Introducer [00:00:02]:
Welcome to The Untold Stories of Real Estate Investing, hosted by Wayne Courageous III, a place where active and passive investors come to hear the good, bad and ugly of real estate investing. Our guests consist of experienced operators and investors who want others to succeed by sharing their stories. If you're looking to syndicate, real or grow your your wealth passively in real estate, you've come to the right show. It's now time to sit back, take mental notes, and enjoy our next episode of The Untold Stories of Real Estate Investing.
Wayne Courreges III [00:00:38]:
All right, welcome. We are at our monthly meetup on the fourth Monday of each month. This is August 28, 2023. We are going to be talking today about how real estate investors can save thousands of dollars in taxes through cost segregation. It's one of the main reasons why people invest passive and actively into real estate, not only for the cash flow, obviously, but for the tax benefits. And a big reason for the tax benefits is the depreciation through cost segregation. So we're going to talk with Matthew today with mass inspects and learn all about cost egg. So before we get going, I got a few slides, one to talk about our meetup. We meet on the fourth Monday of each month other than December. So 07:00 P.m. Central Standard Time, where we talk about multifamily investing, have outside speakers. I also host some of these conversations where we're just talking about investing primarily from passive investing standpoint, because we really try to educate passive investors in hopes that they can make a more sophisticated decision when they're reviewing deals that come their way. I'm starting to become more competitive with this. So for those that are becoming or watching this show or this meetup, we are ranked number two as far as the number of people that have subscribed to our meetup, which is awesome because not everybody can join each month. But we do send out the recording to people and just love to see this number growing. We're catching up to the meet up in Hamburg, Germany. They've got about 1560, we're about 1433. So pretty cool. We've done this in about a couple of years. So thanks to you. For those that are live on this meetup and those that are listening in afterwards. Excited about the growth? Just a little bit about me, myself. My brand investor relations person is like, you have to update this photo because it is pretty old. So I'm going to make a goal of updating my photo. We just need to get some actual photos. But I'm in Central Texas area. Born and raised in Austin, moved out in Bryan College Station area a few years ago, bought some land out here and really love being close to the Houston Austin area. That's where we primarily focus on our assets, though. We have multifamily storage, build to rent communities in Texas, Louisiana and Alabama. We've got about $33 million assets under management where we are heavily involved on the asset management side and day to day of those assets. Previously worked for a Fortune 150 commercial real estate company. Transitioned out of the W Two role this past summer. So just a couple of months ago, went all in on our real estate investments. So super excited about that and really been doing this for the last 16 years on the commercial real estate management investment side. So going into just a couple more slides here, we are ramping up our podcast. I've got speakers for the next eight weeks. So we are going to be getting back into the every other week postings. I sort of slacked on that this year, so I'm excited to get that momentum back going. So if you haven't subscribed, please do so. The Untold Stories Real Estate Investing my goal is to bring a lot of other asset classes into the discussion. I know I heavily talk about multifamily, but we're going to be talking about other asset classes as well. And so hopefully mix it up and make it more interesting for people that are interested in real estate investing in general. Also, if you haven't already, go to CREI partners.com. There's a lot of content. We do blogs monthly, we do our do, you know, just so much content with this meetup, et cetera. It's all there. Our YouTube channel, et cetera, you can all access it through there. If you're open to investing with us, there is the Invest With US link and you put in your information. We'll have a one on one conversation and see if it's a good fit. The other thing is we have a couple of offerings that we are actively capital raising for. We should be done with both of those in the next couple of weeks, but wanted to mention it here. And not only for those, but just for future investments CREI Partners invportal.com. You can also access it through Creipartners.com. There's that investor login link. It'll take you to the same spot. So if you're actively looking for passive investment opportunities or want to see what we have now or in the future, definitely click on Investor Login on our website, CREI partners.com. You can register or if you already registered, just log in and see our offerings. One of the things that we're proud of this year is we've launched a Passive Investor Coaching program. We recently lowered the price. Really just wanted as many people to take this as