Mastering Real Estate Investing Through Strategy & Tax Advantages — Brian Davis & Josh Smith, MI

In this episode of the Neighborhood Realtor Podcast, we delve into effective tax strategies for real estate investment with our guests, real estate guru Brian Davis from Spark Rental, and seasoned investor Josh Smith of the Fulton Group.

Brian opens the discussion with insights from his article "7 Ways to Avoid Taxes on Real Estate Investments." He highlights the 1031 exchange, a tax-deferring strategy for property sales, and shares his shift towards 'lazy 1031 exchanges' in passive investments, emphasizing the benefits of depreciation write-offs.

We then move into discussing the advantages of Roth self-directed IRAs, which allow for tax-free growth in diverse real estate investments.

The episode is a treasure trove of tips for minimizing taxes in real estate, making it a must-listen for investors and real estate professionals at all levels. Tune in to uncover the secrets of navigating real estate taxes with Brian Davis and Josh Smith, here on the Neighborhood Realtor Podcast.

None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All viewers agree that under no circumstances will Neighborhood Loans. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained.

The Neighborhood Realtor is proudly sponsored by Treadstone Funding and Neighborhood Loans. For more tangible tips in real estate marketing, check out Matt's book, The Tangible Action Guide for Real Estate Marketing available on Amazon.
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Transcript

(upbeat music) - So you can keep pocketing that equity. Your tenants keep paying down the mortgage for you, but you never sell, you keep the asset. Hopefully you have a little bit of cash flow from it. And you never owe capital gains taxes.

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(upbeat music) - Just a disclaimer before we start today's episode. The content on today's show involves taxes and financial advice. The information given should be taken as a starting off point and questions to ask your CPA or qualified tax advisor, not as gospel. However, the information is great and it's a great place to start. Enjoy the show. (upbeat music) All right, hey everyone. Thank you so much for tuning into the newest episode of the Neighborhood Realtor podcast today. We have something different and exciting, right? Like I think diversity makes the episodes a lot more fun. And today's diversity is that we're not talking to just another top producing realtor who's doing 20 to a hundred million dollars in sales. I know that's the speed of the show we normally run at. But today I know that so many of our listeners(...) own rental properties. And I know that so many of our listeners sell clients for rental properties and investments.(...) And the buzzword that I don't know about you guys, but the buzzword I keep hearing in the media is house hacking, real estate investing, 2024, right? I think the minute rates even tick lower, that just explodes again. So I wanted to do an episode today about rental properties and tax saving when it comes to real estate investment properties. So I have two experts on with me today who know a lot more than I do. So first I'll introduce Josh, because I know him, I've known Josh Smith for the last 10 years. A lot of the listeners in the Michigan area will know Josh. Josh is the co-founder of the Fulton Group, among other companies. Fulton Group is one of the largest real estate

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rental property portfolios in the area. And Josh and his partner Kevin run the company

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very intelligently and profitably. So Josh, welcome to the show today. - Thanks, Matt. Thanks for having me. It's a wonderful, warm introduction, more than probably I deserve, but thank you. - I'll make sure to let your wife know that it's not my fault if your ego goes a little higher this weekend. - Oh boy, oh boy. - And then we have Brian. So Brian and I recently connected, he's a new friend. So Brian had an article published on Inman, one of my favorite real estate marketing websites, and he had an article about tax avoidance through rental properties. And it was fascinating to me because I have rental properties, and I don't know a whole lot about this. A couple of maybe one or two of the points I've heard before, but I thought the ideas were really great. So Brian's the co-founder of Spark Rental.(...) They are a passive real estate investing club, and they just have a ton of tools for helping to analyze which properties are good deals, and pairing non-accredited investors together to take advantage of some of those opportunities. So Brian, thank you so much, and welcome to the show today. - No, Matt, thank you so much for having me. Excited to be here. - So I wanna start, before we get into the tax savings, right, you can't save money on taxes until you start making or spending some money. So I wanna get into some rental property stuff. I'm gonna start with Josh on this one. So Josh, you've been buying properties, you know, since 2008, 2009. And the market then very different to the market we have now, but what historically have you looked for when it comes to your real estate portfolio, and how has that changed over the years, and what are you looking for now?

