swing for the fence that I still get the little statement on that says, “Zero.” I guess it’s still registered as a stockholder. I don’t know.

Get 0% of zero. That’s awesome.

 

It’s beautiful.

How would people get access to things like this? I have different resources, but what do you recommend to people if they want to get access to the things that the wealthy have access to, whether they’re accredited investors or not?

One way, especially for folks who are not accredited, is to get involved with crowdfunding. I was a little skeptical about this. My book, which is called The Perfect Investment, is about multifamily. I was a little down on crowdfunding, but I’m a little warmed up to it now. I think that is one way to do it. Another way is to become a fractional owner of the property you’re investing in by investing directly in syndication. Syndication is when a sponsor pulls together a lot of individual investors, goes in together, and operates the deal that way.

For those of you that aren’t familiar with that, it’s a small version of a mutual fund. It’s a much more private version, where you’re going in with different partners. Do you have resources for yourself that you refer people to for that?

For syndication, it’s a hard time to find any deals because it’s overheated, as we recorded this in the summer of 2018. My company does that. There are a lot of great companies that are syndicators, and you can find someone with some careful research on BiggerPockets and other locations. There are several podcasts that have great syndication opportunities, Jake and Gino, Reed Goossens, and my company. There are self-storage deals that we are starting to learn more about and starting to like. As far as crowdfunding, they’re all over the place. I couldn’t recommend one specifically because I’ve heard good and bad about several. RealtyMogul, RealtyShares, Fundrise, and things like that are apparently pretty popular with people.

If you’re non-accredited and you’re starting out, that’s someplace you can go to.

Within those portals, there are accredited and non-accredited deals.

Let’s get into the next segment of this show. Talk about partnering with the IRS because most of us are not humongous fans of the IRS. My wife spent an hour waiting on hold for the IRS for something that was useless. How can we use this to our advantage versus our disadvantage?

I was audited by the IRS, and it was completely random in 2001 or 2002. It was a year when I had flipped a whole bunch of houses. I had tons of money moving in and out, and it took six months. It was only three-hour meetings at a time, once a month. At any rate, it was a hassle, and they found, I hate to say it, $152 that they thought maybe misclassified. I paid my CPA thousands of dollars to help me with that audit.

If a commercial property is refinanced, the capital is returned. There is no tax on that. When money is handed back to you, you can take reinvest it. Click To Tweet

I didn’t complain. I’m glad to be in a country where I have all the benefits. It was a pain, but I’m glad to get away from it. Now, partnering with the IRS is my wink of how commercial real estate investors get these incredible taxes. He was talking about commercial real estate investors. If they knew how little we pay in taxes, there’d be another tax revolt. I said, “Tell me more.” He went on to tell me how he could take it. It was $20 million, and if the investor were patient and willing to let that ride with him for twenty years, which most wouldn’t, it would throw off $131 million in free cashflow and build a portfolio of $210 million. He proved it with math.

That was cool, and then he said, “Here’s the amazing part. This investor may pay virtually no tax during that time, maybe a few hundred thousand dollars.” I was pretty blown away by that. I wanted to learn more, and I did a deep dive on this. This is back when I was researching this a number of years ago. There are amazing tax benefits for commercial real estate investors. Second, only to my knowledge of drilling an oil well that was dry. Not that you’d want to do that, but I been there.

One would be a direct investment. When you directly invest in stocks, bonds, or a REIT, you own shares in a corporation. If you’re investing with the right syndicator, sponsor, or directly in your own commercial real estate investor investment, you’re part of an LLC that owns that entity, and you get all the benefits of the tax savings that commercial real estate gets.

A second way to do it is a way I recommend that everybody does is to hire a tech strategist. That’s a side note. I’ve written that on BiggerPockets, and I’ve gotten hundreds of responses. People are asking me more about what does it mean to hire a tax strategist? Maybe we’ll come back to another show and chat about that if you like.

Return of capital is another one. I’m not saying you can do this willy-nilly, but it’s possible that a lot of the return, like let’s say a ReFi, if a commercial property is refinanced or the return, the capital is returned, there’s no tax on a refinance on your own home. There’s no tax on commercial real estate when your money is handed back to you. You can take that money and reinvest it. It’s awesome.

Another opportunity is accelerated depreciation through cost segregation. A cost segregation study allows you to accelerate some of the tax savings. It’s the depreciation that’s accelerated instead of a 27 or whatever your life that might be put on a five-year life. That’s legit because appliances, countertops, and things like that get worn out. It’s a great strategy that a lot of people don’t know about, and that’s something I’ve written about as well and got a lot of feedback.

