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Warrant Buffet once said, “Buy into a company because you want to own it, not because you want the stock to go up.” Or as I’ve also heard it said, never buy a piece of real estate or stock because you expect it to go up in price. Let me give you a practical example of breaking this rule and what I learned from it.
It’s 2003. I just got stationed in beautiful Phoenix Arizona. I attended a free presentation given by Robert Kiyosaki at the base theater. I was hooked. I quickly read Rich Dad, Poor Dad and everything else of his I could get my hands on. I highly recommend all of his books. The housing market in Phoenix starts to accelerate. Everyone’s making money on the appreciation of houses. Mortgage lenders are swamped because everyone is buying houses. They keep talking about the flood of people from the Midwest moving to the Southwest. I have friends who’s kids move out to Phoenix from Michigan, buy a house, and sell it six months later and make $60,000. The guys I’m hanging around with are talking about interest only loans and never paying them off. Being from the Midwest, that made no sense to me, but nonetheless I’ve read all of these books I can do this.
In early 2004 I buy my first investment property near where I live in Phoenix. I’ve got my team all lined up, a great realtor, a property management company, and a mortgage broker. As a side note, a great realtor is vital to real estate investing and do you want to know why? They know EVERYONE! If you need a plumber…call your realtor. If you need a new property manager…call your realtor. It’s a nice house with an HOA and everything. The market is Booming! I’m going to be rich. Well, with financing being so easy and everyone buying houses, why would anyone rent? It takes six months for me to get a renter. Realize I’m paying the mortgage, the hoa fees, everything. Once I do get a renter, I have negative $700 cashflow a month. No big deal right? The market is going straight up. About halfway through the year I realize, this is dumb. What if the housing market doesn’t keep going straight up? Why am I going to keep this investment and pay $700 out of my own money per month to keep it going. At the end of the year-long lease, I removed the renters and sell the property. Fortunately, I was single at the time with extra cash. I did sell the property for more than I bought it for, but with the negative cashflow and six months without rent, I’m lucky if I broke even.
That’s why you’ve heard me say, I never buy a piece of real estate expecting it to go up in value. I always assume the price will stay flat, or maybe even go down. Do I still want to hold the property? Does it still provide enough cashflow to be worth it to me? Hopefully you can learn from my mistakes and not make the same mistake yourself. “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.”

― Otto von Bismarck

I seem to tell this story often, so I thought I would write it down here. After the mistake with my first rental property, here’s my second mistake. Now I’m stationed in lovely Tucson Arizona having a blast. It’s 2010 and the housing market crashes. If you’ve read my previous posts, you’ll observe this is a GREAT time to buy real estate, during market depreciation. I have a realtor friend of mine all lined up. I see a house I want to buy around where I used to live in Phoenix. I drive two hours there, look at it with my realtor, put an offer on it, and drive two hours back to Tuscon. I don’t get it. The next time my realtor has 7 properties for me to look at. It’s a Saturday, I drive two hours out there, look at all 7 properties, place an offer on one and drive back to Tuscon. I get it! It’s a short sale so it takes six months to close. The title company sends someone to my house in Tuscon to sign the paperwork. My realtor hooks me up with a property manager. I drive out there one more time right before closing just to make sure nothing has changed with the property. Nothing has changed and the property is mine. My realtor hands the keys to the property manager. Did I ever mention what a great realtor I have in Phoenix? If anyone’s interested in a realtor in Phoenix, pm me and I will give you her contact info. She’s the best! Back to the story. My property manager does a walk-through, gets a handyman to fix a couple of things, and within a month I have a renter. Simple…right?
Let’s do it again. The housing market is still depreciated. I place an offer on another home in Phoenix. This one has 25 beautiful pictures from the listing agent. I buy it. My realtor once again gives the keys to the property manager. The property manager has me do a little more work this time, including new carpet and interior paint. As a reminder, I already know how much it will rent for and how long it will take to get a renter before I ever place the offer on the house. In this case I should have a renter no later than 30 days from when I close. Because the housing market has crashed, everyone is losing their homes, so everyone is now renting. My what a couple of years make. 43 days after closing my realtor contacts me and asks me how it’s going. I say horrible, I can’t find a renter. She can’t believe it. She looks up my rental listing that my property manager placed on the MLS. Remember when I said there were 25 beautiful pictures of the property when I bought it? My property manager now has 4 pictures to rent out the exact same home and they’re awful. One is a picture of the community pool looking through the bars of the fence around the pool and the other is picture with the old carpet after the furniture is removed! Needless to say I’m not happy. I ask my realtor if she knows any other property managers. Remember when I said a good realtor is vital because they know EVERYONE. She does. I call the new property manager and set everything up. Now I call the current property manager and I say this is ridiculous, you’re no longer needed, and here’s the name and number of the new property manager. The two property managers worked the transfer out. Notice there wasn’t any feedback, there wasn’t a second chance, there wasn’t a list of documentation…nothing, just You’re Fired! Now, I’m not saying this is how every situation should be handled, but in this case it was necessary. If you’ve read any books on leadership including Urban Meyer’s Above the Line, you will know that it’s important to get rid of the bottom 10% to keep any organization healthy. In this case my property manager was in the bottom 10% and needed to be replaced immediately.
-Vincent Cyran

