Cost Segregation Demystified: How to Save Thousands on Real Estate Taxes

May 7, 2024

Title: “Cost Segregation Demystified: How to Save Thousands on Real Estate Taxes”

Episode: 231

To start your real estate journey, get a good financial team who are experts in real estate. That is Joe Viery’s advice in this episode of Profit First for REI podcast.

Joe is a cost segregation professional (CSP) and the CEO of US Tax Advisors Group. He has helped property owners keep a lot of money in their pockets by eliminating millions of dollars in income taxes.

In this episode, he talks about cost segregation, a strategy you must know when you want to buy an old property. More of this topic, listen and enjoy the show!

Key Takeaways:

[00:51] Introducing Joe Viery [06:11] Accelerated depreciation [09:46] Redo cost segregation in the same building [12:44] Depreciation recapture [20:54] Joe’s advice for business owners

Quotes:

[06:11] “As long as you are a US-based paying taxes entity, whether it’s a married couple or corporation, you can use accelerated depreciation.” [10:47] “We like to see the building before any improvements are done because one caveat… a lot of accountants do not know the world of dispositions.” [15:19] “Cost segregation reduces depreciation recapture.”

Connect with Joe:

Website: https://ustagi.com/

Tired of living deal to deal?

If you are a real estate investor or business owner who is tired of living deal to deal and want to double your profits, head over here to book your no-obligation discovery call with me. Either myself or someone from my team will hop on a short call with you to get clear on your business goals, remove any obstacles holding you back, and map out a game plan to help you finally start keeping more of the money you work so hard to make. – David

Transcript:

Speaker 1 (00:00):

You better know real estate really, really well, and I advise anybody out there, you’re getting involved in real estate, get a good financial team behind you. They know real estate. They can talk about cost segregation and all of the benefits out there of owning real estate, all of the other tax benefits, and on and on and on.

Speaker 2 (00:23):

If you’re a real estate investor who’s sick and tired of living deal to deal, then welcome home. Hear from everyday real estate investors just like you, and discover how they’ve completely transformed their business by taking a profit First approach. This is the profit first for REI podcast, where we believe revenue is vanity. Profit is sanity. It’s time to start making profit a habit in your business. So here’s your host, David Richter.

Speaker 3 (00:50):

Today we have Joe Ri on the podcast talking about cost segregation. This is little a strategy. If you are ever going to buy and hold properties at any point, please listen to this episode. It will put money in your pocket. He talks about how you save the money and where you capture depreciation, all this stuff that sounds big and scary. He makes it very simple and honestly, this is one of the best ways you can keep money in your pocket that the US government still gives you an opportunity to have those opportunities to be able to put that money there and not be spending as much on taxes and things like that. So if you’ve ever wondered what the heck cost segregation is, this episode will answer it for you. Thank you very much. Hey, welcome to the Profit First RI podcast. Have a special guest and a good friend of mine, Joe Ion today, which I’m really excited about this because if you are a real estate investor, you need to listen to what Joe is going to tell you today. He runs a very special company that helps people keep a lot more of their money in their pocket, and I’m all about that here with the Profit First methodology and what we want to do. So Joe, thanks for being on the podcast today.

Speaker 1 (01:56):

Well, David, it’s good to see you and thanks for asking me.

Speaker 3 (01:59):

Yeah, well, I’m glad we made this happen because I want to get what you do out there to people. So why don’t we first say, okay, what kind of business is it? What are you doing now? What is that? Just so if people don’t know you, don’t know who you are, we can at least give them the foundation and groundwork for what we’ll be talking about.

Speaker 1 (02:18):

Great. The name of the company is US Tax Advisors Group Incorporated. We use the slang usy. You might hear a lot of us say USY to make it easier. And basically we’re an engineering based cost segregation firm, and what cost segregation, as you know is we accelerate the depreciation expense for those who own investment real estate. So the explanation, the elevator speech is really easy, but it’s engineering based, and so it’s complex because we have to determine the depreciable lives of all of the assets of the building in order to put them in the right categories so that the depreciation expense can be accelerated. That’s basically,

Speaker 3 (03:00):

So you work mainly with people that own assets then? Correct,

Speaker 1 (03:04):

Correct. Yeah. We work with the owners. Now, the ownership can be in many different forms. There’s a lot of syndicates out there that use us for cost segregation. It can be a sole proprietorship, it can be in the LLC, that’s never important. But what we do, what is important is the benefits we find go to ever owns the investment, and it could be a hundred people, which has to be sliced and diced according to the accountant or the CFO and to who owns what part of the building. But basically that is up to the client. We give them the bucket load of depreciation and apply it to whoever owns the building.

Speaker 3 (03:44):

Okay. So let’s say it’s a mom and pop shop that just have a couple rentals. Do you recommend that they get cost segregation even if only own a couple buildings or a couple houses?

Speaker 1 (03:55):

Well, I started in 2009 and back in the day in 2009, we all did one type of study, which is, we still do it, which is called the detailed engineering Study. And the detailed engineering study, we use the guidelines presented in the audit technique guidelines, a TG for cost segregation. Everybody can Google it and they can read the technic guidelines by the IRS that gives us our body and that requires that we go out to the building and we do the inspection of the building. However, about seven years ago, we started to develop a, I don’t like the word desktop, but let’s say a different type of analysis which doesn’t require us to go out to the building. So therefore we can do buildings with a basis of 750,000 or less. And of course the building basis is whatever you purchase the building for less the land. That’s what we have to work with and basically we can do that for, I just did somebody from one of our meetings, I did a building with a basis of $50,000 and it still worked. It made sense because the fee that we charge is so low that even the people that you mentioned, a couple who has only two single family homes can still get accelerated depreciation. And we defend our work to the IRS, so this don’t need to beat this drum, but it’s legitimate and it’s acceptable by the IRS.