possible. This is not what we make our money off of. We make money off real estate, but we really want people to accelerate their learning as quickly as possible so they can invest sooner. So if you've been on the fence about joining Passive Investor Coaching Program, definitely check it out and there's a lot of great content and then we meet monthly and then when you have opportunities to invest, I'm definitely here to answer questions and be a resource so enough about us and what we're doing. I want to introduce y'all to Matt Clark, sales associate with Madison Specs. Madison Specs is a group I've used on two other properties that we own in Houston, and they've done an outstanding job with their cost segregation analysis. So not only am I excited to have them here, but I'm also excited to talk them up because I know there's active investors that are listening in or on this meetup today. So if you haven't connected with Matt or Mass Inspects in general, definitely recommend doing so. But I'll introduce Matt and then I'll stop share here and then he'll take it over. But Matt lives in Houston, Texas. He was born and raised and attended the University of Houston. So before the show, he is all Houston. And just amazing how Houston has grown so much and how he's seen the growth. But his journey came into the world of real estate pivoting from the software realm, where he honed his skills as a value added seller. Currently, Matt is part of the dynamic team at Mass Inspects, a company with over 15 years of experience in the field and an impressive track record of completing 10,000 studies nationwide. In his role, Matt specializes in offering cost segregation studies, helping real estate investors unlock hidden value with their properties and optimize their financial returns. With a passion for property and commitment to delivering top notch service, matt is dedicated to helping clients achieve their real estate investment goals through the power of cost segregation. Matt, really grateful for you to join us today. I'm going to stop share and turn it over to you and excited to learn from you.
Matt Clark [00:07:52]:
Awesome. Thank you so much, Wayne. I really appreciate that. So I will get started here if I can click the right buttons. There we go. Excellent, everyone good to go. Can see that. Perfect. OK. Excellent, Wayne. So first and foremost, I just want to thank Wayne and the partners over at CREI. Thank you so much. And like you said, I'm with the Madison Specs team. All we do is cost segregation. At Madison Specs, we're part of a larger umbrella of a full service commercial real estate company, madison Crest Commercial Real Estate Services. But all we focus on is cost segregation. So I want to just start by giving everyone just a brief overview of what cost segregation is in general. And then we'll dive into just a little bit of detail on cost segregation and of course, open it for some questions thereafter. So I'm a simple man, I like analogies. So I'm going to start with a very simple analogy of cheeseburgers for the cost egg, right? So everyone gets depreciation on an asset. This is what your CPA is doing for you. If you have an investment property, they're doing straight line depreciation. So on a commercial property, all they're doing is taking your property, subtracting the land value and dividing that by 39. And that's the depreciation you're going to get each and every year, the same amount for 39 years until you sell. Now, this cheeseburger is your cost segregation, is your depreciation on cost segregation. So a little bit more meat to it, a little bit of fixings, right? So I don't know about you all, so sorry if there's any vegetarians in the chat, but this is the burger I'm going to go with. So I hope this analogy makes a little bit more sense after I cover some topics. So in Overview of cost segregation study, all we're doing is breaking down each component of the property. So a lot of people think, well, I bought this property and that's all I get is just whatever the property value is. But that's not true with the cost segregation. We're going to take each component of that property, break it down to five year assets, 15 year assets, and then the rest of the structure is left over to a 39 year asset. So, again, the formula for cost segregation, we need to start with your depreciable basis. So what that is, is your property minus land value. In Texas, it's traditionally around 15%. Places like California, New York. Typically about 25%. So you take your property, subtract land value, and that's how we start your cost segregation. And we start also with five year properties, so that's anything in the building that you purchase that's personal, tangible, and nonessential. So if you took all that out, you'd still have the structure, you still have the building. So this is not a comprehensive list. This is just a couple of brief examples. But things like that can be appliances, flooring, any kind of cabling for telephones, special plumbing, electrical, window treatments, and even some equipment and furniture that comes with the property could be included in a five year property. Now, your 15 year properties are going to be land improvements. So you walk outside, you see a trellis, pavement, sidewalk