That is what dentists and chiropractors, people who own buildings, have done cost segregation for themselves in their commercials. They save tens of thousands of dollars a year in taxes by doing that.

The cost segregation, people say that for $5,000 or $6,000 study, they can do this on a $100,000 commercial building and break even. Anything above $100,000 building, they claim, is gravy. Even if you have a small building, it’s something to consider.

To clarify, for people that are reading this. Commercial buildings or commercial real estate, in this case, what do you define as commercial real estate? How many units or what property?

It could be a single-family home, according to the cost segregation people. That seems odd to me, but a duplex, a fourplex for apartments, or it could be a very small office building. Deferred taxes at the sale of your property through a 1031 exchange needs little clarification. Lots of people know about that. What a lot of people don’t know that you can roll into a 1031 exchange, and you can do that in a Delaware statutory trust. There’s a lot of stuff involved in that, but that allows a lot more freedom in the 1031 exchange. We all know you can do a self-directed IRA and not be beholden to your employer’s 401(k) options.

Passive loss limitations can sometimes be avoided if you’re a real estate professional. That’s what a lot of people are doing. Some new things that, at the time of this recording, the tax reform law from December of 2017 offers high net worth individuals a chance for a 20% deduction on income from the past through business entities. That’s pretty cool.

Taxpayers can also factor in 2.5% of the original purchase price as part of their 20% deduction. Section 179 of the tax code, a long time, has allowed deductions for capital improvements. The new law expands this dramatically, which allows significant paper losses for some capital improvements like putting a new roof on or an HVAC system. A heating and air system can be fully deducted in the year it’s done in some cases. One last comment on the 1031 exchange, it was eliminated for things like airplanes, trucks, and things like that, from what I understand, but it was kept for real estate. It’s another benefit to the wealthy and other commercial real estate investors.

It’s so much different going from a place of active income, which is usually, what you create through your own income streams, whether it be through a job or through your business, whatever it might be. When you start moving to that investor profile, it’s amazing the ways you can reduce taxes. You can make money or even lose money in oil well, but it’s nice to know that you can create something from expenses and costs. You’re going to be doing it paying for anyways or even cost that you don’t pay for it like with cost segregation and those kinds of things. You’re getting deductions off stuff that you’re not even necessarily paying for.

It’s a beautiful thing.

Explain a little bit more about what you do.

I am a real estate syndicator, which means we are looking actively for large multifamily properties in select cities. We’re very conservative, not swinging for the fences. We’re doing fairly safe Class B, which means maybe a 30-year-old property that might be a little tired and need some improvement, but in a great area. We’re looking to buy apartments, and we’re allowing investors to partner with us in that, so we can all make some money together.

We’re also investing in self-storage. I’m writing a lot on BiggerPockets about the fact that the multifamily housing market is overheated. We’re turning into self-storage because we have hundreds of investors who love and trust us, but we typically have nothing to show them to invest in. We only did one deal in 2017. We didn’t do any in 2018. We’re starting to partner with some great operators to invest in self-storage.

I’ve noticed a lot of people. Apartment deals, for example, have been competitive in the sense that it’s harder to find deals, but there are other alternative investments such as self-storage and things popping up here and there. I’ve even had somebody buy assisted living-type stuff. There are lots of different alternatives popping up, but you have to be much more selective in that these days.

 

We don’t want to knowingly overpay. I did that years ago, and I don’t want to do it again. It’s not that I knew I only overpaid, but I think it was more out of ignorance, but I know better now. My partners are all in their 50s. We’ve all made them lose money and don’t want to lose anymore.

If people want to get ahold of you, reach out or find out more about you, what would you recommend? How would they do that?

They can visit our website, which is WellingsCapital.com. They can check out How to Lose Money on iTunes or Stitcher. They can check me out on BiggerPockets, where I’m blogging there quite frequently.

Paul, thank you so much for your time. It’s been awesome. It’s an informative power packed episode, so I appreciate your time and your expertise.

Chris, thank you for having me on the show. I’m truly honored and would love to have you on our show if you would like to contribute to the How to Lose Money world.

I would love that. I’ve lost plenty of it.

All right.

Thanks so much, Paul. We’ll talk to you later.

Thanks.

 

Important Links

• WellingsCapital.com
• How to Lose Money Podcast
• BiggerPockets – Paul Moore
• The Perfect Investment: Creating Enduring Wealth from the Historic Shift to Multifamily Housing
• Jake and Gino
• Reed Goossens
• RealtyMogul
• RealtyShares
• Fundrise
• Stitcher – How to Lose Money