Speaker 3 (05:33):

Then can you work with anyone in the US then in any of the states or is this specific to a certain area?

Speaker 1 (05:41):

We work with, again, it’s income tax strategy, so they have to pay income taxes. So we don’t care where they live, as long as it’s an entity paying us taxes, we don’t care where the buildings are. I’ve even done buildings in Europe for US based companies. They owned industrial buildings in Europe. So it made sense and I would fly to Europe and I would do the inspection of the European buildings. So basically there are very few circumstances where cost said doesn’t work. As long as you’re a US based paying taxes entity, whether it’s a married couple or whether it’s a corporation, you can use accelerated depreciation. When I first started, a lot of people said, this must be a scam. I don’t believe you can do this and it’s not. Or if they don’t, then you definitely are not like your organization, you should run from those entities, CFOs or accountants. If they don’t know what cost ag is now in today’s day and age, because it’s the accepted way to depreciate a building end of story.

Speaker 3 (06:47):

So then what are the benefits of getting that cost segregation and someone hasn’t gone down that road?

Speaker 1 (06:53):

Well, what we’re going to do is we’re going to accelerate their depreciation. So depreciation is an expense, and when you have gross taxable income, how do you reduce your taxes? You want expenses. So if I have somebody who has a gross income of a hundred thousand dollars and I give them a $50,000 expense, extra expense, I’ve just reduced their taxable income down to $50,000. Woo-hoo. That’s huge. That’s big. So basically it’s an expense against income, and all we’re doing is we’re redefining the components of the building according to the IRS rules that puts these components into shorter lives. So for example, the outside of the building is land improvements, driveways, landscaping, patios, pools, fencing will go in 15 year the inside of the building, items like flooring, like window coverings, specialty lighting, applying

Speaker 4 (07:50):

Five year property, five year property from

Speaker 1 (07:56):

Inside the Cassie of the building, which is real property that’s going to stay in 27 and a half year. So all we’re really doing is peeling out for a single family home, about 25 to 30% of the building, and we’re putting it into a shorter like asset, which then translates into savings on income taxes. So one of the caveats is we only need to talk to someone who pays income tax. Real estate is really powerful, gets you a lot of deductions. Some real estate owners don’t pay income taxes. You don’t need to call me until you do.

Speaker 3 (08:39):

Okay? So that’s where the big wine in the sand is. If people are paying taxes, you can help them reduce that tax burden, and that’s really what you’re trying to do is help them keep more money in their pocket at the end of the day.

Speaker 1 (08:51):

Right. And I would love it if they bought more real estate or improve their real estate, but you can do whatever you want with the extra money in your pocket and it’s huge as long as you’re taxable. Now you mentioned one thing about the couple. There is one situation where it may not be worth it and now it would be a passive investor. So if you are a passive

Speaker 4 (09:13):

Best, we have a lot of path to

Speaker 1 (09:20):

Other people like

Speaker 4 (09:21):

You and your

Speaker 1 (09:23):

Team

Speaker 4 (09:24):

To help us

Speaker 1 (09:26):

For

Speaker 4 (09:27):

Cost segregation. The reason being is because of

Speaker 1 (09:32):

Your passive investors, there’s limitations to how much depreciation expense that you’re allowed to take per year. We don’t get involved in that. What I will do is a NOCO estimate, the client takes the estimate to their professionals and say, Hey, look, Joe’s going to give me a hundred thousand dollars in losses. Do I need them? Even if you’re a passive investor, many times the answer is yes, but sometimes the answer is no. It really won’t benefit you.

Speaker 3 (10:01):

Okay, that makes a lot of sense. So then as a real estate investor, it sounds like most people should get a cost segregation study on their buildings. You had also mentioned potentially upgrading the building with that money. Is there ever a time when you would redo a cost segregation on the same building if you upgrade it substantially or something like that?

Speaker 1 (10:22):

Well, that’s a great question, David. Yes.

Speaker 4 (10:25):

So we do a couple different types of studies soon after for

Speaker 1 (10:34):

The Is it mandatory? No, because we can do look back studies. I can do a study that somebody bought 15 years ago and still make the numbers work. But bottom line is what we like to do is we like to see the building before any improvements are done. Because one caveat, and this is really important, and I beat the drum, I want to spread the word because a lot of accountants do not know the world of dispositions. So when you do improvements and let’s just say a single family home, what do they do? I know what they do. You rip out the flooring, you rip out the cabinets, you rip out the countertops, put in maybe new windows, new doors, new HVAC. Everything you throw in the trash has remaining basis. How do you know what the remaining basis is unless you do a cost segregation study? The answer is you don’t. We break it

Speaker 4 (11:28):

Off, and that’s right up that you don’t

Speaker 1 (11:34):

Need me back and do it for you because it’s in our report. You’ve already depreciated it for two years, so you got to take that out the equation. But the rest, the 25 and a half year remaining basis of that carpet is a write-off. The IRS doesn’t want you to have two carpets on the books. They only want one, so you have to write it off. Now it’s a IRS regulation, but honestly, no one’s going to go to jail or be fined if you don’t write off. But David write-offs are gold. So bottom line is that’s one reason why you do cost se, and then you do those improvements and then we can come back and do another cost set on the improvements. So

Speaker 3 (12:14):

Then let me ask this. I really like this stuff a lot. So then if you’re doing cost regulation for people that are more landlords, would you recommend this for flippers? Then someone who’s looking to sell it or would

Speaker 1 (12:29):

Just

Speaker 3 (12:29):

Great be for buy and hold?