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- Yeah,(...) so initially, 2008, 2009, 2010 was a very different market, obviously, than it is today. So when we started,(...) you know, there was, you could buy anything anywhere for dirt cheap. Doesn't mean it was in great condition, but we had a model where we bought things in a couple of neighborhoods, key areas, and kind of stuck to that,(...) over-improved those properties, paid down debt aggressively,

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created our own management and brand. And so that was early on, if you will. Today, it's much different. So today, the opportunities are a lot tougher to come by.

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And we're still finding some deals, still finding some opportunities.

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But we also have a very long-term investment horizon,(...) so that helps us. But deals are tough to come by. So happy to be here, I think. Brian, hopefully, is gonna have tons of ideas for us on where to find the opportunities today. - So I think there's the first, kind of the first write this down moment, right? Have a long-term investment horizon. I think we talk about that on the marketing side of this show all the time, right? We have long-term marketing strategies, and we have short-term. If your goal is to only get into a real estate investment situation for a quick short return, that probably carries a very, very, very high level of risk. That's something for both you to consider and for you to be able to educate your clients on.

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And I know, Josh, you guys have made a lot of long-term investments, where you're playing the long game and you're making some guesses about the market. - Yeah, 100%. And I like to say we hit a lot of singles and maybe a couple doubles, but no home runs. We're just playing the averages, we're working through it. That's kind of how our model's been built. And I think, for sure, there's some singles that can still be hit in today's market.

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But yeah, and again, when you look at things over 100 a year, you're gonna own the single for 100 years. It certainly changes the metrics and the dynamics of the numbers.

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And that's how we've always looked at things. And I think it's even more important in today's current market environment that you're looking at things over that long-term horizon. - I love that. So Brian, I know you tackle it from a little bit of a different perspective using some pretty interesting tools that you guys have. How are you guys spotting, I guess, deals or opportunities?

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- Yeah, so it's worth mentioning right off the bat that I'm no longer an active real estate investor. I'm not a direct property investor anymore. I used to be a landlord. I used to have a bunch of rental properties. I sold all those rental properties. Now I invest passively in group real estate investments.(...) So I'm coming at it from a little bit of a different perspective than Josh's as an active direct property investor.(...) But I certainly, I spent many, many years as a rental investor.

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So one point that I would say, I would reiterate Josh's point about investing for the long-term and not speculating on appreciation,(...) but rather, and I'm putting words in Josh's mouth a little bit here, but I always liked to invest for cashflow because you can measure it from day one. You know exactly what the market rent is for a property. You know what your expenses are going to be averaged out over the long-term. So you can take a cashflow calculator, and by the way, we have a free one on our website, but there's a bunch of good ones out there that are free as well. Go out there, run the numbers with the average annual cost you're going to spend on maintenance and repairs, your average annual vacancy rate, all of these numbers that a lot of novice investors forget about because they're irregular, but they're also inevitable, right? So you have to take those expenses into account. So run the numbers on a property now, and you'll never buy a bad investment again if you can forecast the exact cashflow that you're going to earn on that property, and hopefully you will earn some appreciation as well. But if you are investing just for appreciation, if you're trying to find the next hot market, that's really speculation, right? I mean, we don't know which market is going to pop in two years from now, despite what the pundits might tell you. So, you know, I mean, there was a time when everyone thought, everyone's investing in San Francisco real estate, right? Because it was appreciating so fast, and it was just going through the roof. And guess what? They have done quite poorly over the last few years since the pandemic, right? You know, Austin, Texas popped up in the pandemic and then crashed back down to earth over the last 18 months. Boise, same story, you know? So these were all markets that at one time, everyone thought was like the hottest thing, right? So everyone poured their money in, thinking that they're going to get appreciation, even though they had negative cashflow on a lot of those properties, and they got burned. So, you know, I, the way I look at real estate investments nowadays is very much through the lens of risk. And where is the risk with this property? How do I mitigate that risk and minimize it? There's always going to be some element of risk in any investment, but with cash flowing investments that are cash flowing based on today's numbers, you can really minimize some of that risk if you're going into it with a long-term perspective and with an income perspective rather than-- - Absolutely, and I think the appreciation thing is an interesting one, right? Because, you know, historically homes over a 10-year period appreciate. That being said, for that person looking for the quick flip, that quick profit, you can't count on appreciation in the one to two-year period. I think a lot of people got really lucky in the 2011 through 2022 and a half market where things did go up on fire every single year, no doubt. But I think even in those periods of time, a lot of investors got caught with their pants down when big repairs came up that were more than the appreciation gains in a one to two-year period. So, before we get into the tax side, I want to go through, if you're new to this, like if a real estate agent's new to this, if a consumer is new to rental properties,(...) we can do the math, right? There's a lot of us who are analytical and we can figure out which properties are in cashflow. We can look up rents using different tools. We can look at what our monthly cost is gonna be. But Josh, I want to go to you on this one. What are some costs that people,(...) that landlords are gonna have that they might not think about? We have our mortgage, our taxes and our insurance. Those are the basic three. What are some of the other ones that we don't want people to forget?(...) - Yeah, you have principal interest, taxes, insurance, right, those are the common.(...) You can have some property management fees if you're not managing it yourself, is another big one.