fencing, landscaping, even a pool and a tennis court can be included in a 15 year land improvement property. So all this means is the IRS is saying they know carpet doesn't last 39 years. They know that's probably a five year asset, and they know pavement doesn't last 39 years either. That's closer to 15 years. So that's how we're breaking that up, based off IRS code. And this is just a quick visual aid on random property to show you the savings of cost segregation, right? And some people are saying, why am I saving so much more with cost segregation? Well, you're not really saving more, right? You're saving more quickly. So if you added up all the blue bars and all the green bars, it's the same amount, we're just giving you that benefit much, much sooner. So say I owe you a million bucks and I give you two options. I can give you a million bucks tomorrow to pay you back or I can give you 100 grand for the next ten years to pay you back. Which one are you taking? You're probably going to just take all the money tomorrow. So in conclusion, a couple of high level cost segregation benefits reduces your tax liability, increases cash flow and the time valued money. Again, would you rather have a million bucks tomorrow or 100,000 for the next ten years? Up to you. And I'm not going to go through all these. I just wanted to give you all one example. I'm going to cover the top left one, the Houston multifamily property. But these are just some recent tax savings we've had for our clients. So again, you start with the depreciable basis. So we took the property subtracted land. We got $11.1 million. This particular property had about 20% of it added up into five year assets, and the rest was another 8% on the 15 year reclass. So 20% is pretty common with multifamily. Say it's 100 unit complex. What do you have? 100 microwaves, 100 washers and dryers, 100 pieces of countertop, 100 pieces of carpet. So you can see how those small numbers start to add up very quickly, especially with a multifamily. Each individual piece of property has its own pros and cons, if you will. But multifamily, there is definitely large amount of savings available. So that is just my quick overview of cost segregation in general. And now with the recent tax codes, in recent years, we have this thing called bonus depreciation. So what that means is it just ended last year on the 100%. This year we're in 80%. It's getting phased out 20% by year. But even at 80, 60 40, you're still getting large amount of savings. So all that means is with the five year assets and 15 year assets, you can take all that depreciation up front. And again, last year, if you bought a property or any year, 2018 and 2022, you could have got 100% bonus depreciation. So you could have got all the five year assets and 15 years assets upfront to you. And a tax deduction year one. This year we're looking at 80. Next year, 60, 40, 20. There is a little bit of speculation, rumors that they're trying to bring this back, but that's just speculation rumors. This is the current tax code and how we're looking at it now. And just to give you another visual aid, this is what an example of 100% bonus depreciation and tax savings looks like, right? So it's not for everybody, but if it's going to work for you, it works very well. You get a huge tax deduction year one and say, well, I didn't make $2.5 million in real estate last year. I don't need a $2.5 million tax deduction. It rolls over indefinitely as long as you own the property. So if you only made $500,000 or however much money, you'll get a rollover year after year indefinitely until you reach the end of your scheduled tax deductions. There's a little bit of misconceptions as well in the market of who should do cost segregation. Anyone who invests in real estate, if you're planning on holding the real estate asset for longer than a couple of years, do a cost egg. And some people are also a little curious about who is eligible. It doesn't matter. Individuals, trust estate, corporations, partnerships, LLCs, anyone can do Cossec. Okay, this part is a little bit more particular to you all or will be in the forthcoming years after you make your first investment. So there is a difference between an active investor and a passive investor, right? And so I'm going to go into detail on that. Now, active investor, you need to qualify as a real estate professional. So I have a couple of qualifications there. Essentially what that means is on your tax form, you're able to check certified Real Estate Professional. And what that means is you have 750 hours of service during your tax year in real estate. So it doesn't really work if you have a full time W Two. The IRS is probably not going to buy that you've spent 750 hours in real estate traditionally. And those activities include or not limited to developing, constructing, acquiring, converting, renting, operating, or brokering real estate deals. So that's just a brief overview of what active real estate professional means. Now, for a lot of you in the short term, you'll probably fall into this passive real estate professional side of things. But don't worry, you still qualify for savings. It's just not quite on par with what you get with the active investor. So again, you still qualify and all