Speaker 1 (12:31):

That’s one of the four. Number one is passive investors. You got to really look at that. That may be a reason you don’t do it. The number two would be a flipper. The reason is because you have a concept called depreciation recapture. So the IRS will go back and tax you 25% on the depreciation you took, however, so here’s the bottom line, because I talk all over the country and I have panels with CFOs and brilliant guys who are in the real estate world. They tell me that the hold is about a year and a half to two years taking this all in consideration, what I’m saying is that I feel the average whole time is not five years, but a year and a half to two years, if you’re a flipper, you are going to have to pay depreciation, recapture, and so therefore it’s not, I will tell a flipper, don’t do it.

(13:23):

Now, I’ve had some flippers who say my internal rate of return is so high that even if I get that dollar for one year tax free from the IRS, I’m going to take it. But most of the time they all kind of agree maybe a year and a half to two years. However, there is a caveat that I’m going to explain now, which is really powerful David and a lot of people don’t know about is that cost segregation reduces depreciation recapture. So if somebody pulls that card out of the hat and goes, well, I’m not going to do cost set, I’m just going to have to pay it back when I sell the building. And keep in mind depreciation recapture is only for the selling of the building for cash. If you exchange a building or reduces depreciation or capture, I use the example of a laptop. You bought a laptop five today, what’s that laptop worth, David? $2,000, 50 bucks, a hundred bucks. Yeah,

Speaker 3 (14:28):

I don’t, yeah, maybe

Speaker 1 (14:30):

Nothing. For example, let’s look at the rental. What’s your carpet worth five years later? I don’t know. Maybe you could sell it to a junk man for 50 bucks, but most likely you’re going to have to pay to rip it out and throw it in the trash. That’s not the point. The point is though, that now you’ve got a five-year asset that the only way it’s five years is if you did cost segregation. So you have that five-year asset less whatever residual value. I tell you that you should calculate some residual value and I’m not the person to do that. But you give a residual value. So basically you now can take the $5,000 off the table for depreciation recapture because that asset no longer exists. It had a five-year life. So what have I just explained? Cost segregation reduces depreciation, recapture. So that objection goes off the table.

Speaker 3 (15:27):

What are other big objections that you might get?

Speaker 1 (15:31):

Again, you don’t pay income taxes. That’s one. Sometimes if there’s a lot of individuals like a syndicate and there’s so many that it dilutes what we find most of the time we do it for the primary investors, and if they have other investors, they don’t care. They just say, we will pay for the cost savings and go on. But that might be another reason. So I’m going to tell you don’t do coeg. I mean there’s no, but most people exchange up. Same example. They sold the building for 500,000, they bought a new one for a million. Now I have $500,000 to work with and I can cost EG and accelerate that 500,000. So if you do a straight exchange or a pretty much straight exchange without much meat on the bone, then I’ll tell that client don’t do cost eg. But that’s it. I just named the four reasons why you don’t want to want to do cost ag. And other than that, I mean I’ve heard all the objections out there, David, and there’s really none that I give any thought to except for the four that I just mentioned.

Speaker 3 (16:37):

And it seems very cost effective too, getting the cost segregation going through you guys, because I’ve heard other people that are charging a lot of money and sometimes it’s like, is it worth it? So it seems like when they go through you, you make it worth it for them to be able to go through that process and do the depreciation, recapture,

Speaker 1 (16:56):

And like I said, we will give you a no cost analysis, and so it’s really easy. You just fill out, we have a link we can send you and you fill out, give us some basic property information. We’ll give you the estimate of savings and we’ll tell you what the fee is on the modeling or analytical studies. The fee is really affordable. I know a lot of people think that I had a CPA last week. He goes, wait a minute, cost eggs costs four or $5,000. I go, yes, we do those all day long, but it doesn’t make sense. If your building is a single family home, you can’t pay $2,000 and make it worth, but if you pay 6 75 now you can make it’s worthwhile.

Speaker 3 (17:42):

That’s really good. So what is that?

Speaker 1 (17:44):

I think the best thing is we need to give you your link

Speaker 3 (17:52):

If you’ve got a link for us. Even better.

Speaker 1 (17:54):

Yeah, definitely. Definitely. Okay. And another way is they could go to us t agi.com and click on the get a free quote.

Speaker 3 (18:06):

Okay, cool. So that’s how they could get it there. Then What were you saying before I cut you off about the leak? Was it there was something else about, I don’t know what they would pay or whatever it might be.

Speaker 1 (18:17):

No, I think I finished that thought process. Oh, no, I know what I was going to say. Now this is for smaller buildings. So obviously if we get into buildings that are bigger, over 750,000 in building basis, then what we do is our fees are based on engineering time. So we look at each building separately. So we need to look at the building. So we have you fill out the same link, give us the information, we look at the building and we will give you a fee. That fee is not going to be in the hundreds dollars. That fee is going to be in the thousands of dollars, but you’re going to get that much more in accelerated depreciation. So it’s a wash.

Speaker 3 (18:54):

Yeah, yeah, for sure. Oh man, this is good stuff. I wish everyone would go to your site and just see, especially if they own property and if they’ve owned it. I like how you gave the timeframe too, owning it for the year and a half to two years. It’s like you gave good parameters there. You gave good parameters of who should do this, who shouldn’t do this. It’s been a lot of good information. Is there anything we haven’t covered about cost segregation that you’d like to share here?

Speaker 1 (19:20):

You know what, I’ve covered the major objections. There are a lot. Some people say, oh, this can only be done on new properties. No, I just explained we can go back 15 years and we don’t care the age of the property. Every time somebody closes on a property, the depreciation clock starts over. So if George Washington slept in the building and somebody bought that building this year, guess what? It’s a completely new depreciation clock. We do not care about the age of the building. Again, we’ll go in and we’ll look at the building and there may not be a lot on the building, like a really super old building, probably there’s a lot of improvements to it. It can be a farm, a ranch with no building, just fencing and windmills and watermills and items like that. So we look at each building and what we give everyone is we give them the estimate and let them make up their mind. We always recommend go back to the professional, go back to David and say, David, does this make sense? And you’ll tell ’em. I’ll tell ’em. If you ask me, I’ll say, I don’t think so, David. If I were them, I wouldn’t do it. But we don’t ever tell people what to do. We just give them enough information so that they can make an educated decision.