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You gotta look at city municipality inspections and fees that might be associated with that along with the cost of any repairs.

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You're gonna have vacancy, obviously. That's one to build into the equation, although vacancy is low.

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So, yeah, there's,(...) and then you're gonna have, you're gonna have major repairs too, right? And so, I'm curious to understand how Brian accounts for that, and then his formulas and calculators, but it's, yeah, you got a lot of different expenses. This is, and just comment on this something, if I can for a minute, Matt, this is something that,(...) how I look at it

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and have developed this is, you know, it's investment property, right? Income property or investment property is what it is. And so, the analogy I use is, if you have a financial advisor, right, that you send $500 a month to, or $200 a month, or $1,000 a month, whatever, the number is, it doesn't matter.

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We do that, right? We do that religiously for some of us, and we say, okay, I'm gonna send money in every single month, and my financial advisor and I are gonna come up with a plan and we're gonna invest in every single month.(...) You put money in every single month is the point.(...) You don't then call that financial advisor and say, hey, what's my return? What's my distribution this month? What does that look like? That would be silly. Most people don't do that, right? And so, I think it's important to have that same sort of approach or at least understanding, distributions are good and they might be there and they're awesome and it's great and that's what you want, right? But at the end of the day, I think it's important to say, this is investment property. I am gonna make an investment in this every single month, day, week, year, whatever it is, and not necessarily expect that return because it may or may not be there because of vacancy or these expenses or those expenses or whatever. And so, I think that's a mindset that I think is really important to have and to understand if you expect to put X amount of hours in in the next month, get a return on that that's distributable to you, I think that's a little bit of a mistake. I think it's a big mistake.

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- Real estate has a lot of contracts. I want this podcast to have a social contract as well. Here's what I need from you. If you're listening to the show and you get something valuable out of it, or you hear something that you think, that's awesome, I want you to send me a DM on Instagram or if you find my email, send it that way. The more feedback that I get helps me to put together better shows and attract better guests.

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- What do you think psychologically, it's a hard one, right? Because psychologically, you see more money leaving from a property than you see coming in and that can be frustrating and you can get down on yourself. But when you look at the law of averages, you'll get like a five to 10 year performance.(...) It's a very different story and you're able to kind of take the bigger picture there than just the, what am I making or losing in one month, for instance? - Right, it's over a long-term investment horizon and I think all of us on this call and probably most of your listeners over a long-term, over a hundred year period, I think we're all gonna be fine from the investment return. It's the short-term where you have to not shoot yourself in the foot or think it's gonna be better than what it is. - I love that. So Brian, let's start getting into some of the tax side of things. So you published an article, seven awesome ways to avoid or mitigate some taxes on investment property. So why don't you start walking us through these there's a couple ideas I hadn't heard before that I thought were unique. Obviously in any investing, one way to make money is through returns but another way to make money is through money that you didn't have to pay the government in taxes. So I think most people that listen to the show would like to pay a little bit less or would like to get some other benefits from some of these tangible assets that we're holding. So take us home.

