There are several things people typically do by the end of the year. Make charitable donations, clean out the medicine cabinets and bathroom drawers, declutter, clean out the refrigerator, review your goals, organize photos from the past year…
In this episode Tim and Greg discuss strategies for real estate investing as the year 2023 comes to a close. They suggest five key steps for investors: reviewing and assessing investment goals, reviewing the performance of existing investments, consulting a real estate tax professional, considering the diversification of the investment portfolio, and staying informed about current real estate market trends.
They also highlight the importance of cost segregation studies for tax efficiency and warn against emotional investing.
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WHAT TO LISTEN FOR
3:16 Review and Assess Investment Goals
6:12 Review Performance of Existing Investments
10:37 Consult a Real Estate Tax Professional
14:47 Understand and Diversify Real Estate Portfolio
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Tim Lyons (00:01):
Yeah, except there’s a great quote out there that says the market can remain irrational longer than you can remain solvent. Yeah.
Greg Lyons (00:21):
Welcome to the Passive Income Brothers podcast.
Tim Lyons (00:23):
Here we take the fear out of real estate investing using real life stories of everyday successful investors.
Greg Lyons (00:29):
Tim Lyons (00:32):
Welcome to another episode of the Passive Income Brothers podcast. My name is Tim Lyons. Today I’m joined by the one, the only my brother, Greg Lyons. How you doing today, buddy?
Greg Lyons (00:39):
Tim, I am doing exceptional and the reason I’m doing exceptional is because you so eloquently called me out on saying, I feel great every podcast. So I went to the old Google machine, got some synonyms for great, and I was feeling exceptional today. But next podcast, I may be feeling noteworthy, illustrious, or significant.
Tim Lyons (01:06):
I’m so proud of you. The growth that you exhibit is just amazing. I love it
Greg Lyons (01:11):
That Google machine is something
Tim Lyons (01:13):
The Google as big rich likes to say. So well, listen, Greg, we are just about to round the third base year on 2023, and as we stare into the future for 2024, there’s a lot to think about, right? There’s a lot that happened. There’s a lot that we need to process. Look back on the year. What did we do? What did we do wrong? What decisions did we make that we shouldn’t have? What decisions should we have made that we didn’t? All this, for me at least, is what I think about towards the end of the year. Try to celebrate the wins, try to acknowledge the losses, really kind of say, what could I do better? But in the last 30 days of the year, Greg, there’s a lot of work to do for investors.
Greg Lyons (01:59):
Yeah, it’s going to be an absolute sprint whether you are a real estate investor for your regular day job, for your family, getting ready for the holidays. Before you know it, it’s going to be December 31st and the year’s over and you look back and say, what have I done? What have I accomplished? So I think today let’s just take a quick step back and say, Hey, what should I be doing looking at and how am I going to close out the end of 2023?
Tim Lyons (02:30):
And it’s all about, for us at least, I mean Greg and I, we always have a lot going on, right? With the business making pivots, all these things that we’re working on behind the scenes, but it is really about what are you committing to? What are you committing to for the last 30 days of the year, the last month, whatever, to really kind of set yourself up for success. Because let’s be honest, if you made some mistakes in 2023, or you should have, and you could have, and you would’ve, but you didn’t, that’s okay. It’s already behind you. Nothing you can do to go back and change that. But what can you commit to for the next 30 days to say, I am going to do this. I’m going to look into that. I am going to investigate, educate. I’m going to go take action. What are those things that you’re going to commit to make 2024? Get off to a good start.
Greg Lyons (03:16):
And I think that’s why we came up with these five things for passive real estate investor to do to close out 2023. I think, Tim, the first thing, and one of the most important thing is to review and assess your investment goals. That’s important because some people have not taken the first step to actually make an investment, but others have made investments over the years or maybe in 2023. So reviewing and assessing what you have is really important.
Tim Lyons (03:46):
Greg, this is financial planning. Sometimes in any 1 0 1 book, take time to review your investment goals and assess whether or not they were met. I mean, listen, if you don’t have any goals, well guess what? Now is the time, right? Start getting ’em onto paper. Start getting, I don’t care if you write it down into a Google Doc, get them out of your head and get them into your journal onto a piece of paper, onto something. Because if we don’t have a goal to start working towards, we’re never going to get there. If a ship leaves to harbor and it doesn’t have a certain destination, it’s just going to aim listlessly out there. You have to have that destination. So whether you have goals or you don’t, here’s the time where you got to assess whether they were met during the current year. If not, what adjustments or changes might be necessary for the upcoming year.