Speaker 3 (20:39):

Awesome. I like that a lot. And you said it was ust agi.com.

Speaker 1 (20:44):

That’s it.

Speaker 3 (20:45):

Awesome. Well, I love that stuff. Is there anything else? I don’t know, just any other advice that you give people as business owners or real estate investors?

Speaker 1 (20:54):

Okay, I get this question a lot, and when I tell them, and this falls right into your wheelhouse, is what I tell them is, if you are going to play in the real estate game, you better know real estate really, really well. And I advise anybody out there, you’re getting involved in real estate, get a good financial team behind you. They know real estate. They can talk about cost segregation and all of the benefits out there of owning real estate, all of the other tax benefits and on and on and on. So that’s my number one suggestion to everybody is get a team behind you, because I don’t care what the fee is, your service, it’ll be paid for it 15, 20, 30 times over. Yeah, you’re going to have to pay for whatever it is, but it’s going to be well worth it, and it’s going to save you a lot of pain.

Speaker 3 (21:49):

Yeah. Well, I appreciate that and I appreciate that you also we’re in this world together and we’re just helping people keep more money in their pocket and really at the end of the day, helping that other person. So if you’re listening to this as the listener, go to usta gi.com and get on their calendar. Especially if your own properties, it’s like a no-brainer to have the conversation. They’re very consultative with you as well too. They’re not going to push you into a decision. It’s like, does this make sense? Is it one of those four areas that might not make sense? It’s like they’re just trying to see, does this make sense for you that you’ll save that money and be able to put the money in your pocket too? So I love that. And if you are out there and you’re like, help me. I have no idea what’s going on with my finances.

(22:31):

I don’t know if I should give Joe a call or whatever. Speak with our team. We can point you in Joe’s direction too@simplecfo.com, and we can go there and you can book a call with us and we’ll help you get connected with Joe as well too. We’d love to make sure you’re keeping more of what you’re making, and this is a big thing that we suggest to people in our sphere of influence as well too. So Joe, this has been awesome. Thank you for giving the breakdown, making it very simple and digestible. I think that was the most digestible I’ve heard on cost segregation, so this was really good stuff. Thank you for being an awesome guest here on the podcast today. Well,

Speaker 1 (23:03):

Thank you, David.

Speaker 2 (23:05):

This episode of The Profit First for REI podcast is over, but there are plenty more where that came from. Are you ready to learn how David and his team can help implement the Profit First system in your business? Schedule a discovery call@simplecfo.com right now. We’ll see you next time on The Profit First for REI podcast with David Richter.

Title: “Profit First Strategies with Jay Conner: The Power of Private Money”

Episode: 242

There are 15 reasons to love about borrowing private money over traditional money. One of them is making your own rules for your private money.

In this episode of Profit First for REI podcast, Jay Conner, a nationally renowned real estate investor and the king of private money. He talks about how private money works.

Jay helps you get your money from private lenders and will share with you the mindset that will get you money in the door without you ever having to worry about it.

Listen and enjoy the show!

Key Takeaways:

[01:01] Introducing Jay Conner

[05:00] Introduction to private money

[08:30] The Great News Phone Call

[11:23] Why don’t you use your own money?

[13:18] Maintaining relationships with private lenders

[15:40] Private money vs traditional money

[22:05] Things that make them want to recommend you

[25:18] Advice for real estate investors

[29:01] Connect with Jay Conner

Quotes:

[07:34] “If you are talking about private money and raising private money with an individual and you got a deal for them to fund, you already sounded desperate.”

[12:07] “If you want to scale your business, private money is the way to go.”

[16:05] “In this world of private money, we make the rules. We set the interest rate, we sent the length and all of that.”

Connect with Jay:

Website: https://www.jayconner.com/book-details/

Tired of living deal to deal?

Transcript:

Speaker 1 (00:00):

I got 15 reasons I love private money over traditional money. I won’t share all 15, but the biggest one is it puts you in the driver’s seat. The traditional way to borrow money is you go to the bank and get on your hands and knees and you’re begging and chasing. Well, they are making the rules right? Like the lender is making the rules. But in this world of private money, we make the rules, we set the interest rate, we set the length of the note and all that.

Speaker 2 (00:34):

Speaker 3 (01:01):

We have Jay Connor back on the podcast. I love Jay Connor. He helps you get your money, the money from private lenders and that whole framework and process, but he does it from a passion and a place of heart. And servant Teachership. I feel like he goes out there and is a servant teacher of how private money works. Listen to this episode. He gives the magic question he tells about desperation and private lending, and I thought his perspective was so good, and then ultimately the mindset that will get you money in the door without you ever having to worry about it. So listen to this episode. Can’t wait for you to get value from it. Thank you for being a listener of the Profit First. RII podcast. Have a great episode. Hey, here’s the profit first RI podcast. Really excited to have Jay Connor back because he’s the came of private money. And this is where I love to go into this topic because I don’t care what kind of business you’re in, you probably need help with this, but especially if you’re in the real estate world, this comes up all the time at every event I’m at with every conversation I have. So we’re having the cane here talk about private money today. So Jay, thanks for being on the show.

Speaker 1 (02:07):

Hey David, thank you so much for having me come on here to talk about my most favorite topic. Of course, that being private money. And why is that? Because private money’s had a bigger impact on our real estate investing business than any other strategy that we’ve implemented in our business.

