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In the second episode of Real Estate Investing Unscripted, we speak with Brandon Hall of the The Real Estate CPA. Brandon talks why he left the corporate accounting world to start his own firm (spoiler alert: financial and professional freedom played a big role!) and how The Real Estate CPA is "punching the traditional accounting model in the face."
Listen in for great insights on how to set up your real estate business to save the most in taxes and other great insights you won't hear anywhere else.
Matt Rodak:
Welcome to Real Estate Investing Unscripted. I'm your host, Matt Rodak, founder and CEO of Fund That Flip. I'm super excited as always, but particularly today excited about our guest. We've got Brandon Hall, who is the founder and CEO of The Real Estate CPA. As the name suggests, he is an accountant and does a lot of work with real estate investors around the country. Welcome, Brandon.
Brandon Hall:
Thanks, Matt. Thanks for having me on.
Matt Rodak:
To get us started tell us a little bit about yourself and a little bit about the firm. What do you guys do? How do you help real estate investors? Give us the lay of the land and what it is that you guys do, and how you help real estate investors?
Brandon Hall:
Sure. I run www.therealestatecpa.com. It's a subsidiary brand of our firm Hall CPA PLLC. We're based out of Raleigh, North Carolina, but I'm actually the only person in Raleigh because we're 100% virtual. I have employees spread out throughout the United States; 12 employees total. We also have clients spread out throughout the United States. We have about 315 clients at this point.
Every single one of them is involved in real estate somehow. We've niched into real estate and specifically niched into the role of an investor. So what we've realized over time is that we can help the guy that buys the single family home to either flip or hold, but what we're realizing is that we're really adding a ton of value to the folks that are buying the portfolios and injecting a lot of capital into real estate into various markets. We're able to help them from not only tax planning and tax compliance, but also from a CFO-level perspective. We've moved into that space pretty rapidly, and it's been relatively successful for us in a short amount of time.
Matt Rodak:
You mentioned that everyone's involved in real estate in some form or fashion and that extends to your accountants? All of those 12 people that are part of your team are actually active real estate investors as well, right?
Brandon Hall:
Yeah, I need to do a better job at selling my firm. We didn't even plan this, to be honest with you. I've just hired people. I had presence on LinkedIn, and we pretty much sourced everybody from LinkedIn and from BiggerPockets. All of our employees have reached out to me saying, “Hey, I'm a CPA. Not really happy with the 'big four' or big regional firm. I really love what you're trying to do. And by the way, I love real estate.” Well, tell me about why you love real estate. “Oh, I own 38 units, or I just syndicated my own 80-unit deal.”
We have those guys working for us, and it's really neat because when we get a client that's like, “I'm buying a portfolio of 10 single family homes. Are you guys the best fit to advise me?” And I'm like, “Well, personally. I'm not, but we have a guy on our team that owns 38 single family homes, so he can advise you.” It's just nice to be able to connect to clients on an eye-to-eye basis rather than advising blindly on a real estate tax.
Matt Rodak:
Yeah, I think that's so cool and so important. I think one of the things you said to me last time we spoke was that one of the goals for you and your firm is to punch the traditional accounting model in the face. I think that was a direct quote. I wrote that down.
Brandon Hall:
Yeah, that was a direct quote. We're still there.
Matt Rodak:
Other than wanting to punch the traditional accounting model in the face, how are you guys different? How do you think about being different, and why do you think that's important for both your employees and your staff and your partners, but also your clients?
Brandon Hall:
Well, we're very tech driven, and we're very innovative. We've changed operating systems, like entire systems, probably three times in the past two years just as we've scaled. We don't stick to technology that doesn't work anymore. We're always trying new things. One thing that we are doing now is instead of sending a traditional email back to our clients is sending a video email through a piece of technology called BombBomb. I'm not affiliated with them or anything. I just think that their software is brilliant. It allows you to record something, send an email, and when [someone] receives the email it's a .gif of the first three seconds of the video. That's been going overwhelmingly well for us in servicing our clients.
We're always just trying to figure out better ways -- since we're a virtual CPA firm -- better ways to implement technology, to improve the client experience, and to connect with our clients. Our clients love it because they can take a call from the golf course or in their house in their pajamas. There's no “let me drive through 30 minutes of traffic to get to my CPA.” It's super easy to get in touch with us, and our employees love it because they can live in Italy for three months and still have a full-time US job. That's what we want to do more of. We want to be able to say, hey, our employees are awesome. They love working here, and because they love working here, that's going to spill over into the value that they add to clients.
Matt Rodak:
That's really cool. How did you come up with this kind of business model? How'd you get into it? I guess a follow onto that is, how did you get into personally investing in real estate?