And this could involve reevaluating your risk tolerance. I think right now, Greg, in 2023, it’s been risky. It’s been volatile, right? Am I doing the right thing? I don’t know. Should I make a pivot? What are other people doing? So what kind of return expectations? I mean, a lot of things have been reframed this year. You hear a lot of stuff on TV or podcasts or on the print media about money market accounts yielding four and five, five and a half percent. I mean, that’s unheard of for a lot of people, especially younger folks that have never kind of had that. So what kind of return expectations are you looking at and the overall composition of your real estate portfolio? Really what you and I are doing, Greg?
Greg Lyons (05:22):
Yeah, what’s interesting with that money market accounts, and we hear this a lot like, Hey, I could throw my money into a money market account and get five and a 5% on my money, but you also pay tax on those gains. So it’s not actually 5.5%, it could be a percentage lower or whatever your tax bracket may be. We’re not a tax professionals never claimed to be, and we didn’t even stay in a Holiday Inn Express last night, so we can’t even do it. But you will pay taxes on that five and a half percent gain. And when you start factoring in inflation, where are you at the end of the year when you’re taking a look at those money market accounts in investing money?
Tim Lyons (06:06):
Greg, you might be skipping ahead to number three.
Greg Lyons (06:08):
I’m just saying, oh, I’m sorry. I’m sorry. I think
Tim Lyons (06:10):
You might be skipping ahead.
Greg Lyons (06:12):
Let me back it up. I am so sorry. Second tip for real estate investors is to review the performance of your existing investments, which is very important.
Tim Lyons (06:25):
A hundred percent. How did you make out, right? I mean, there’s a lot of people that went out and bought, say, Airbnbs at the top of the market with very favorable financing, and now maybe they’re realizing that people are pinched or they’re starting to get pinched and they’re not spending the type of money they were spending maybe 18, 24 months ago. So that’s just one example. I mean, listen, you have to look at what have you done? What are they doing? Are you a passive investor in syndications? Are they still paying? Are they pause distributions? Are they going full cycle? Are they refinancing? Are they doing just fine? Are they reporting? Are they not reporting? How’s the market doing in that area? What kind of adjustments should you be making? Such as vetting other sponsors or other groups, vetting other markets, looking at your long-term strategy and saying, how did I do this year? How am I maybe sizing up due in the following year? And what pivot, if any, could I make?
Greg Lyons (07:27):
I think it’s also important to ask questions, whether that’s if you invest with Cityside capital, ask Tim and I or Paul questions about what’s going on. But whoever your sponsor is, ask them, Hey, what’s happening with the property? What’s going on? What can we expect in the future? Those are all valid things to do as a passive investor to really kind of assess and review where you are and when you do, what are your goals? Review the performance of your current goals. Tim, we like to talk about the conveyor belt theory. Do you want to run people through the conveyor belt theory real quick?
Tim Lyons (08:04):
Yeah, so the conveyor belt I got from Gino Barbara from the Jacobs Gino Mastermind, and I’ll make it for the $50,000 investor. Greg and I at Cityside Capital, we do say $50,000 minimum investments for a lot of our deals. So if you were to have, say, 50,000 each year that you wanted to put into a passive real estate investment, so in year one you put the 50,000 up on the conveyor belt, and that kind of moves down the line to year two. You put another 50 on that moves down the line. Year three, you put another 50 on and so on and so forth till year five, because a lot of these deals have a five year or so kind of life cycle. But on year six, that first 50,000 might fall off. That deal might go full cycle. So now you get your original $50,000 back, you get any appreciation due to you.
Hopefully there is appreciation at the end of that deal. And now in year six, you can now recycle that first 50,000 plus the appreciation and put it onto the conveyor belt in year six, and now it moves down the line. Year seven, take year two, dropping off, take that money and you can see how over time you can now put that conveyor belt to work, but you’re putting more and more capital, you’re recycling capital, the velocity of your own money can start building on itself. So that’s just really hit me, Greg, back when we were first starting out early 2020 with the Jake and Gino folks, when he kind of mentioned that to us, that really stuck with us a lot and it made a ton of sense.