Speaker 3 (02:24):

Why did you go down that road though? I mean, you teach this all the time. You’re helping a ton of people, like anyone I’ve ever talked to that works with you is like he taught me how to do and I got money and it actually works. So I mean, how did you even go down that road where it made a difference on you and then you wanted to get it to others?

Speaker 1 (02:43):

Well, I actually backed into it. I didn’t do it on purpose. So here’s what happened. So my wife, Carol, joy and I, we’ve been investing in real estate, single family houses, other real estate full time here in eastern North Carolina since 2003. And here’s what happened. From 2003 until 2009, David, all I knew to do in my real estate investing business was rely on the local banks to fund my deals. I mean, all I knew to do was go to the bank, get on my hands and knees, put my hand underneath my chin, raise my skirt up so they could look at all my personal financial statements and stuff and actually beg to get my deals funded. That’s all I knew to do. And so I had a big wake up call in January of 2009 after being in this business here in Eastern North Carolina. I called up my banker.

(03:38):

I told him about these two deals I had under contract in Newport, these two single family houses. And David, I learned like that over the telephone that my line of credit had been shut down with no notice. My banker, his name was Steve, and the bank was bb and t at the time. I said, Steve, what in the world are you telling me? My line of credit is shut down. I got two deals under contract. You gave me no notice. Why is the bank closing my line of credit? He said, Jay, don’t. There’s a global financial crisis going on right now. I said, no, but now you just gave me a global financial crisis. Financial crisis, yeah, I ain’t got no way to fund my deals. And I got ’em under contract. So I hung up the phone and here’s what happened, David. I sat here and I asked myself a very important question.

(04:27):

And so I’m going to share this question with your audience right now. This question I’m going to share with you will help you solve any problem you’ve got. I don’t care if it’s business, financial, career, health, relationships. I don’t care what your problem is. By the way, David, these people going around and saying, any problem, you got some opportunity I want to throw up. I didn’t have no opportunity. I had a problem of not funding my deal. So here’s the question I asked myself. The question I asked myself was, Jay, who do you know that can help you with your problem? And when I asked myself that question, I immediately thought of my good friend Jeff, who lived in Greensboro, North Carolina at the time, and he was investing in real estate. And so I called him up and I told him what happened. And he said, well, Jay, welcome to the club.

(05:18):

I said, what club? He said, the club of the bank shutting you down and losing amount of credit. They shut me down last week. I said, well, how are you funding your deals, Jeff? He says, well, have you ever heard of private money? And I hadn’t. So Jeff told me about private money. He told me about self-directed IRAs and how people can use their retirement accounts and funds that they currently have and move them over to a self-directed IRA company and then loan that money out to us real estate investors, either tax deferred or tax free depending on the type of account they’ve got. Well, that just opened up my whole world. I’d never heard of that. And so what did I do? How did raise $2,150,000 in less than 90 days after being cut off from the bank? Well, here’s what I did, and here’s the secret sauce I put on my teacher hat.

(06:10):

So I put on my teacher cap, which is my private money teacher cap, and I just started teaching people in my own network what private money is, how they can earn high rates of returns safely and securely. And what’s interesting, Carol, joy and I, we got 47 private lenders right now. Not one of them had ever heard of private money and private lending. Not one of them had ever heard of self-directed IRA companies and what a third party custodian is. That’s important by the way, to establish a relationship with a self-directed IRA company because over half of my private lenders are using their retirement funds. And if I didn’t have that relationship to introduce them to move their retirement funds over, I’d be missing out on over half of my private money. So how did I go about raising all this money when I was cut off from the banks?

(07:02):

I led with a servant’s heart. I led with education. And here’s a really, really important point. I separated the activity. I separated the conversations of telling people what private money is and how they can earn high rates of return safely and securely and having a deal for them to fund. You see, desperation has got a smell to it. And when you talk about is that not true, David? Yeah, very true. So if you’re talking about private money and raising private money with an individual and you got a deal for them to fund, you’re already sounding desperate and you’re not even trying to sound desperate. So we don’t talk about deals and when we’re first exposing somebody to how they can earn high rates of return, we talk about private money. So how do we separate those conversations? Well, when someone has told me that they’ve got, let’s say they’ve got $150,000 they want to invest and get high rates of return conservatively, I’ll say, great, I’ll put your money to work for you just as soon as possible.

(08:11):

I don’t talk about a deal upfront. If they’ve got retirement funds that they want to get higher rates of return on, I’ll introduce ’em to the self-directed IRA company that I recommend. They’ll get their funds moved over. And so here’s what happens and here’s the magic sauce, David, I give ’em and I call ’em up with what I call the great news phone call. What in the world is the great news phone call? Well, the great news phone call is not a pitch. I’ve never pitched a deal in my life ever since I started raising private money in 2009. I pick up my handset with my cord attached to it here in North Carolina and I call some of your, don’t even know what that is. And let’s say, David, let’s say you’re one of my private lenders. So I’ll put my phone right up here and you’ll answer the phone and we’ll have a little chitchat and I’ll say, Dave, I got great news for you.

(09:06):

I can now put your money to work. I got a house in Newport with an after repaired value of $200,000. The funding requires 150. Closing is next Tuesday. You’ll need to have your funds wired to my real estate attorney next Monday. I’m going to have my real estate attorney email you the wiring instructions end of conversation. Notice I didn’t ask If you want to fund the deal, of course you want to fund the deal. You’ve been waiting for the phone call. I’ve told you the program. I’ve taught you the program, you know what kind of rate you get, what the maximum loan to value is, the program that I’ve taught you. And so now you’re waiting for the good news phone call, which I just gave you. And in addition to that, if you as my private lender, if you’ve moved your retirement funds over to a self-directed IRA company, you ain’t earning any money until I put your money to work.