Brandon Hall:
It all boils down to: I hated my job at the “big four.” I started at the “big four” accounting firms and literally three months in I was sitting in my cube, tears streaming down my face. “How do I get out of the corporate world?” Literally Googling that. If anybody would have looked at my search history, they probably would've fired me because it was all, “I hate my job, how do I quit.” Real estate kept popping up as a great opportunity to build passive income and ultimately replace your job. I found BiggerPockets, and I was really bored at work. I didn't feel like I was adding any value, and I was definitely not getting any sort of feedback, positive or negative. So I just started answering questions on BiggerPockets. People would be asking tax questions, I would chime in and that was really rewarding for me. I got a little addicted to it, so I have like 1500 forum posts now, but that ultimately snowballed into me owning investment real estate and also starting the CPA firms.
I [initially] decided to start the firm after I realized that I could buy rental property and eventually get out of the corporate world, but it was going take another 10 years and I didn't want to wait that long. So I was looking for other opportunities and decided I would just go right into a CPA firm. I knew immediately starting the CPA firm that I did not want to structure it like a standard accounting firm. I wanted to be really cool, and again, wanted to punch of the accounting world in the face. You don't have to service your clients in a suit and tie. You don't even have to be in the same country. That's the type of work environment that I wanted to build and offer to my future employees.
Matt Rodak:
I think that's where this world of work is going. People having more autonomy, working on their own terms, doing things that they're passionate about, and ultimately making an impact and having some fun doing it. That's cool. You mentioned BiggerPockets. Those that are listening, if you aren't aware of BiggerPockets, check it out, especially if you're just getting started. It's a resource that I used a ton early on before starting Fund That Flip to develop a perspective on what the market needed from a lender, and it’s a great resource to network and transition from whatever you're doing currently into the world of real estate. A lot of network there, a lot of learning there, and a lot of creative people and ideas on how to get things going. Or, if you're already going, how to take them to the next level. Big fan of BiggerPockets for sure.
I have to ask some tax questions because you're the CPA, and the theme of the show is Real Estate Investing Unscripted. I'm sure you see a lot of interesting tax strategies -- maybe some of them are legal and some of them are less legal -- that people are bringing to you before they start working with you. I'd love to hear maybe one or two examples of some of the more creative strategies that you've seen in your line of work. Things that you would recommend doing and then maybe a thing or two that you would recommend not doing.
Brandon Hall:
Well, we can be here all day talking about that. What I would recommend doing: a lot of flippers, especially, they like to set up LLCs before they even begin business. Then they immediately tax those LLCs as S-Corporations because that's what LegalZoom tells you to do, or an uninformed CPA might tell you to do. Flipping is probably the one business that I would say, have your LLC set up before you actually do business. Otherwise you're going to hear me constantly say, don't set up an LLC until you've proven out your model. I'm a big believer of keeping it lean. But, in flipping, even that very first flip should be taken title within an LLC. Not in your personal name because then you've got to transfer it into the LLC, worry about transfer taxes, timing issues, all that stuff. One thing that you don't have to do is tax your LLC immediately as an S-Corporation.
An S-Corporation is a tax classification. It's an election that you make. It's not actually a completely separate entity that you can go and set up. You set up an LLC then you file a form with the IRS to elect to be taxed as an S-Corporation. The big benefit of S-Corporations is to pay yourself a salary that is lower than the total profits that you earn. So, if I earn $100,000 and I have an S-Corporation, I could pay myself $50,000 of the $100,000. Now, I'm still going to earn the full $100,000, but an S-Corporation allows you to not pay FICA taxes, otherwise known as self-employment taxes, which are equal to 15.3%. You don't have to pay FICA taxes on the amount of profit that you're not paying yourself as salary.
So, if I make $100,000 flipping and I pay myself salary of say $70,000, I only pay the 15.3% self-employment tax on the $70,000. The remaining $30,000 I just get as a distribution to me, but I don't have to pay the 15.3% tax. An S-Corporation allows you to save pretty significant money on self-employment taxes if you structure it appropriately. What I'm getting at is, a lot of people will go and set up the S-Corporation immediately, and this is a problem because S-Corporations cost a lot to administer. You have to pay payroll, you have additional administrative burdens just in terms of reporting to the state, meeting minutes, different costs there.
Then you have to pay a CPA probably $2000 to file that S-Corporation for you. What we advise clients on is: don't set up that S-Corporation until you're actually generating profits. If you set up the S-Corporation before you're generating profits, then you're just paying everybody for expenses that you don't need. What a lot of our clients will do is they'll set up an LLC, they'll take title to their flips, and then in the year that they earn more than $40,000 net profit -- and we're not going to get into the $40,000 mark, it's just the threshold that we have come to realize is the threshold -- but if they earn more than $40,000 net profit, what we do in November or December of that year is we retroactively elect to be taxed as an S-Corporation. That retroactive election means that that $40,000, or whatever we earned, will still save us a ton of money in self-employment taxes because we're now going to be treated as an S-Corporation for that tax year.