Greg Lyons (09:40):
The velocity of money when you kind of put the plan into action of making investments each year, watching ’em go up the conveyor belt, that really did make sense to us. And then just for the listeners out there, this is not investing advice. This is just a general idea or thought like dollar cost averaging that you could be doing in the market. So take this with a grain of salt, but it’s just a thought to think about when going forward as we move into our third tip, Tim, I think this is one of the key things that a lot of real estate investors overlook when having the full picture of their real estate portfolio. And that’s consulting not only a good tax professional, but a real estate tax professional, a tax professional that has a great handle on real estate, the power of real estate and how to use real estate when filling out your taxes.
Tim Lyons (10:37):
Greg, this has quickly become one of my favorite topics is taxes, right? And
Greg Lyons (10:44):
That’s why you’re a killer at all. The cocktail parties killer. I mean taxes, woo. Boy, if you move into insurance too, you’ll be a killer. Listen,
Tim Lyons (10:52):
Forget religion and politics. We’re going to go for insurances and taxes. But listen, taxes, it’s one of our biggest expenses. If you read Tax-Free Wealth by Tom Wheelwright, when one of the beginning chapters, he talks about how the average W two workers works until April or May each year just to satisfy their tax liabilities. And if you think about that, you’re working for free just to pay the government until April or May each year. I mean, that’s crazy, right? I mean, that’s wild. So when you can learn about what strategies, what deductions are out there that you can take advantage of, can you consider 10 31 exchanges for tax deferral? Can you optimize your portfolio for tax efficiency? Understand any changes in the tax laws that might affect your real estate investments, and then you can plan accordingly, right? I mean, there’s all these different things, but you have to start that conversation now for 2024 or for 2024 planning.
The worst thing you can do is wait until, say, March of 24 and say, you know what? I need to call my guy or my girl and say, I think I might be basing a tax hurdle this year. What can I do? Like, no, no, no. You got to start that conversation now. Start the planning and the strategy now so that when you come up to next year’s tax deadlines, now you have a plan, right? If you don’t have a plan, you’re setting yourself up to lose money. And I always say, Greg CPAs are CPAs, right? They have CPA after their name, but doctors are also doctors and they have MD next to their name. But if you broke your ankle, you would not want to go see a pediatrician or you wouldn’t want to go see a neurosurgeon. You want to go see an orthopedic surgeon that specializes in ankle fractures. And the same thing for CPAs, right? You can’t just go to a general practitioner and expect to have top-notch advice or somebody that’s specializes in farming and machinery or something like that and have them do your real estate stuff. No, you want to get with people that are understanding the industry, they understand the deductions strategy, the tools, the tactics of real estate investors, whether you’re an a limited partner, a general partner, a solo practitioner, an entrepreneur, whatever it might be, you want to find the folks that can help you solve your problems.
Greg Lyons (13:13):
That just doesn’t go for more complex 10 31 exchanges or anything like that. It goes for your whole portfolio, right? Did you have a big bonus at your W two job? How does that affect your overall tax situation? But having a real estate centric CPA is the way you want to go. So
Tim Lyons (13:34):
Lemme just stack on top real quick. The example you were giving when you so eloquently jumped ahead in tip one. For tip three, the money market account. Just say for example, it’s 5% and people feel good about that, it’s relatively risk-free, I guess, and they’re getting 5%. They feel good about it. Alright, but inflation’s still trending. I don’t know today, Greg, what is it? 3.2% as of the last reading? Sure. Right. So inflation is 3.2%, and I think right now people are understanding what inflation means and how it can really diminish your purchasing power. But then on top of that, any gains from a money market account or anything like that is taxed. That’s simple interest. It’s simple interest, which means it goes towards ordinary income. So if you’re in the highest tax bracket, which might be, I don’t know, Greg, what is it now? 37, 30 9%, something like that. That’s another consideration, right? It’s another consideration that it’s simple interest. There’s no real kind of shielding of that income. So it’s just one of those considerations that you need to talk about with your financial advisor, with your tax strategist, so that you can really understand how your tax picture is shaping up.
