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Cost Segregation Tips for Short-Term Rental Investors · The Academy Presents podcast

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  Did you know that 90 % of the world's millionaires
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  invest in real estate? Well, I'm Angel with the
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  Academy Presents, Real Estate Investing Rocks.
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  And I'm here to help you if you want to go for
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  your piece of that pie. Are you new? Are you
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  new to this? You just don't know where to start.
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  It's okay. Are you someone that has invested
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  but you feel stuck? You feel like you've lost
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  momentum. You don't know where to really head
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  from here. Are you a seasoned real estate investor
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  who is doing great, but maybe you just want to
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  hone a few skills here and there? This is the
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  place for you. The Academy Presents Real Estate
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  Investing Rocks podcast will connect you with
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  industry experts so that you can save time, avoid
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  costly mistakes, and begin living the life you've
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  dreamed of all through real estate investing.
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  You're already taking the first step. just by
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  joining us here today. Hey guys thank you so
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  much for being here you know this is well how
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  many bazillion times have I said it these are
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  my favorite six days of the year um because I
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  get to spend one on one time with experts in
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  the space that I mean a lot of people they don't
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  get those options so I'm kind of lucky. and I'm
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  going to basically collect information and share
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  it with you because that I feel is my job and
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  that is my desire and it's just what I want to
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  do. So we're going to be talking to Mark here.
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  Mark Gross is a cost seg specialist and really
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  what I'm focusing on right now is the short term
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  rental. So for those of you that have thought
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  hey there are short term rentals And that's a
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  possibility for me. There are ways to do it through
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  arbitrage. I mean, there are so many ways to
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  get into the short -term rental market. But if
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  you want to do cost seg, you're going to have
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  to own the property. So that kind of pushes out
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  the arbitrage, but that is still an absolutely
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  amazing way to make money. Don't push it aside.
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  But for those of us that are looking for ways
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  to potentially get a vacation home that pays
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  for itself. This is the guy you want to talk
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  to. I am super excited. Mark, I'm going to let
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  you intro yourself, give us a little bit of background,
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  and then we'll get going. Sure. Thank you, Angel.
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  I really appreciate this opportunity. I'm Mark
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  Grossman from CSSI, which is Cost Segregation
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  Services, Incorporated. Over the last 20 years,
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  we've completed tens of thousands of studies
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  across the country, not just short -term rentals,
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  but all property types. I've been doing that
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  for over 10 years with them and really enjoy
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  it like saving people money. Absolutely. if you've
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  heard in the past you might have heard hey it
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  needs to be $500 ,000 before you can really do
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  a cost seg maybe you've heard more than that
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  but if you're looking for vacation rentals um
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  you're you're going to be beyond that amount
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  anyway um you know it's having these kinds of
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  events they can get pretty uh well yeah um we
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  get kind of sandwiched with them I'll give you
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  an example. I mean, I'm working on several right
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  now where the acquisition price is probably in
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  the four to 500 ,000 dollar range. One is 300
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  ,000 something. What you need to do is take a
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  look at what the acquisition cost is, subtract
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  the land because you can't depreciate the land.
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  And then we do the study based on what the cost
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  basis is of a property after that. So do y 'all
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  have a percentage that you knock out off the
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  top for the land? We don't because it varies
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  significantly depending upon location. Let's
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  say you're in a tertiary market, that's going
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  to be a lot different than maybe Manhattan, New
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  York or Southern California, where I did one
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  in the San Diego area. And the land on that one
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  was about 40 % of the purchase price, where some
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  of the tertiary markets might be 10 to 15%. So
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  it really varies. All right, so again, we're
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  going to get selfish here. We just spent a weekend,
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  a couple of weeks ago. We spent a weekend at
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  a friend's cabin in Broken Bow, Oklahoma. And
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  as we are leaving, I am literally calling the
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  realtor and I'm like, we want to cabin here.
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  And when we set our parameters, we set 700 ,000
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  to maybe, you know, 700 ,000 to a million. And
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  the cool thing about that is, like I said, I
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  had been told that you need $500 ,000 before
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  you can really cost seg with it being a benefit.
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  Now I got friends to say $300 ,000, you know,
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  whatever. But I knew that at $750 ,000, I could
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  cost seg that baby. And this is the last year.
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  So this is 2022. This is the last year that you
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  get 100%. of the bonus depreciation unless it
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  gets voted back in. Correct. As of right now,
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  this is it. Well, one thing to take into consideration,
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  you're right. This is the last year for 100 %
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  bonus depreciation. It goes to 80 % in 2023 with
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  subsequent reductions of 20 % per year until
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  it goes away. However, think about it this way.