So you can either set up the S-Corporation at the beginning and lock into it -- and then you're definitely paying all those fees -- but if you don't earn more than $40K net profit, it's not going to be beneficial to you. It's going to be more costly than beneficial. Or, you can use our method which is set up the LLC, and just because you have the LLC set up, we can now retroactively elect at anytime to be treated as an S-Corporation. We always wait until November or December to make those elections because we know at that point what the net profit is going to be.
Matt Rodak:
That's really interesting. Just, so I'm clear -- this is even new to me -- you set up an LLC, you classify the tax treatment as an S-Corporation and then what you're saying is you actually convert that LLC into an S-Corporation or you just set the tax classification up as an S-Corporation later on?
Brandon Hall:
We would just set up an LLC. If you were our client, Matt, and you were starting a flipping business, you would say, what do I need to do? We would say, go set up an LLC. You would go set up an LLC. Then you would do all your flipping stuff. So you'd buy property, you'd sell property, all that. It gets to November and December and were saying, okay Matt, give us your profit and loss statement year-to-date. Let's look at it. Okay, cool, you've earned $80,000 net income in your LLC. So what we're gonna do now, Matt, is we're going to file form 2553 with the IRS and we're going to elect that this LLC that you originally set up, be retroactively taxed as an S-Corporation as of whatever date -- either at the beginning of the year or the date that you set up the LLC. We're not doing anything with S-Corporation immediately. We're going to wait until November or December to look at what our net profits are and then make that retroactive election.
Matt Rodak:
Got it. Then there's really no timeline, that could happen whenever, but any tax year that happens while you're still the LLC, you get taxed as an LLC. Then whenever you set the date, now you're treated as an S-Corporation. So there's no, you've got to do this in the first year or anything like that.
Brandon Hall:
The retroactive election is referring to a safe harbor, and technically you have 3 years and 75 days that you can retroactively elect to be taxed as an S-Corporation from the date that you start the LLC -- or from the date that you want to be taxed as an S-Corporation. If you started your LLC six years ago, but 2018 is the first year that you're netting above $40,000, then what we would do is we would just retroactively elect to be treated as an S-Corporation as of 1/1/2018. We wouldn't go all the way back to the beginning of the LLC. We would just do it in the year that you're exceeding the profit threshold that we've set.
Matt Rodak:
Gotcha. So how does that work? You get out of the 15.3% for self-employment tax on the distributions from an LLC, but as an S-Corporation -- and because you're paying yourself a salary are there not still employment taxes and other things that go along with that salary piece? What's the difference between the 15.3%? I'm assuming the IRS has thought some about this. Is there a difference? I can't imagine it’s a zero. You get the full 15.3% benefit.
Brandon Hall:
You do. It's not a walk-in-the-park. When we provide these salary thresholds to clients -- if you came to us and said, “Hey, I've netted $100,000, what should I pay myself?” There's all sorts of analytics that we run to actually determine what a fair wage is because that's the thing. You have to pay yourself a fair and reasonable wage. Otherwise the IRS can come back and audit you and challenge the wage that you're paying yourself. What we see a lot -- and this is horrible, so this is one of those don't-do-its -- what we see a lot is people running S-Corporation will go to their CPAs and their CPA will say, “Pay yourself 40% of revenues or 40% of net profits, or they'll come up with some random percentage.”
You as a taxpayer are ultimately the one that's responsible for your information. So you're going to need to ask the CPA, how did you determine that percentage? The only reason that we tell you that is because when you get audited -- not if -- when you get audited at some future point, they're going to ask you, how did you determine 40%? You're going to say, I have no idea. Then the IRS is gonna say, well, we think it should be 80% or 90%. We're going to take you to court over it, and that's when you get into trouble. So what we do is we say, hey, we arrived at 40% by analyzing all of this data and information for you, and here's a packet so that if that audit ever comes along, you can hand that to the auditor and say, good luck. Challenge me all you want, but this is how we arrived at it. At least we have support there.
Going back to that $100,000 example, if you don't have an S-Corporation and you net $100,000, you're paying $15,300 in self-employment taxes before you ever even pay your marginal tax. A lot of business owners, not just flippers, but a lot of business owners will have effective tax rates in excess of 40%, and that's what we want to try to avoid. With an S-Corporation, we pay ourselves a certain amount -- maybe we pay ourselves $50,000 and we take the remaining $50,000 as prophets -- but we only pay that 15.3% on the $50,000 that we pay ourselves. So just in that example alone, our tax is only $7,650. It's not $15,300 and we've saved a ton of money as a result of the S-Corporation.
Matt Rodak:
Interesting, and you know more off the top of your head than I ever hope to know off the top of my head about accounting. My favorite was 3 years and 75 days, or whatever that number was. The fact that you know that is rather impressive.