Greg Lyons (14:47):
Even with the best planning. I could still screw up the tips. And so really sorry about that one, Tim, but you know what? The listeners are probably used to it by now as we jump ahead to tip number four, having the whole picture of your real estate portfolio is really important. And what kind of overall diversification do you have in that portfolio? Are you all in on one particular asset class, one particular market? What is the diversification or the mix of investments look like in your real estate portfolio?
Tim Lyons (15:23):
Well, I bet you a lot of financial planners, Greg, are reaching out to their clients right now into the new year talking about this exact topic, right? Diversification, little bit into equities, a little bit into bonds, a little bit into fixed income, a little bit into annuities, a little bit into life insurance, a little bit into cash. And then it was do some rebalancing. And that’s like, it’s a thesis that has been around for a really long time. But for real estate investors or alternative investment investors, it’s the same thing. Are you too heavy in multifamily? Are you too heavy in single family? Are you too heavy in notes? Are you too heavy in certain areas? Should you reallocate some of your resources into debt? There’s a lot of debt products out there for real estate investors who want to be on the debt side right now, right?
Rescue capital, mezzanine debt, something like that versus just being on the equity side every time. Private lending probably huge right now. I don’t do any private lending, but I know people who do, right? And they’re making some good deals right now. So where are you in your portfolio? What is available to you? What could you understand, educate yourself on, align yourself with that might really kind of put you in the right direction. So same thing with the traditional financial advisors. They do it. So as an alternative investor, real estate investor, we should be doing it the same way.
Greg Lyons (16:46):
Yeah, regular financial planners called rebalancing your portfolio. I think it’s good to take that step back and maybe rebalance your real estate portfolio. What are the things that I could go into that gives me a little bit more diversification? I think that’s important. I think, Tim, what you mentioned, things like rescue capital, mezzanine debt, private lending may not be something you’re familiar with, but that kind of leads us into tip number five, and that’s keeping yourself informed about current real estate market trends, interest rates, economics, staying on top of what’s happening out there is really important. And that kind of goes with the rescue capital, mezzanine debt and all that stuff. If you don’t know about it, let’s start reading about it or asking the right questions.
Tim Lyons (17:30):
Listen, the worst thing we can do is be an ostrich in today’s day and age and putting your head directly into the sand and hoping for the best. Keeping yourself informed about current real estate market trends. Where are the housing shortages? Where is there oversupply? What’s, what are the rents doing? What’s the occupancy doing? Where is the data center needed? Where is the warehouse needed? Where is it not needed? All these things. Where are interest rates today? Where are they forecast that being? I mean, I would be very leery about looking at interest rate forecasts and never, right? But understanding the broader market conditions, it really can help you make informed decisions about your real estate holdings and just staying updated on local market dynamics. These can significantly impact your property values, rental incomes, your financing needs. So listen, there’s no shortage of websites and subscriptions and print media and podcasts that really kind of go over these at a high level and on a niche level. So really, who are you following? Who are you getting your information from is huge, right? And really staying on top of the current market stats.
Greg Lyons (18:40):
Tim, I think you nailed hit the nail right on the head there with where are you getting your information? If you’re just on Yahoo Finance and hey, I’m 65, I have $500,000, I have a pension. That’s not keeping yourself informed. And a lot of times it’s getting off the internet and it’s having conversations with people and maybe having conversations with people that are maybe five or 10 years ahead of you in either real estate investing or whatever you choose. But looking at that person that again, is ahead of you in investing or whatever it is, and have a conversation with them. How did they get to the point in their life where they’re maybe a little bit more financially secure or invested in some different asset classes? Tim, what do you think about getting off the internet and talking to people? Crazy concept, right?
Tim Lyons (19:30):
Crazy concept, Greg. And 10 years ago, I would’ve thought that somebody like me was weird. That guy’s weird. He’s going against the grain. He’s not just conforming to the 60 40 portfolio and his target date fund, that is 4 57. What’s that guy doing? But what I found, Greg, as a lot of our listeners know, is that we’ve built a tribe. We’ve built a tribe of trusted folks, people that have done the thing that Greg and I want to do that we are doing, and they’ve been successful doing it. And you’re not going to find that on the old interweb, Greg. You’re going to find that at meetups and conferences and masterminds. I mean, they’re real. I’m telling you guys right now, they’re real and they’re out there and people are building tribes of like-minded folks, not echo chambers, not crazy stuff. But listen, how did you take your 4 57 or 4 0 1 k and how did you self-direct it?