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  This came about from the Tax Cuts and Jobs Act
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  at the end of 2017, which had had bonus depreciation
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  for new acquisitions. It was available prior
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  to that time for new construction. Now, that's
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  fairly recent from a time perspective. We've
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  been doing this for 20 years before there was
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  even bonus depreciation for it. So even if the
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  bonus depreciation part is going to be diminished,
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  There's still a lot of value to be associated
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  with cost segregation. This is just kind of a
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  cream on the top. Yeah, no, and I thought about
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  that too, because we come to the residential
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  world. We are buying whole people. That's me
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  and my husband, my family, his family. We grew
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  up in this. We are buying whole people. And even
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  when all of the bonus depreciation is gone, you
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  can still cost sag and get your five year bucket.
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  You can get your seven year bucket, your 15 year
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  bucket. There are buckets that you're still going
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  to benefit from through cost segregation. So
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  don't think that there is no need for cost sag
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  just because it's phased out. That is not the
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  case at all. because you can still take a depreciation
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  at five years instead of waiting for 39 or 27
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  and a half or whatever those years are on the
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  straight line because it's a long time, friends.
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  Yeah, you raised an interesting point there about
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  the differentiation between 27 and a half years
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  and 39 years. Now, the 27 and a half year straight
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  line depreciation is associated with residential
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  property. and the 39 years for the others. Now,
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  what not everybody is aware of is what classification
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  are short -term rentals. They're actually treated
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  as a hotel because it doesn't have a long, it's
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  a 39 year straight line depreciation, not 27
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  and a half because it's based on what the lease
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  terms are. If you have a short -term rental and
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  you have an annual lease on it, then yes, it
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  can be 27 and a half years, but Otherwise, the
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  short -term rentals that I do is based on it's
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  39 and a lot of people are not cognizant of that.
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  Okay, so that kind of changes it, right? That
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  can really affect your strategy as far as what
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  you're hoping to get out of it. I'm not happy
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  with that. Well, it's not a huge deal. I mean,
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  the way the process works is that Because we've
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  done so many studies, we were able to provide
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  a free preliminary analysis. And what we do is
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  ask information about a particular property.
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  How much did you pay for? Estimated land value?
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  What's your tax rate? Things of that nature.
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  And then what we do is provide a free preliminary
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  analysis based on that information, which says,
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  for instance, if it was to be a a multi -family
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  property versus a short -term rental, we'll take
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  that into consideration and provide the numbers
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  accordingly. So we will provide a free analysis
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  which will show the estimated savings and what
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  the cost of the study is so you can determine
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  what the ROI is, whether or not you want to move
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  forward on it or not. Hey guys, it's Angel. In
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  case you didn't know, I put on a three -day virtual
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  summit twice a year. It's the Real Estate Investing
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  Rocks Summit and I've been hosting it since March
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  of 2020. The next one, number 11, is March 25th,
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  26th and 27th. Three full days, no cost to you.
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  My friend Sandy is speaking and she supported
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  me at every single summit since I started. Joe
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  Fairless, Kathy Fedky, a Tony Award winner, another
• 9:49
  friend who's raised literal millions from people
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  met on LinkedIn and the list goes on. You have
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  to join our mighty networks community gain access
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  and that link, it's in the show notes. Wow. So
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  we were. Honestly, and I'm just going off what
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  we were looking at with broken bow. Um, so when
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  we're looking at properties in broken bow, they
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  basically come turnkey. When you purchase them,
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  you're getting the hot tub, you're getting the
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  bed, you're getting everything. So when you cost
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  tag something like that, do you, do you look
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  at the stuff that's in the house? Oh. Oh, sure.
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  You would look at the bedding and everything
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  that was in the house. We'll take a look at all
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  the different aspects because that's part of
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  what the purchase price is going to be. So we'll
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  take a look at all that. I mean, that's going
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  to be different than let's say you buy a multi
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  -family apartment, which is basically, you know,
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  vacant. Yeah. Each of the units. So we take all
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  those factors into consideration. One of the
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  other things we ask as well is it may not be
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  applicable for the short -term rentals or maybe
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  What are you planning on doing on CAPEX expenditures?
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  And what we can do is take that in consideration
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  and do a separate study and give you additional
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  tax savings on what CAPEX you're doing in addition
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  to the acquisition. Well, and that brings me
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  to another question. So what I was reading was
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  that, okay, you only get, I think it's two weeks
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  max per year at your short term rental. in order
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  for it to meet the tax designation, whatever
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  that magic is. But I also read that if you are
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  going to your property and you're doing maintenance,
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  you're doing the building bunk beds, you're doing
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  things to make the property better, or you're
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  doing maintenance on the property, those weeks
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  don't count against you. But if you're going
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  into the home and you're adding, say, built -in
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  bunk beds, how does that affect the cost side
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  piece? Because it's something you've done after
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  purchase, right? Yeah, because really, what we
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  do is take a look at it as snapshot in time.