(10:04):

You moved it at my recommendation. Now I’m ethically bound to put your money to work. You ain’t earning any money until you actually put her to work. So again, we separate conversations, we leave with a servant’s heart, we educate, and by the way, David, these people going around saying don’t just get the deal under contract. The money is show up. I want to throw up where is the money going to show up? Is it just going to rain out of clouds or something? No, get the money lined up and you can get it lined up fast. Just like me. There’s always going to be deals.

Speaker 3 (10:38):

Yeah. Oh man, that’s really good stuff. I love how you went down that road and it helped you personally. Now you’re just teaching a lot of people. I love that magic question. Who do you know that can help me with my problem? It’s that who, it’s not always the how. It’s the who did I know, and in that point it really helped you. I also run into a lot of times, I don’t know if you see this, where there’s someone who’s like, I could save a couple interest points if I just use my own money versus a private lender’s funds. What are your thoughts on that of always taking down your own deals versus going out there and putting the work into getting a private lender?

Speaker 1 (11:17):

Sure, I get that question all the time. They say, Jay, you making all that money? Why don’t you use your own money to invest in real estate? Why are you still borrowing private money? Well, here’s the answer. If you’re just going to do one deal, that’s a great use of your money. That’s a fantastic use of your money. But do you want to scale your business? I mean, right now we’ve got seven different projects going on, single family houses simultaneously. Well, I don’t want my money buried in seven houses or projects simultaneously, which here in our local market can easily be over 3 million with the prices of our homes. So if you want to scale and really, I mean most people have got a bottom of the bucket in their checkbook. So if you want to scale your business, then private money is the way to go. Another answer to that question is, do I want to pay myself 8% or do I want to use my money for something else,

Speaker 3 (12:22):

Right? Yep.

Speaker 1 (12:24):

So that’s a couple of answers to why I use private lending and why I’m still using 47 private lenders,

Speaker 3 (12:33):

Which is great. I love what you said. If you want to scale, it can run out of cash real quick. If you just keep using your own money where a lot of people have to choose between, okay, paying some percentage points or sleeping at night, and it’s like, I think I like your option a whole lot better, especially if you’re looking to grow. But I like how you said that one deal. That’s okay, but if you are looking to be a real estate investor, this is something you’re going to have to go down that road. Now, last time I asked you some questions about the private lending process. I don’t think I asked this one though, is how do you maintain a relationship with that many private lenders? You’ve got 47 people in your network that you call up with the good news call. So is it like how do you maintain a relationship with all those people?

Speaker 1 (13:22):

I mail ’em checks.

Speaker 3 (13:25):

I love that. That’s a great answer. Oh man. No better way to keep a relationship there.

Speaker 1 (13:33):

I mean, they love getting money in the mail, right? Yeah. They love mailbox money, so I mail ’em checks.

Speaker 3 (13:41):

So you mail ’em checks. So you’ve built a good enough business where you can keep 47 lenders busy and their money active.

Speaker 1 (13:50):

Well, to be totally transparent, I mean, it is a juggling act to tell you the truth. I mean, there’s more money than there is deals.

Speaker 3 (14:00):

Yep.

Speaker 1 (14:01):

There’s more money than there is deals. And so we got 47 private lenders. Some of them have got $30,000 with us, some of ’em have got a million dollars with us. I can’t buy a house for 30,000, but I can use 30,000 for rehab money. You can use private money, borrow private money in a junior position, you’ve got to disclose that. But I can put private money in a junior lien. But what comes into play there is what we call total loan to value. So I’m not going to be borrowing more than 75% of the after repaired value. I didn’t say the purchase price 75% of the after repaired value. But let’s say back to that example that we just talked about, David, where if I’ve got a after repaired value on a home of 200,000 for easy figuring, I can borrow up to 150,000. That’s 75% of the after repaired value. But if I buy it for a hundred thousand, which I do all the time, 50% of the after repaired value, I can have a private lender in first position at a hundred grand. I could have another private lender in second position at 50 grand. So add a hundred to the 50, now one 50 divided by 200,000 after repaired value, I got a total loan to value of still 75%.

Speaker 3 (15:27):

Yeah, I love that. And it seems like private money gives you flexibility and

Speaker 1 (15:32):

Options. Does that make sense?

Speaker 3 (15:34):

Yeah, that makes sense. A hundred percent.

Speaker 1 (15:37):

Oh, absolutely. Flexibility is where it’s all at. I got 15 reasons. I love private money over traditional money. I won’t share all 15, but the biggest one is it puts you in the driver’s seat. The traditional way to borrow money is you go to the bank and get on your hands and knees and you’re begging and chasing, well, they are making the rules, right? The lender is making the rules. But in this world of private money, we make the rules, we set the interest rate, we set the length of the node and all that.

Speaker 3 (16:14):

I love that. Flexibility is the ultimate play in real estate. You want to have flexibility and you want to be able to have that. So I love what you teach. Who is the person that you’re trying to teach out there? Is it the person that’s done one deal a thousand deals? Who are you trying to help the most with your business?

Speaker 1 (16:33):

Yeah, that’s interesting. At my live events, which is called the private money conference, and my live events, we have about 60% or so have already done deals. They’ve already done deals. They want to scale their business. They are real estate investors wanting to scale their business, and about 40% are looking to get their very first deal. So I’m helping everybody. I mean Stu and Harriet Baldwin from New York State, they enrolled and joined my mastermind membership community and they already had a portfolio of a hundred houses. They’d already raised over $2 million in private money, but they wanted to see how I went about it. Well, just one webinar that I recorded with them brought in 1.2 million in additional private private money. So I’ve worked with real estate investors that are brand new and those that are also seasoned to help them get more private money ready to go for their business.