your passive losses will be offset with passive profits. I think I wrote that backwards, actually. Your active profits will be offset with passive losses. So you can't put it against your active income, such as a W Two or 1099 in most cases, but you could essentially almost see your passive profits being all tax free as long as you have the qualifying passive losses to offset that. And then this is a discussion to have with your CPA, but there is also examples of where you are able to write off passive losses against your active income. Again, a W Two or 1099 work is active, not related to real estate would be active income. But you just need to have your modified justed gross income, $100,000 or less, which I know some of you are like, well, I make way more than that. That is what you make on paper, right? So again, that's a conversation to have with your CPA. See if you can get to that number. But that is an option available. The best time to do a cost segregation study is after an acquisition, after any major renovation or addition to the property, newly constructed properties, and also look back studies. So a lot of people think, oh, I already pay taxes on the property. I'm out, I can't do cost SEG anymore. Not true. We can do a look back study and get you that additional savings. All we're going to do is subtract any depreciation you've already acquired. So if you had it for three years already, we're going to subtract that 130 9th or 330 9th from whatever your cost SEG study might save you. And we're going to bust some myths as well on cost SEG. So a lot of people think that, oh, my building is too old to do a cost segregation study. This building is already 100 years old. So we're way well past that 39 year schedule. That's not true. So once ownership changes, the depreciation schedule starts all over again. Doesn't matter if your building is two years old or 150 years old. If you just acquired that property, you're reset on a new depreciation schedule. Residential, 27 and a half years, commercial, 39 years. And some people also say, well, my CPA already handles all the depreciation for the property. True. They do straight line depreciation, right? So they're just taking that property minus land value, dividing it by 27 and a half years and or 39 years, and that's all you're getting. So they plug in your tax loss numbers. They're not doing cost segregation for you. They need to have a third party independent engineer do that for them to give you the line items for each asset. And some people also think, oh, if I do a cost, I'm going to get flagged by the Rs and I'm going to get audited again. Not true. When you go with a certified professional cost segregation like Madison Specs, they want to see clean, nice cut, engineered cost studies and that's all we do. So again, if you did a cost SEG with Madison Specs, IRS audit is not of your certain. Now a lot of people also say, sounds a little too good to be know what are the downsides? So essentially the only downside of cost SEG is going to be tax recapture. So if you're selling the property next year and you just bought it, don't do a cost segregation because you're going to have to pay those taxes back. The difference on what you owe from the cost SEG study versus the straight line depreciation, you need to pay that back. So if you're going to plan to hold it for 34567 years, do cost egg. But otherwise we always tell flippers, stay away, don't do this, it's just not worth the headache. So that pretty much wraps it up for my cost overview. I just want to very quickly go through a little bit about Madison Specs, my company. And actually some of these numbers are outdated. So we actually are closer to 70 professionals now that solely focus on cost segregation. And we're actually closer to 20,000 studies done across the country. So that tax savings number is also a little bit larger now during COVID it was hard to travel to sites and it was hard to set up meetings and get cost done. So we came up with a virtual smart tour. So for some properties we're actually able to do them virtually. No one has to go there and do the engineering work on site. We can do them virtually so it's much quicker and saves some expenses as well. For the travel costs, we typically have to charge a customer. So virtual tours are streamlining the process and saving people even more money. And again, I mentioned this briefly, but Madison Specs is just one division of Madison Commercial Real Estate services. We are a full functioning commercial real estate services company. And here are just a couple. Here's a little bit of what we do, title work, 1031, so on and so forth. Awesome. And then also we do offer free feasibility analysis. So what that means to you is all we need is an address and a relative purchase price and we can give you a preview of what your cost segregation will look like. And we use very conservative numbers on the feasibility analysis, so we can almost guarantee whatever number we provide you is going to be your savings, if not a little bit more. So that's it for me on my presentation. If anyone has any questions, I'll do my best to get some of those answered, but otherwise I really appreciate the time. And thank you Wayne. Thank you everyone else for listening.