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- Yeah, and that is one of the huge perks of real estate investments, right? Is that they come with inherent tax advantages. So diving right in here, the first one is one that a lot of people are already familiar with. So we'll start with 1031 exchanges where you go and you sell an investment property, typically a long-term income property.(...) And within a certain timeframe, you buy a replacement property. It must be what they call a like kind exchange. So you sell a rental property and you go out and buy another rental property. The new one has to be equal or higher value than the old one. - Are there any other, when you said like kind other than the value, are there any other major stipulations there?(...) - No, it really, it just has to be an income property, income producing property is the main rule here. So you have to declare a new property. You can declare up to three options for new properties as replacement properties within 45 days of selling the old property. And then within 180 days of selling the old property, you must actually close on one of those properties. So there is a timeline here. And there is also a rule where you have to hire a qualified intermediary. So they call it like a custodian basically to hold your proceeds from the sold property.

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You can't actually touch the money yourself.(...) So that adds some costs and there is some red tape involved here. So for active investors who are going out and doing this all the time, people like Josh who are very actively involved in this, it's their full-time business,

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1031 exchanges can make a lot of sense.(...) For the average person who might have one rental property on the side of their full-time job, it might be more hassle and more red tape than they wanna get into. So for that person, that segues us into the second one. If you are a passive real estate investor like I am, if you don't wanna be a landlord anymore,(...) there's something called a lazy 1031 exchange where you buy into a real estate syndication. And if you're not familiar with that term, it's just a group real estate investment basically.(...) You buy in as a fractional owner in a large property.

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If you're not familiar with these, look them up, come to our website, we have the whole investment club around them. But a lazy 1031 exchange, you buy into one of these. A few years later, the sponsor, the syndicator, the main professional investor who manages this, they sell the property, right? So you get your big payout, you get your profit.

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Within that same year, if you go out and invest in a new real estate syndication, you get some great upfront tax benefits. So you get a paper, an on paper loss, even though you probably collected cashflow in the real world. So those paper losses,(...) which come from a couple of different forms of depreciation, which we don't necessarily have to get into here, but those paper losses offset your big capital gain. So you can, again, like a 1031 exchange, you just keep kicking the can down the road and deferring it indefinitely

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and keep enjoying the cashflow in the meantime.(...) So you guys, you with me so far? Absolutely, yeah, makes sense. Yeah, so there's no red tape, there's no special rules you have to follow. You just have to buy a new, or invest in a new syndication within the same calendar year of another one selling. So really easy, really pass. One thing I wanna mention, because I've heard a lot of horror stories here. When it comes to the normal 1031 exchanges, a lot of like normal investors buy a property as an investment, sell it really quickly, or sell it, and then go into a 10th, email their accountant at the end of the year that they did a 1031 exchange, but they didn't follow any of those rules you mentioned with the custodian, all those things. So then they find out that they weren't eligible because they didn't do the paperwork or the stuff right. So I guess like the big thing here, especially if you're a real estate agent, when you're talking to your clients about tools that are a little bit more technical, like a 1031 exchange, make sure to walk your clients through a little bit of those intricacies so that you don't get that call a year later that the thing that you told them didn't work because you didn't give them all the information. I think that is a big one to watch out for because your clients will be mad at you even though it wasn't your fault that they didn't do their due diligence and research. - Hey Brian, what I think you call the custodian or that has to handle the 1031? - Qualified intermediary is the technical term. - Correct me if I'm wrong,(...) title agencies, title companies a lot of times have

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parts of their business that do that, correct?

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- Sometimes some banks will offer to serve as a qualified intermediary for a fee of course. You might pay 500 bucks, 800 bucks(...) to a QI, a qualified intermediary. So it's not free, but talk to your bank, talk to a title company if you work with one. Yeah, those are options on the table. - And obviously every state does title and things like that a little bit differently which is definitely something you should research in your own market. - So bank, title, attorney, call your CPA, they might have someone, probably two, three, four ideas to avoid any issues there. - And there are online, if you go on Google, you'll find a dozen options right off the bat that nationwide online companies that serve as qualified intermediaries. - So let's talk about some IRAs and Roths. So I have a Roth, I have an IRA, I have both, but my properties are not in my IRA. What are our options here for some tax avoidance?