How to debrief like a fighter pilot, and apply it to real estate. When I was in the fighter squadron, my weapons officer always used to say, “All of the learning occurs in the debrief.” How do you get better at investing in real estate or anything you do in life? Similar to high level sports athletes reviewing tapes, the key to success is the debrief. You can apply it to anything, but today I’m going to talk about how to debrief to get better at flipping houses.
First, you need to come up with quantifiable objectives that you want to accomplish while flipping a house. You need quantifiable objectives so that you have something to debrief towards after the flip. The objectives cannot be ambiguous. For example, let’s use Time, Accurate rehab cost, and Profit. Now, those are not quantifiable so let’s make them quantifiable. 1) We want to flip this house within 6 months. Time is money so the longer we take, the less money we will make since likely we will be paying interest on some kind of loan. 2)We think it will cost X dollars plus or minus 10% to rehab. If we spend much over our rehab cost, we will reduce our profit and if we over-estimate our rehab cost, we will lose deals because we will not be able to go as high on our purchase price. 3) We want to make at least Y profit. Given that profit is sales price minus purchase price minus rehab costs, profit incorporates all aspects of the deal. A business will not survive if it’s not making a profit. We can add some sub-objectives under each main objective which we think are critical to accomplishing each main objective. We now have quantifiable objectives. Let’s go flip this house!
We close on the house and now it’s time for the debrief. It took us 9 months to flip the house instead of six. We failed at objective one. Why? Once we bought the house, someone came up to us to buy the house. Instead of flipping the house, we decided to wholesale it to that buyer. Wholesaling is buying a house which needs to be fixed up and instead of fixing it up, you sell it at a small profit to someone else to fix up. At the agreed upon price, we would make about the same as if we would if we had spent the time and money to fix it up and we would make that money in a significantly shorter period of time, win-win for everyone right? The problem is after waiting 40 days, the buyer did not qualify for financing, so the deal fell through. From our perspective we wasted 40 days. This is an execution error. Now here’s the key to the debrief and learning. We need to determine if we had a bad plan or did we not execute our plan? In this case, our plan was to flip the house in six months, we did not have a plan to wholesale. We did not execute our plan. Next time, if we just flipped the house instead of trying to wholesale it, we would have saved 40 days on our timeline and been closer to our 6 month objective to flip our house. This is the critical part, if we would have just executed our plan and flipped our house, instead of trying to wholesale, we might have been able to meet our Time objective. That’s the learning and how you get better, stronger, faster. Now can we incorporate wholesaling into our plan? Absolutely, more on that at the end.
Additionally, we had several contractors who took longer than expected and who did sub-par performance which needed to be corrected. Execution error. The plan was sound. We were unable to get the contractors to execute the plan. Get new contractors to execute the plan and it will allow us to meet our Time objective. Next was a title company delay. The title company took longer than expected and we ended up owning the house for two weeks before they communicated to us that it was ours. Execution error by our title company. Get a new title company. Another issue where two weeks was wasted on our timeline which contributed to preventing us from meeting our 6 month Time objective. We are now using a different local title company that we have a pre-existing relationship with. They are phenomenal at communicating with us and it is likely that we will get this house quicker than the last helping us better meet our time objective.
Now I have shown at least three execution errors here in the Time objective. Anytime there are multiple reasons why an objective is not met, there is a lesson or two to be learned there. I was always forced to complete the following sentence at the end of a debrief, “The next time I flip a house I will…” So, to apply to our above example, “The next time I flip a house I will only allow cash offers with proof of funds to a wholesale a property that I intend to flip.” This is a Lesson Learned and we will apply this lesson learned to our plan. Additionally, “The next time I hire a contractor I will use established contractors who have a history of quality work and can complete a project in an expeditious time frame even if it costs a little more so that I can meet my time objective, assuming it still fits into my rehab budget.” Sometimes in life the difference between success and failure can be a very fine line. Knowing how to debrief and pull out the lessons learned is key and will allow you to progress towards greatness. Feel free to reach out to me if you would like to discuss how to debrief more.
Vincent Cyran
LionHeartGroup, LLC