Wayne Courreges III [00:22:05]:
Hey Matthew, great job summarizing costsec. So for multifamily investors that are looking to invest, this is not something that you all have to go and reach out to, right?
Matt Clark [00:22:19]:
Yeah. You would reap the benefits of it.
Wayne Courreges III [00:22:21]:
You reap the benefits of it. You just want to know. You should ask it, but it should be I think it's probably good to ask and not assume that a cost egg is happening. Hopefully your sponsor this sort of right.
Matt Clark [00:22:34]:
You should definitely ask. Right. It'd be pretty easy to see on the K one you get at the end of the year, but you should be asking before that for sure. Yeah, so that's a good point, Wayne. One thing I forgot to mention, it's one cost SEG per property. If there's 100 investors in a property that you don't need to have to do 100 cost segregation, whoever owns the building, or if it's a 50 50 partnership and they have it syndicated out to passive investing, they handle the cost SEG and they should be passing the savings down to you.
Wayne Courreges III [00:23:02]:
You also mentioned the 39 years and the 27 and a half years. So multifamily benefits right through that 27 and a half years of depreciation.
Matt Clark [00:23:13]:
Multifamily is typically considered commercial property, so that'd be on the 39 year scale for the most part. Even things like short term rentals such as airbnb and verbo are also considered commercial as well. If you had a residential property with a long term lease, typically about twelve months or more, you could get the residential the break. It was actually a good point. I actually just did an airbnb cost SEG for someone and the difference was very minuscule. I accidentally submitted it as a residential property. We had to take it back and resubmit it as commercial. And she went from $301,000 in savings to $297,000 in savings. So even though it sounds like a lot of years, the difference is not as large as you think.
Wayne Courreges III [00:23:58]:
So the commercial is 39 years and residential is 27 and a half.
Matt Clark [00:24:02]:
Correct. And don't ask me why those are those numbers, because I looked everywhere to find that. I don't know why. Those are just the numbers. Yeah. Residential, 27 and a half, commercial 39. So multifamily falls under commercial, and then now since airbnbs verbos, that type of thing are newer, there's not as much tax code with those. Those do follow under commercial.
Wayne Courreges III [00:24:24]:
Yeah, one of the questions we got is does cost segregation benefit commercial multifamily more versus small multifamily to keep it short?
Matt Clark [00:24:33]:
Yes, because again, we're adding every little piece of the property. So if you have more pieces to the puzzle, there's a bigger lump sum, if you will, at the end. But it's not to say that it's not worth it to do it on a small multifamily. And again, that is why. So every now and then, if it's a smaller building or two units or duplex, every now and then the savings or the value of the savings isn't really worth paying for the cost segregation study. But for the most part, if you have an investment property, it typically is. But yeah, the bigger the more you got going on with a building, typically the bigger the savings will be. More moving parts.
Wayne Courreges III [00:25:18]:
We have one hand raised, johnny, if you want to unmute yourself, definitely ask a question or put in the chat.
Matt Clark [00:25:25]:
Sure. Thank you, Matt, for the presentation. So my question is, can you still do a cost SEG even years after acquiring the property? So, yes, again, with the look back, typically the cut off is seven years. Typically, but there is workarounds and special scenarios. But yeah, about seven years is typically where the IRS will cut you off, but every now and then there's workarounds you can get back to ten years. But yeah, don't wait too long to do your cost. I'll say that. But if you had a handful of years, you still have time.
Wayne Courreges III [00:26:05]:
Yeah, and for the active investors, too, a lot of times you can reach out to say, Matt in this case, and they can start doing a cost SEG even before you purchase the property. So if you've got investors, like for example, on CRI partner side, we have a lot of investors who want that tax depreciation, in some cases even want it more than the cash that they want that depreciation losses and I did.
Matt Clark [00:26:35]:
Want to just say one quick caveat for multifamily five or more doors is commercial. If you have anything four or less that you can still get away with the residential. But again, I wouldn't let that scare you away too much because although those years are pretty far apart, when we break it down, you'll see that the savings is not a whole lot different. You're still going to save a lot of money on that 39 year schedule.