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- Yeah, so if you want to invest in real estate with an IRA,(...) at least if you're not going to invest in publicly traded REITs, real estate investment trusts, those you can invest in your regular standard IRA or Roth IRA. But if you want to buy properties directly or if you want to invest in, you know, passive private equity real estate investments, you need a self-directed IRA. And again, you have to pay someone, this costs money, right? So you're gonna have to hire a custodian, you're gonna have to pay them, you know, hundreds of dollars a year in a fee.

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But then you can invest in almost anything you want. There are some rules and restrictions, but you can invest in rental properties, you can invest in passive group real estate investments.

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There are some quirks with this, especially with actively buying rental properties. I have not found it to be super practical for buying rental properties because you, if you finance it, you know, which, you know, it's hard to buy a rental property in cash with money that's just sitting in your IRA, given the low annual contribution limit, right? Like most of us don't have $500,000 sitting in our IRA. They think we can go out and buy a rental property with cash in. So you probably have to finance it and get a mortgage on it, but then that gets funky where the government basically splits the ownership percentage based on what amount of that property, what proportion of that property did you actually buy with funds from your IRA. And that's the only portion that you get the tax benefits on for the property. So it gets a little funky. Like I said, I don't personally do it. It's easier to invest in group real estate investments, you know, passive real estate syndications in a Roth IRA or a self-directed IRA, because there's that whole financing component is taken out of the equation and you're just investing cash in that deal.

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- Josh, have you guys done much with purchasing properties through investment accounts or have the people that you've mentored or coached had any success with this? - Yeah, I've had a self-directed IRA for a couple of them for, I don't know, 10 years plus or minus.

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And at Brian's point, it's nice to be able to have the cash in there so you don't have to get the loans,

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but you can, I mean, that is something you,

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it's a blessing and a curse, right Brian? I mean, there's a piece where it's nice that you can use leverage, right? And you can get loans in your IRAs,

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but there is some tax and accounting and reporting things to Brian's point that goes along with that.

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- Where does the money go? So Josh, if I buy a property in, let's say my IRA, let's say I'm a lucky person and I have 200 grand cash in my IRA, I buy $160,000, my IRA buys $160,000 property, probably won't be in a great area, but that's okay. When my tenants pay rent, do they have to make that checkout to my IRA? Or how does that work?

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How does the money flow part of that work? - Well, there's a couple of different ways to do it. Your IRA can actually own an LLC.

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So as I know, trust me, I'm no exact expert, I know enough to be dangerous on this thing. So you have to have a custodian(...) and then your IRA through your custodian can own an LLC. And your LLC can then own that piece of real estate. And then the tenants can pay your LLC.(...) - Got it, so you can start an LLC, you give the ownership of it to the IRA, and then your tenants are just paying the LLC just as most of us probably already have our properties in an LLC in some way, shape, or form. - Correct, and the thing is when you're doing that,(...) you gotta be very, very careful not to touch the money, if you will, because there's a lot of requirements and you can have penalties and fees and all sorts of things with that.

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So just,(...) to Brian's point, it is complex, but it can be simple if you understand it, but there's a lot of rules and regulation and we've gotten dialed in over the last 10 years and gotten it figured out, but it is not something that you wanna go alone, in my opinion, there's some really good attorneys out there, there's some really good custodians out there, but boy, I would just say if you wanna do that, it's great, it's wonderful, it's awesome, it's a great benefit, but make sure that you have your compliance, if you will, dialed in.

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- I think with everything that we're talking about today, I think that's the biggest thing. So the next one, Brian, I wanted to ask you about, so you mentioned pulling out equity in your article by borrowing, not selling. Now, this is obviously a little bit controversial,(...) some people go with the method of like, pay things down as fast as possible,(...) and then all the profits are yours, other people go more into the, the less skin of the game you have, the more infinite the return, but walk us through your chapter here on pulling out equity by borrowing and not selling.(...) - Yeah, so you owe capital gains tax when you sell an asset for a profit, right? Whether you're talking about a stock or property, whatever, so one way to approach this is you just never sell, right? So imagine you buy a rental property and you get a 15-year mortgage on it, and your tenants basically pay off that mortgage for you over the course of those 15 years, and then after 15 years, you own it free and clear, you go out and you could sell it, right, and have a nice payday, or you can refinance it and take out 80% of it, 90% of it, whatever, of the value of it, and pocket that money, and then do it all over again, right, where your tenants pay off that mortgage for you again over the next few decades.(...) So you can keep pocketing that equity. If you do this a few times, you keep pulling out the equity over and over and over again. Your tenants keep paying down the mortgage for you, but you never sell, you keep the asset, hopefully you have a little bit of cash flow from it, and you never owe capital gains taxes.