And what are you self-directing it into? What are your experience and who do you like to work with and what are the pitfalls and where did you lose money and where did you make money? And all these things, or a different one that we’ve been a part of is people who have liquidity events and hey, having a liquidity event, I’m selling my business, I’m selling my farm, I’m selling whatever. How do you do that? Who do you trust? What kind of people do you need around you to make it happen? Mean? These are the types of groups that are out there. They’re functioning, they’re doing great. Who are you surrounding yourself with, right? Jim Rohn has a quote. You are the average of the five people you spend the most amount of time with. If you’re with five losers, guess what? You’re going to be, right. If you’re with five winners, guess who you’re going to be. So I just love that. And Greg, we’ve done it. And if anybody’s interested to know who we’re talking to and who we’re with, I mean, just reach out and we’ll be happy to have a chat.
Greg Lyons (21:14):
No, totally. So with these five tips that we just gave you, do not have to wait until January 1st. Don’t have to do it. It could be tomorrow, it could be later today. Whatever you’re doing, really, really start thinking about what you’re doing. But it would not be the passive income brothers if we didn’t have two additional tips for you to close out 2023. And I think, Tim, one thing that is often overlooked in your tax efficiency with your real estate is the cost segregation study. And that’s usually done by the operator of the property. If you’re a passive investor or if you’re an active investor and you buy yourself a property, having a cost segregation study is super important. And why is that important in making the investment in 2023? Tim,
Tim Lyons (22:08):
For the uninitiated or the people who say, what the heck is a cost segregation study? It’s actually something that is, as Tom Wheelwright talks about, his book and his podcast, it’s required by the IRS. If you’re a real estate investor, it’s actually required, but they don’t really turn the screws on you on this one because it’s a tax strategy and that can save you money. So they don’t really go after you if you don’t do a tax, a cost segregation study. But anyway, a cost seg study simply is a depreciation schedule. There’s something called straight line depreciation, Greg, for residential properties, it’s over a 27 and a half year lifecycle. So there’s a formula, and I’m probably going to butcher it, but say it’s like just play
Greg Lyons (22:55):
With, oh, just play with public math. Oh, this is public math. This is going to be a train wreck.
Tim Lyons (23:00):
So just say 75% of the purchase price. And then you kind of divide that by 27 and a half years, and this is really, really rough. Don’t hold me to this. That’s what you can take on straight line depreciation. But if you do a cost segregation study by a specialized firm, that’s basically, think of accountants who marry architects and engineers. They come in and they can look at your property and they can break out all the component parts, right? The land, the structure, the light switches, the toilets, the flooring, the walls, everything. They break it down into component parts and they put it in a five year bucket, a seven year bucket, and a 15 year bucket. And those three buckets can be accelerated. The five year bucket, all those parts can be accelerated, depreciated over five years. The seven year bucket can be depreciated over seven years.
And the 15, obviously over 15 years, but back in, I think 2017 with the Jobs Act by President Trump, I think it was the Tax Cuts and Jobs Act of 2017, he said that you can wrap all those buckets together, add ’em all up and take them as a loss in year one, right? That’s called bonus depreciation. But there’s a sunset clause, right? In 2022, you could have a hundred percent bonus depreciation. So those three buckets you added up, you can take a hundred percent of that in 2022. In 23, it’s only 80%. In 24, it’ll be 60 25 will be 40, 26 will be 20, and then it’ll sunset unless Congress makes it permanent. So that’s a long story to say that this year, right? If you have 30 days left, if you want to take advantage of any kind of bonus depreciation at the 80% mark, 2023 is your year.
Greg Lyons (24:44):
And you could take advantage of that as an active or a passive investor. So again, this is all taxed of, you should consult a real estate professional. This is high level thought provoking conversation, and we’ll leave it at that.
Tim Lyons (25:01):
And Greg, just real quick, you can do this on properties as low as I think 200 or $250,000. So again, if you need to contact, email me, email@example.com, and I can point you in the direction of a couple of different cost segregation firms that we know about, and they can get you in the right direction.