Wayne Courreges III [00:26:57]:
Any other questions, Johnny?
Matt Clark [00:27:00]:
Again, Johnny. Yeah, sure, I can shoot a whole bunch of questions to you. So last year was 100% bonus segregation. This year is 80%. Looks like it's going to be phased out 20% every year. So two questions is what do you see? Will it go back to 100%, do you think? And at the same time, if it does go down to zero, what would you actually be pivoting to if there's no more cost SEG? Right, so there'll still be cost SEG, there just won't be bonus depreciation. Right. So you'll still get large savings. You just can't take it all in a lump sum in the first year. And anything I would say on it coming back or not would be largely speculative, so I don't want to say. But there is murmurs and rumors. Elections are coming up. People are trying to garner interest in themselves for votes, so sometimes they can re up on a tax code that's been largely beneficial for a lot of, you know, people that are doing very well for, you know, again, that's all speculation. I saw Parker asked a question in person versus virtual study. Is there much of a difference? Again, I'm saying like general, I'm covering every property all at once on Cost right now. So it just depends what kind of property you have. If there's lots of pictures of it online, every piece of the property is fully available on Google Earth, things like that, it all adds up to being able to do virtual versus not. If you have a 200,000 square foot commercial property, we're going to go check it out, right. If it's that large of a scale, we're going to go in person and look at it. But if you have something that maybe potentially had been listed on redfin before, say it's like a residential property that has tons of pictures and you want to buy it and make it an, you know, we can definitely more than likely get away with the virtual. Yeah. So again, it just depends on the property, what's available online and what's not and how up to date that information is.
Wayne Courreges III [00:29:15]:
Yeah, really great question. And going back to the question on will cost SEG be relevant without bonus depreciation? And you mentioned the five year schedule and I think you said a 15 year schedule. So just depending on the right.
Matt Clark [00:29:31]:
And again, we've been doing this for 15, almost a little bit longer than 15. Years, right. So we started before bonus appreciation was a thing. Obviously it's very beneficial for our division in our industry, but yeah, we'll still be around.
Wayne Courreges III [00:29:45]:
Well, it's also nice you are very diversified with all your other title, right?
Matt Clark [00:29:50]:
Like, hey, can title give me a job?
Wayne Courreges III [00:29:52]:
Yeah, you can transfer within departments.
Matt Clark [00:29:56]:
Awesome.
Wayne Courreges III [00:29:57]:
Any other questions? This is really great. I love the questions. We had a meet up that was recorded and posted out there about K Ones. And the numbers behind the K ones is from the Cost Act.
Matt Clark [00:30:18]:
Right.
Wayne Courreges III [00:30:18]:
It's all part of the to get those numbers and to maximize our tax savings to our investors. It's through the cost act. So such an important subject. That hasn't been one of our meetup conversations. So I'm real grateful that you joined us. I'm going to go ahead and stop recording, but before I do, Matthew, for people that are going to listen to this as a podcast, can you say how people can reach out to you? And then what I'll do after that, I'll stop recording and then yeah, of yeah.
Matt Clark [00:30:52]:
So if you guys want to find me LinkedIn, I'm very active on LinkedIn, so if you send me a request five minutes later, I'll see it. So that'd be Matt Clark and I'm with Madison Specs on LinkedIn. Also,
[email protected], if you want to send me an email, that works as well, but that's probably the two best ways to reach out to me, so I appreciate it.
Wayne Courreges III [00:31:11]:
All right, Matthew, thanks so much for joining us. And then for those that are live on this call, I'm going to stop record and we can take the conversation.
Introducer [00:31:20]:
That's all for this episode. We hope you subscribe, share and leave a review of the show. For more information about passively investing in multifamily apartments, check out Wayne's free ebook by going to forward slash ebook. Also follow us on Facebook by searching CREI Partners. This was the untold stories of real estate investing family.