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- Neighborhood Realtor podcast is proudly made possible by the support of our sponsors, Treadstone Funding and Neighborhood Alarms, two amazing Midwest mortgage companies that now have offices all around the country. If you're a real estate agent looking to partner with an amazing lender, DM me at Matt Muskey 88, and I'll connect you with someone in your market. If you're a lender and you want to join the right mortgage company, DM me, and I'll connect you as well.

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What I think is interesting about that is usually when we hear about refinancing a rental property to pull cash out, we think of the negative side of that, right? Like we think of people getting in some big trouble there, but if you're doing it from the perspective of you're still working to pay that property down, you're still doing all those things, then you're using just a little bit of clever leverage and you're still playing a long game. I mean, I think that can make sense for a lot of people. All right, what about your harvest losses chapter here? You said you love the tax benefits and high returns on real estate, but you love diversification.(...) How does this get into harvesting losses? Like what does that mean? I'm not familiar with this one.(...) - Yeah, so this is usually referred to in the context of stock investing, right? So let's say that you own an ETF or an index fund that owns, let's say US small cap stocks.(...) And they have a terrible year that year, let's just say in this example. So you sell your shares in that ETF for a loss. And that same day that you sell them, you turn on and you buy shares in a similar ETF, maybe it owns US mid cap stocks or something.(...) So you've taken a loss on paper,(...) but nothing's really changed in your investment portfolio. But you did have a transaction and you took a loss as far as the IRS is concerned.

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But other stocks are going to recover at a certain point, maybe not this month, maybe not this year, but they're going to recover, borrowing the zombie apocalypse.

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So you can do it. - So the idea here, correct me if I'm wrong, the idea here is any year that you plan on selling an investment property where you're, let's say you eventually do want to sell one and you have a gain on it, you would look through your stock portfolio and look for any losses that you have that you could just sell so that that loss(...) balances out your gain to avoid paying taxes on the gain. Is that kind of where you're going with that? - Yes, but if you just sell it and leave it there, then you've actually taken a real loss.

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So part of this is you're just flipping over the investment to something new. So you're showing the transaction on paper, but your portfolio stays pretty much the same. You sell your shares in one ETF, you buy shares in a similar ETF. It can't be too similar or the IRS slaps you for it. But you take the loss on paper, you use that loss to offset your gain on say, selling a rental property, or having a group real estate investment sell and pay you profits.

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So those on paper losses offset your gains and you don't pay taxes.

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And by the way, some robo advisors will do this automatically for you. I use Charles Schwab's Robo Advisor, which is free by the way.

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And if you have a certain, the minimum is $50,000 in your account, but if you're above a certain minimum, they will do tax loss harvesting automatically for you. So you can show those paper losses. And by the way, you don't have to time this for the exact same year. You can carry those losses forward. So let's say that stocks do terribly this year, you do some tax loss harvesting, you get those on paper losses. And let's say you don't have any actual taxable gains from this year, but you're planning on selling a property next year and having a big paycheck. You can just carry those losses forward to the next year and then have them next year offset those gains from your property. - Interesting. So what's up with the two year rule? So I know the IRS has some type of exemption for capital gains from your primary residence. What is this rule? How does it work for your primary residence? Is there anything that ties into rental properties here? What's the gist of it? I know both of you guys are pretty knowledgeable here. - Yeah, so this is called a section 121 exclusion and it lets homeowners out of their first X number of dollars of profits from their primary residence. It's $250,000 for individual or unmarried tax filers, $500,000 for married couples. The first 250 or $500,000 in gains is tax-free for your primary residence. So one way that you can go about this with your rental portfolio is you can buy a property and live in it for two years, right? And get that low interest, low point,(...) low down payment homeowner mortgage on it. Move in for two years, move out and keep that property as a rental property for the next two and a half, three years and then sell it. And as long as you sell it where within the last five years, two of those years you lived in it, you qualify for the section 121 exclusion, the homeowner exclusion and that first 250 or 500-- - What's the mechanism for proving this? Is it just like your utility bills were there? How does that work? I imagine the IRS doesn't just like giving money away.