You think you’re interested in investing in real estate, but it’s a big purchase and you do not want to lose a bunch of money in the process. How do you know that you’ll make money in the deal, and how do you know how much you will make? At first this may seem overwhelming but I assure you the math is easier than high school algebra. Today we’ll talk about purchasing a single-family residence as an investment.
The most important thing when investing in real estate is purchase price. As the saying goes, “You make all of your money at the purchase.” Two ways to get a great purchase price is to buy real estate in a depressed market or to buy a distressed property. A distressed market is a great time to buy real estate. The most recent example is after the housing crash in 2010. Everything is on sale and it’s easy to make money. The only problem is it only comes around occasionally. A distressed property is one that has not been kept up. You can often get these at hugely discounted prices. A great place to start looking for distressed properties is auction.com. The major drawback of auction.com is you do not get to see the inside of the house before you buy it, so a good assumption is that you are going to have to do a lot of work to get it up to par. In my opinion unless you already have a bunch of money or you only want to invest in depressed markets, the ability to fix up properties is vital to the real estate investment process.
When looking at an investment property, the first thing I do is look at the 1% rule. The monthly rents should be around 1% of the purchase price. The best place to find out how much a property will rent for is a good realtor and/or property manager. But just to get a ballpark number to see if the investment is worth pursuing further, zillow.com will get you started. This means that if an investment property is selling for $120,000, then it should rent for about $1200 a month. If these numbers aren’t close, then I move on immediately. Next, I just plug the numbers into the SingleFamilyResidence excel document. I cannot share an excel file in Facebook, so just pm me with your email and I will get you a copy. I have attached a pdf for you to see as a reference. The county auditor site has the annual property taxes and it’s simple to look up the annual insurance, management fees, and loan assumptions. I just plug those numbers into the excel document. The vacancy rate varies with time, but right now it’s pretty low so I’m comfortable with a low vacancy rate. Maintenance rate varies depending on the quality of the real estate. A brand new piece of real estate or one that you’re going to fix up will have a very low maintenance rate versus one that’s older and hasn’t been upgraded recently. I will then enter the finder’s fee based on how often I expect to need a new tenant. Finally, I enter a capital expenditure (Cap-Ex) rate. While maintenance is small short-term things that need to be repaired, Cap-Ex is money I set aside for long term expensive repairs such as a new roof or new furnace. That’s it, the excel document spits out monthly cashflow and how long it will take to get my money back. That’s how I determine if a real estate deal I’m looking at is a good investment or not. It’s also how I compare one real estate deal to another. I would like to get my down payment back as quickly as possible and I would like to get as much cashflow as possible. I personally never plan for appreciation, I do not factor that into my calculations. If I get any appreciation, that’s just a bonus to me. If I do get appreciation, my plan is to sell the property and 1031 it into another one, or if the rents increased enough from when I purchased it, I can refinance the property, take some money (tax free by the way) out to buy another piece of real estate.
As most of you know the unique thing about single family residence real estate is that it’s value is based off of comps(comparables). This means that the value is based off of the price of other homes in the surrounding neighborhood. This is not how commercial real-estate is valued. Commercial real-estate is valued based off how much rent it brings in. The fact that single-family residences’ value is based off of comps can work both for and against you. It’s your job to analyze the current market conditions and make it work for you. Similar to riding a bike, after you analyze several real estate deals, the math is easier than high school algebra.

Vincent Cyran

Let’s talk about the tax benefits of real estate. We’re going to cover depreciation and 1031 exchanges. The easiest way to go over this is with an example. Let’s say we want to purchase a piece of real estate for $100,000. We put $20,000 down and finance the rest with a loan for $80,000. Let’s just say that after all our expenses, we make $200 a month. One quick tangent. You and I when we work at a job and receive a W2, we qmake our money, we are taxed, and then we save with what’s left over. Now this is not 100% accurate because there are some deductions we can take but you get the picture. An investment property makes money, pays all of it’s expenses, and then is taxed on what’s left over. A HUGE difference! Now, back to our example. Let’s say we hold the property for 10 years. Every year for a piece of residential real estate, we can depreciate 1/27.5th of the purchase price. In this case, since our purchase price is $100,000, we divide by 27.5 and get $3,636.36 per year of depreciation. If we’re making $200 a month, $200 times twelve months equals an annual profit of $2400. Since we depreciate more than we make in profit, how much do we pay in taxes on the monthly cashflow? Zero. We can likely even deduct $1,236.36 ($3,636.36 – $2,400) from our personal tax return. Now, let’s say after 10 years we have now depreciated the property $3,636.36 times 10 years which equals $36,363.60. If we were to sell the property now for $100,000, the same price we paid for it, we would have to pay taxes on the $36,363.60 of depreciation at the depreciation recapture rate of 25%..ouch! Now let’s say that instead of buying one, we bought 3 pieces of real estate each for $100,000. We hold them for 10 years and now they’re worth $200,000 and we would like to sell all three of them. How much tax would we have to pay? Well, we depreciated each one $36,363.60 so multiply that by 3 and we get $109,090.8. At the depreciation recapture rate of 25% that is $27,272.70 in taxes. Additionally, we have to pay capital gains tax on the $100,000 increase in property value for each of the 3 properties which is $300,000. There are currently 3 long term capital gains tax rates depending on your income so let’s just assume 15%. $300,000 times 15% equals $45,000. If we sell all three properties we would have to pay $27,272.70 plus $45,000 which equals $72,272.70 in taxes..ouch! But wait it gets better. Let’s say you buy another piece of real estate using what’s called a 1031 exchange. If you take the money from the three properties you sold and buy another piece of real-estate, and you meet the requirements of the 1031 exchange – YOU WILL PAY NONE of the $72,272.70 in taxes. Now the taxes are deferred, but there is no limit to the number of times you can execute a 1031 exchange.
Now let’s talk exit strategy. Let’s say you hold a piece of residential investment real estate for 27.5 years and you have thus depreciated it to zero. You pass away and will it to your children. The cost basis of your investment property that you willed to your children is now “stepped up” to fair market value. This means that your children can either depreciate the piece of real estate for another 27.5 years, at the current market price not the price you paid for it, or they can sell it at market value with no capital gains.
Yes, you can invest in real estate without paying taxes legally. As always this is for educational purposes only. If you intend on executing one of these strategies, please contact a qualified accountant. As Andy Dufrene says in Shawshank Redemption: “It’s perfectly legal, go ask the IRS, they’ll say the same thing.”