Speaker 3 (17:33):

I love that. It sounds like a lot of people out there need private money, and even if you’re just getting started, if you don’t have the funds to do that first deal, like you mentioned, you do that first deal, that one deal at a time, it might be okay, but this sounds like a great spot where if you’re getting into it or if you’ve got lots of stuff going on, this could be another way to make sure your company can keep running without what you ran into with the banks back in 2007, eight or oh nine. Would you say that’s true as well?

Speaker 1 (18:04):

Absolutely. Absolutely. I mean, I’ve met very, very few people. In fact, I can’t even think of one. I haven’t met any real estate investor that says, I got enough money.

Speaker 3 (18:20):

Yeah, me either.

Speaker 1 (18:22):

I can’t use any more private money. However, David, you are looking at one right now. I got about almost $2 million right now, what I call sitting on the shelf waiting to be deployed. And I tell you what, I’ve had new private lenders come into my world that want to invest and just to prove to them that I can perform. I’ll take the new private lender’s money and pay off a current private lender, refinance the deal so I can get their money to work for ’em, right?

Speaker 3 (18:53):

Ah, yep, that makes sense. I like that. As you grow and scale, you might run into that issue and you make one lender a little bit happy. I mean, at least they’re getting paid off, but then they probably come back to you and say, I want you to put my money to work again. Do you have that come up a lot?

Speaker 1 (19:12):

Quite frankly, when I pay ’em off, they’re not happy.

Speaker 3 (19:17):

That’s why I said just a little happy, maybe a little bit.

Speaker 1 (19:20):

But when I pay ’em off, they’re not making any money on that money. In fact, with a new private lender, I’ll get ready to pay ’em off cashing out on a deal and I’ll call ’em up and say, Hey, just want you to know that you’re going to have a check coming in the mail from a real estate attorney’s trust account. We’re paying off this house. And they’ll say, Jay, can’t you just keep the money? And I’ll go, no, I can’t keep the money unless I’ve got your money secured by a property because we do not borrow unsecured funds. Now, here’s maybe a little advanced strategy for some folks, but I do substitutions of collateral or loan modifications all the time. If it’s a small amount of money that a private lender’s invested 30, 40, $50,000, and we use it for rehabbing a property. So when I’ve got another property I’m getting ready to start on, I’ll substitute the collateral and keep that 30 or $50,000 note in play. So they keep earning money on that money, but we will substitute the collateral just to a different project that we’re moving to.

Speaker 3 (20:25):

That’s awesome. So then sounds like you have a good problem. It’s like, I want that. Well, I think a lot of real estate investors would rather the problem, I have too much money versus I’ve got these deals and I can’t fund them. So I really like how you teach people that and where it could snowball into this, where it’s like, I’ve got 47 private lenders, I’ve got to go out there and get the deals for ’em. Absolutely. And I really like that. And

Speaker 1 (20:50):

For goodness sakes, you don’t start out with 47 private lenders. I started out with one, right? I started out with one and then that quickly became two and three and four and five because private lenders tell other people what’s going on. So I haven’t actively attracted private money for years because our current private lenders just keep sending us people. In fact, day before yesterday, day before yesterday, I got a phone call from the mother of a good friend of mine, his name’s Craig, lives in Newburg, North Carolina. Craig had told his mother about this investment thing that I got going on and she had never heard of it, which is really funny. I’ve been doing it now private money since 2009. So she calls me up and she says, Hey, my son’s been telling me about this investment thing you got going on. Tell me about it. So word of mouth gets around very, very quickly when you start doing business with private lenders the way I do.

Speaker 3 (21:53):

Yeah, I like that a lot. So in order to get people to talk like that, what are the biggest things that you do for your current private lenders that makes them want to recommend you?

Speaker 1 (22:07):

Well pay ’em on time.

Speaker 3 (22:08):

There you go. That’s a big one. Sounds like that would be a really great place to start.

Speaker 1 (22:12):

Pay ’em on time. But I also have three times a year I put on a party for our private lenders at the Dunes Club. So we have three times a year a VIP reception over at the Dunes Club on the beach, and it’s just an evening of private lenders getting together and we have a good old time and I feed them and give them all the soft shell crabs they want, and I tell ’em to bring their friends with them.

Speaker 3 (22:42):

Yeah, that’s awesome. So number one though, that anyone can do at any stage is pay people on time. So actually pay, would you say, what about communication? I hear that come up sometimes too. How do you do a good job on the communication with your private lenders as well?

Speaker 1 (23:03):

Well, it must be good enough. They never go away,

Speaker 3 (23:06):

Right? Yeah, that’s the big things I hear.

Speaker 1 (23:10):

Here’s one thing I have not delegated as far as communication. I personally, I mean my relationships with my private lenders are very, very important. So I personally pick up the phone, pick up the phone, and call my private lenders when I have got a deal for them to fund. I do not delegate that out. I could

(23:37):

Delegate that out, but I don’t, when I got a deal for them to fund, I’m the person on the phone keeping that relationship When I’m getting ready to pay them off. I don’t have a check just show up in the mail. Of course they got to sign a payoff instruction letter if a different closing agent is closing it for a buyer. But before any of that happens, I personally call ’em up and I tell ’em that we’ve got that property sold. We’re getting ready to pay you off. Or I’ll call ’em up and I’ll say, Hey, we’re getting ready to pay this property off, but I will keep your note open so you can keep earning money. I’m just going to substitute the collateral. We got some documents we’re going to email to you for you to sign and send back the communication. I’m personally involved in putting their money to work and letting them know when we’re cashing out and where they are on the deal.

Speaker 3 (24:31):

That’s awesome. Then since it’s the profit first I podcast here, I love this concept of the private money because you need your cash in your accounts. So to be able to run your business, do those things, and then setting up a separate account just for your private money lenders, so it makes it easier to do what Jay just told you to pay them back, to pay them back on time to be in good communication with them. So now this has been really good. Do you have any other advice before I ask you? How could they work with you? How can they get in touch with, because I know this is something that is needed desperately, that I send people your way all the time. I know I trust you to help people, but any other last minute advice here that you would give to the real estate investors listening to the podcast?