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- Well, they take your word for it on your tax return until they audit you, right? So if you get audited, then you have to prove it and it's up to you to prove it to them to their satisfaction. So utility bills would be one way of doing that.(...) But in the year that you're reporting it on your taxes, I mean, you're just putting your word for it. And then if you get audited, then you have to prove it to them, but-- - Got it. So this is really something that typical real estate agents really need to understand. I mean, if you have a customer and they're coming to you to sell a house and their primary residence and it's close to that two years, but it hasn't been, I mean, there could be a pretty tangible reason here that agent might want to delay closing for 30, 60 days if that can get you to that two year mark. Is that the case, guys?

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- Sure.

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Yeah, I mean, having $500,000 of profits tax free for a married couple, that's very real money in taxes savings. - I mean, that's a pretty huge deal. So I know we're getting a little bit short on time. Josh, what kind of closing comments would you give to someone who, let's say they're thinking about getting into the housing market this year. They've heard about house hacking. I know that's the big buzzword for 2024. What's kind of the closing that you would give them? Like where should they start their journey?

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- Oh boy. - And by the way, could you define house hacking really quickly just for anyone listening that isn't super familiar with that term?

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- You want me to define that?

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- Brian? - What would you be able to?

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One of you guys?

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- I'm happy to, but I certainly don't want to step on Josh's toes here. - You take this one, Brian. Where are you seeing the opportunity as walking throughout? I mean, I would love your opinion on it.(...) Go ahead.

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- So house hacking is finding a way to score free housing basically. And the standard way of doing that is using your home to generate enough income to offset your housing payment, whether that's rent or mortgage. And there are a ton of ways to do it. The classic way, the traditional way was multifamily house hacking, where you buy a duplex, a triplex, quadplex,(...) move into one unit and you rent out the other units. And the rent from those other units covers your mortgage payment and hopefully some repairs and maintenance. That's not the only way of doing it. The reason that works, by the way, is that you can get a homeowner mortgage or a conventional mortgage on properties with up to four units. So that's why you can do that.

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But that's not the only way of house hacking. I mean, I've house hacked with housemates.

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You can house hack by renting out storage space, garage space, parking for RVs and boats. And I mean, you can set up an ADU, an accessory dwelling unit. You could create a garage apartment, a basement apartment with its own entrance and rent that out. My business partner, she house hacked by hosting a foreign exchange student for four years. And the monthly stipend that she earned from that almost completely covered her monthly mortgage payment.

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We live for free through my wife's job. We get free housing there. So get creative with it. There's not one way to do this. There are infinite ways of doing this. If you're going to get creative about it. And we do have an article on our site listing out 14 ways of house hacking, but there's more than 14 too. So yeah, get creative with it. - So Brian tells, what is the website? Where can people find more of these creative ideas? Cause those are a couple of house hacking techniques I have not heard of. And I think everyone would love to check those out. If they want to find them, where do they find that stuff online? - Yeah, so our website is sparkrental.com. Come check it out. You can email me, Brian at sparkrental.com. We have an investment club. If you like the idea of passive real estate investing, where you don't have to become a landlord, you just write a check to become a fractional owner and some larger properties, apartment buildings or mobile home parks or whatever. We meet every month, vet different deals. And we have a ton of free tools and resources in our website from interactive maps to calculators, investing calculators and over 400 articles and how to's and educational library. So check us out and reach out anytime.

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- Well guys, thank you so much for joining for the show today. For everyone listening, quick reminder for me to get great guests like this, I need you to go on the podcast and leave a review. Nobody wants to be a guest in my podcast if the reviews are no good or not there. So please go and leave one. I greatly appreciate it. It'll help us get some other great quality episodes but Brian, Josh, thank you so much for being on the show today. (upbeat music)

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