Greg Lyons (25:20):
It doesn’t have to be a skyscraper that you just purchased. A lot of us are not buying skyscrapers, but it doesn’t have to be this big monstrous property to take advantage of some of those tax savings. Tim, we are moving into bonus tip number two, and I think it’s really important in 2023 with all the negative news out there, and I think it’s something we’ll label emotional investing, right? It’s bringing your emotions squarely into the decision-making process and not letting numbers or market or anything, anything like that drive your decision-making when it comes to investing. But it’s going to be fear or excitement. It’s going to be emotional investing.
Tim Lyons (26:10):
Yeah, just how about fomo, right? Fear of missing out. I mean that is, it basically leads us into these highs and lows, right? I mean, is anybody talking about NFTs anymore? I mean, has anybody bought an NFT? Right? But 18 months ago it was Bitcoin and NFTs. I mean, we’re buying these little digital, not me, obviously, but people are buying these little digital widgets or something. I don’t even know what they are, but right now you don’t really hear about that, right? Because we’ve had inflation, we’ve had maybe some job losses, we’re facing some uncertainty. Are we going into recession? Are we in recession? I don’t know. So you really haven’t heard much about NFTs, have you? So listen, I mean, FOMO is one of those things that retail investors, right? Every day, main Street, mom and pop investors, we struggle with, right? We have money, we have resources, we worked hard for that money.
Where do we put it? Where can we be confident that we can do something positive with that money? Besides keeping it safe in your local savings bank or your savings account, yielding 0.05%, whatever it might be. And here’s the emotional part. Emotions can lead us down the wrong path. But what you can do as an emotional investor, because I’m one as well, hi, I’m Tim, and I’m an emotional investor, is education. Education is the antidote to fear. So who are you getting your information from? Where are you reading it? What kind of sources? Who can you talk to that’s done the thing that you want to do? Is there a mastermind? Is there a group? Is there a meetup? Is there a podcast? Is there somebody out there that is doing the thing that you would want to do and align yourself with that person or that group or get that knowledge with the books and the podcasts and all of the things? Because if you have the education and you apply the action towards it, then you can kind of minimize some of that emotion and that FOMO that can creep up on us at exactly the wrong time. I mean, you read any book, Greg, it’s going to be chapter one, page one, buy low, sell high. I don’t have the stats in front of me, but people traditionally buy high and sell low. So let’s not be that for 2024. How about that? I
Greg Lyons (28:19):
Love that. That’s a good message to start wrapping up on. But last week was Thanksgiving, and I think it’s always a time for reflection, family, friends and stuff like that. But I think Tim and I are really thankful for our listeners and together with Doug, our wonderful podcast guy, we have kind of gone over the numbers and we are really happy about where the podcast is, our listenership, how long people are listening to episodes, and we always appreciate feedback on the rating and reviews. But generally speaking, we are so thankful to our listeners, and as we make the sprint to 2024, it’s going to come quick. Make sure you reach out to us, have a conversation. We’re not going to hold your feet to the fire to make an investment. But I think it’s making that connection and starting the conversation, which may lead you in a completely different area outside of what we do. But having those conversations, getting off the internet and talking to people, I think is really important as we turn the page to 24.
Tim Lyons (29:33):
Love that. And just so you know, we both read all of the podcast reviews and the ratings. They mean a lot to us. It’ll be, Greg, we got two more ratings, or We got two more reviews. Did you see what that guy said? Or whatever. So if you could just take a few minutes, leave an honest rating review, and also if you have something you want to hear about, if you have any feedback, if you think that Greg’s jokes are horrible, I do, just reach out to me, Tim, at cityside cap.com. I’d love to hear your feedback.
Greg Lyons (30:10):
But if you like Dad Jokes 1 0 1, firstname.lastname@example.org, I’m ready for all of them.
Tim Lyons (30:16):
I love it. So listen, that’s going to do it for this week’s edition of The Passive Income Brothers podcast. We look forward to serving you again next week. Thank you for listening to another episode of the Passive Income Brothers podcast. We would be grateful for your support of our podcast by giving our show a five star rating and review and subscribing to our show on your favorite podcast platform. Don’t forget to take inspired action after listening to this show so that you can start building out your passive income streams. Finally, head on over to cityside cap.com to connect with us and find out more information about how to get started passively investing in real estate.