Speaker 1 (25:18):

Sure. I appreciate you asking that question. It’s going to be very hard to own a lot of real estate

(25:26):

Until you own the real estate between your ears. So what do I mean by that? People ask me, how do I start? How do I start raising money? I can tell you how you start raising private money. You get your heart right, you get your mindset right. So what do I mean by that? Well, what do you do? You lead with a servant’s heart, you lead with education, you put your private lender money hat on, you private lender, teacher hat on, and you leave with education, don’t pitch deals, and you really, really are concerned about the other person and realize, part of this mindset is realize you’ve got an opportunity to change people’s lives, right?

Speaker 3 (26:11):

That’s so good.

Speaker 1 (26:13):

We’ve got countless people that are particularly in their retirement years, that have thanked me and Carol Joy for making a difference in their retirement years to where they can, I mean, they don’t want to touch their principal. They want to live off of their principal investment. So they’ve been able to travel, go see grandkids, do all this stuff that they couldn’t do otherwise until they got involved in our program. So just know that you’ve got a way to really make an impact on other people’s lives. And lemme tell you another part of mindset. It ain’t about reaping. It’s not about reaping. It’s all about sowing. It’s all about sowing. I can’t be reaping all that private money and deals until I have sown and given and led with value first. So how you sow is how you’re going to reap.

Speaker 3 (27:08):

Yeah. Oh man, this is so good. I’m glad I asked that question because I hear the passion in your voice and I hear that you really care about the people you work with, the people that have private money lenders out there, you care about that relationship. I love what you said. Get your heart right, get your head right. I also think, like you said too, that if they don’t have that desperation has a smell. So if you’re out there, you’re desperate and you’re just going out there, then you won’t have people like you have that want to keep coming back, that want to continuously invest in you. So that was, I think, the best advice that you could give right there. Get it between your ears and get your heart right. I absolutely love that. And just to recap too, I love your magic question.

(27:55):

Who do you know that can help me with my problem? Then one day you’re going to wake up and you’re going to be like Jay, and you’re going to be helping other people with their problem. I’ve got money. I want to put it somewhere, and you’re the able to get them to where they can be. Desperation has a smell. I love that. And then honestly, I love that pivot. You are like, it’s not about the reaping, it’s not about the interest that I’m making or the profit I’m making for the deal. It’s more about sowing those seeds and ultimately you’re changing lives. That’s why you get private money, and it’s like that interest that you’re paying them is twofold. It’s like you get to sleep at night, you’re not using all your money and you’re getting to help someone else get a return that they wouldn’t be able to get anywhere else or in someone that they trust as well too, and that’s a little bit more tangible than the stock markets or all this other Bitcoin, some of that stuff that’s floating around out there. So this has been awesome. So how do people then, Jay, take that next step with you? Do you have a book? You talked about an event. What can people do?

Speaker 1 (29:01):

Absolutely. Well for your audience, David, I’ve got two gifts. First of all, I finished writing my book Where to Get the Money. Now, this is not a ebook. This is a book book that we actually send in the mail Autographic where to get the money. Now the subtitle is How and Where to Get Money for Your Real Estate Deals Without Relying on Hard Money Lenders or Traditional Lenders. It’ll walk you through step by step how to get all the private money you would want. Very, very easy to read. It’s $20 on Amazon, but you can get it for free. Being David’s audience, just cover shipping. You can go to www dot j Connor, J-A-Y-C-O-N-N-E r.com/book. So I’m an er, not an or. So that’s j Connor, J-A-Y-C-O-N-N-E r.com/book, and we’ll three day priority mail it out to you. Now, in addition to that, I’ve got an upcoming $3,000 per ticket live event right around the corner. But for your audience, Dave, I’m going to let everybody come for free with a measly $97 registration fee. This private money event. You can check it out at www.theprivatemoneyconference.com. The private money conference.com. That’s coming up right around the corner in June. Get on over there. Registrations are open, and I’d love to meet you in person at the private money conference.com.

Speaker 3 (30:31):

Awesome. I’m excited about that too. I love what you’re doing and you’re solving a big need that we hear all the time. Just like all people always needing to sharpen their acts when it comes to private money, you graciously have also invited me there to speak about Profit First. So I’m excited to get to tell people about that so they can get more private money and be more confident and not be desperate when they go and ask for people. So I’m really excited about that as well. So make sure we’re going to put those links there, but make sure either get his book or go to that event. I cannot endorse Jay Moore because I know how many people he helps, but then he also has the heart. You heard it right here. That’s how he wants to help you too. It’s very much a heart and a mission and a passion for him.

(31:13):

So Jay, thank you for coming on, for sharing your wisdom, your knowledge today. If you are listening to this episode and you feel stuck like, what the heck is going on? Where is my money? I don’t know what to do. I’m a little bit nervous to go out there and get private money. I can’t keep my own house in order. That’s where you could go to simple cfo.com where we can help you walk you through that process. We’ll link you up to Jay too. If you need private money or need to learn about private money, this is who we recommend. I recommend Jay to many people, so make sure that if you need that help you go to simple cfo.com. But Jay, again, thank you for being on the show and sharing your wisdom here today.

Speaker 1 (31:51):

David, thank you so much for having me. God bless you.

Speaker 2 (31:54):

This episode of the Profit First for REI podcast is over, but there are plenty more where that came from. Are you ready to learn how David and his team can help implement the Profit First system in your business? Schedule a discovery call@simplecfo.com right now. We’ll see you next time on The Profit First for REI podcast with David Richter.