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  When you acquire the property, the only exception
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  of that would be when you're doing cat -backed
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  expenditure that could take over a period of
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  time. But what happens after that time is not
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  going to have an impact on the study that we
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  provide. So here's something else I've heard.
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  You're probably like, oh, dear god. So when one
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  fiscal year or one year has passed, so you made
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  the purchase in 2022. In 2023, you've made changes.
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  Could another CASEG study be done on the additional
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  changes and have those put into play? Yeah, I
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  think what you're referring to is what I mentioned
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  before about CAPEX expenditures that we mean
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  by changes, improvements in the property and
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  things of that nature. Yes, the answer is yes.
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  And what we do is when we engage with a client,
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  we ask them upfront, what are your CAPEX expenditures?
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  what your plan is going to be and then what happens
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  is at the end of the calendar year we will say
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  what did you actually do versus what you anticipated
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  you're going to do at that year. Now let's say
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  that you initially weren't planning on doing
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  any CAPEX expenditures but then things happen
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  and then a year or two later or whatever the
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  case might be you decide to do that you can then
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  engage us and we can do a study on just that.
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  portion of it not the initial acquisition because
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  that was already done. Yeah well I think that's
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  really important in the short -term rental model
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  because like my husband and I we come from residential
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  we are buy -and -hold people but I think that
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  the short -term rental model is also really a
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  buy -and -hold kind of model um which is really
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  good for your cost seg because you don't have
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  that recapture right? Correct. And that's one
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  of the initial questions that we ask in our preliminary
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  analysis, and that is, what's your whole period
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  going to be? We say, are you planning on keeping
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  it at least five years? Because if you're planning
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  on doing a quick flip on it within one to three
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  years, it may not make sense to do it because
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  of what you just indicated about the recapture
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  tax. So our objective is not to sell studies,
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  just to make sure we provide things which are
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  meaningful to the clients and they need to be
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  aware of that, which is why upfront we ask those
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  questions. So when someone hires you or your
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  firm for a cost segregation, do you send like
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  one of those engineer people out to look at the
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  property or do you just rely on pictures? Every
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  single one of the tens of thousands of studies
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  that we've done, we have had someone physically
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  go to the property. Take hundreds of photographs
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  and do that. Because one of the things that we
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  do is we will defend the study at no cost in
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  case you ever get audited by the IRS. We cannot
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  defend the study if we don't have that level
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  of detail. We want you as an owner to be able
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  to sleep well at night and know that this is
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  covered. I'm not going to have any issues with
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  this because I know that because of our track
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  record, there's not going to be any problems.
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  And I bring that up because there are Cossack
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  firms out there that are not going to send somebody
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  to your property. They're going to rely on pictures.
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  And if for whatever reason you get audited or
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  you get sent to the IRS, it's not going to hold.
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  you don't want to be in a position where it doesn't
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  hold for you and you certainly don't want to
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  be in a position where it doesn't hold for people
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  that have invested with you. Correct. And another
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  thing to take into consideration is that, well,
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  I'll give you an example. I had a client who
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  bought a large portfolio of dollar generous stores
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  and his CPA recommended to him, why don't you
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  just do two of them and then we'll extrapolate
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  out what it's going to be for the rest of them.
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  because they all have similar footprints. And
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  I talked to the guy and I said, you know what?
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  We just won't do it. We won't do any of them
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  because we have to be able to have, you know,
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  a site visit for every single one. Now, you know
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  what's interesting about that is he went ahead
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  and he said, you know what? I want to go ahead
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  with you guys because I told him it's not just
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  the cost of studying maybe, you know, $1 ,000
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  or whatever the case might be. What's more important
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  than the cost of study is what your depreciation
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  is going to be. One of those those dollar general
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  source for instance had a large retaining wall
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  behind it. One of them you know not every property
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  even though you think they might be identical
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  are really in fact identified and by actually
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  going out there and doing that site visit you're
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  able to identify things that can be depreciated
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  that you're not going to be able to pick up but
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  just looking at some pictures. No, absolutely.
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  And I know that there are companies out there
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  do these statistical sampling. Those are like
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  cookie cutter. Those aren't like what he's talking
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  about with these stores that they're built in
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  whatever area in whatever town and they have
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  to fit the specifications of that location. So
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  they're not cookie -cutters. So if you're doing
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  something with the statistical sampling, we're
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  not saying that's bad or wrong. We're just saying
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  in this particular situation, you really had
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  to have somebody come out there and look at it.
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  Well, some people will say too that the percentage
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  of audits are low, very low, and that's correct.
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  Is that before the 87 ,000 new hires? That was
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  my next sentence. With all the additional people
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  that the IRS has brought on board, the anticipation
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  is that there's going to be a lot more audits
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  and they're going to be looking for things like
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  that.