-Vincent Cyran

Do you enjoy the stock market? Do you like having most if not all of your retirement savings in the stock market? Would you like to invest in real estate, but all of your available money is tied up in retirement accounts? Let me explain how to use retirement accounts to invest in real estate. There are others, but the two retirement accounts we will cover here today are the self-directed IRA(SDIRA) and the solo 401(k). Almost anyone can rollover money in a retirement account (401k, IRA) into one of these retirement accounts(SDIRA, solo 401(k)), assuming they are eligible to open one of these accounts. Here is a chart from the IRS on eligible rollovers: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf. Rolling over simply means transferring from one retirement account to another. The key is are you eligible to open a SDIRA or solo 401(k)?
First, we’ll discuss the SDIRA. A SDIRA has the same eligibility requirements as any other IRA and there is a Roth option for the SDIRA. The most effective way from a tax perspective to buy real estate in a self-directed IRA is to buy a piece of real estate outright including paying for any rehab without a loan. Let me explain why. Normally, when buying real-estate a person puts a down payment of around 20% and gets a loan for the other 80%. While you can do this in a self-directed IRA, only the 20% that you used for the down-payment grows tax-free. The 80% of the investment that you get with a loan is subject to Unrelated Busines Income Tax(UBIT). For example, let’s say that we buy a single family residence for $200,000. We put $40,000 (20%) down from our self-directed IRA and we get a loan for $160,000 (80%). Let’s say that in a year after expenses you make $10,000. $2,000 (20%) will go to our self-directed IRA tax free, but the other $8,000 (80%) of our profits will get hit with the UBIT. Anyone want to take a guess what the current UBIT tax rate is?…37%…ouch! So, in this example, you would pay 37% taxes on $8000 of your profit which would be $2960. This tax of $2960 must be paid by your IRA. Unless you want to buy real estate without financing, make sure you understand all of the tax implications of using a self-directed IRA to purchase real estate.
Next, we’ll discuss the solo 401(k) which is also available with a roth option. Who’s eligible for a solo 401(k)? According to the IRs, “A business owner with no employees” qualifies for a solo 401(k) https://www.irs.gov/retirement-plans/one-participant-401k-plans. Some business owners with no employees include the sole proprietor, home-based business owner, independent contractor, consultant, or small business owner. You can only obtain non-recourse loans when buying real-estate with a solo 401(k) which is a good thing for you the borrower. A non-recourse loan means that if you default on the loan, the entity holding the loan can only go after the collateral. In this example if you default, the lender can only go after the property the loan is with. The beauty of the solo 401(k) is that IRS 514(c)(9) exempts the solo 401(k) from UBIT tax! Yes, you read that correctly. In the above example, instead of paying 37% on the $8000 profit using your self-directed IRA, if you bought the same piece of real estate using a solo 401(k), all of your profits would remain in the solo 401(k) and be tax free.
Absolutely, you can invest in real estate using your retirement money. Yes, you might be eligible to rollover money in your current retirement accounts into one of the above retirement vehicles assuming you are eligible. This is intended to be a brief overview and is for educational purposes only. There are many details and iterations which may or may not apply to your specific situation. Please consult a qualified accountant to see if one of these options might work well for you.

Vincent Cyran