So, the things to do: Set up the LLC. If you're flipping houses, obviously hire Brandon to help you with thinking through all of this stuff or some other competent attorney that should know at least as well -- or I should say accountant -- that should at least know some of this stuff as well. Then if you're making more than $40,000 -- the threshold that you think makes sense -- you get to the end of the year, have that conversation again and consider maybe getting the tax treatment changed to an S-Corporation. That's the takeaway. That's the to-do. What about a do-not-do kind of advice?
Brandon Hall:
I've got two. One for smaller investors, one for some larger investors -- well, I guess one for everybody. The first one for everybody is: you should have a team of professionals. You need a CPA, you need an attorney, you might even need a financial advisor, but keep everybody in the loop. We've had multiple clients take action based on their attorney advice and only come to find out that that action results in thousands of dollars of taxes. Sometimes tens of thousands of dollars of taxes. When we ask the client, hey, why didn't you come to us first? They said, well, I talked to the attorney. The attorney said that it was all fine and kosher, so I just executed. The problem is that if you're not considering -- attorneys are generally not considering the tax side and that's not what their job is. You really need to loop your tax accountant in to really any kind of business decision like that, even if it's just a quick email, because they can save you tons of money.
There was one client that had an $80,000 tax bill because he simply did not send me -- just a one sentence email would've saved him $80,000. Don't trust attorneys to give tax advice. Don't trust accountants to give liability advice. That's the one big piece of advice that I would give everybody. The second big piece of advice for the larger investors and mainly for people that are closing on portfolios or larger deals where the bank might have some weird clauses in their contract with you -- their mortgage agreement with you -- have your CPA or have an attorney review that before you sign it.
Most people have their attorneys review it, but again, does an attorney focused on tax stuff? Sometimes. Sometimes not. One of the examples that I can give you is -- we've had multiple clients do this -- sign mortgage documents without us being involved. The bank might include something that says, we need certified financial statements. In this particular case, that's all they said. So for me, I asked, what is a certified financial statement, because there's no such thing in the accounting world as a certified financial statement. There's audited financial statements and then there's just financial statements. The bank comes back and says, we need audited financial statements. Well, that costs $15,000 a year at a minimum to get those financial statements audited. Now the client's facing a $15,000 professional services bill that he really didn't even need if we just clarified it all up front. The takeaway here is talk to your accountant before you make decisions because we can definitely save you a lot of money, and especially not just on the tax side, just in the ongoing professional services.
Matt Rodak:
It's a great point, and I think a lot of people in this business are stepping over dollars to save pennies. You say, well, I don't really want to get my accountant involved, he's going to charge me. Or, I don't really want to get my lawyer involved, he's going to charge me $1,000 or $2,000 or whatever it is to review this. Yes, but in this example, maybe you don't even charge us, maybe we'd get into that conversation. Even if you did charge, you could make the argument, well, I just saved you $15,000. That's a really good point that I think some people get lost in the immediate cost when there's a lot of hidden costs that you may be assuming without the right guidance getting you through these transactions. That's a really good bit of advice there.
Brandon Hall:
Our client in that particular case didn't know what a certified financial statement was, and he didn't know what the implications were. We as accountants have laws that we have to follow, and in this particular case, the bank meant we need financial statements signed off by your CPA, but no CPA firm can just do that. They have to run all sorts of procedures to actually sign off and those procedures cost a lot of money to run. That was the issue there. It's just not having somebody review that and just catch that one little sentence.
Matt Rodak:
Even when you're thinking about comparing two lenders. Lender A may have that clause and Lender B may not. Lender B may have a slightly higher interest rate than Lender A, but if Lender A is going to --and they won't negotiate off of that point -- you have to ask yourself how much cheaper is actually Lender A, interest rate aside, if you've got additional costs to meet their covenants and not technically be in default of your loan. Super helpful point that, frankly, I had not even thought of before.
Brandon Hall:
A lot of those guys, too, they don't even enact their clauses. They don't even know what's in their clauses. That bank in particular was surprised to find that in their own mortgage clause. They're putting these clauses in place just in case you ever screw up or you ever default. Or maybe you don't even default, you just do something weird that they don't want to be a part of. They can point to something in those mortgage documents and say, you didn't give a certified financial statements. Well, didn't know I had to. Too bad, we're calling the note. That's what we want to avoid.
Matt Rodak:
Makes a ton of sense. That's great advice. Thanks for sharing. One thing that I wanted to ask you about -- and I've been hearing more about this and I don't know if it's because of the recent tax law passage -- but there's been a lot of buzz in my circle around opportunity zones and opportunities as an investor that these opportunities zones create. It's from my understanding, somewhat of a technical tax thing, for lack of a better word. Could you give us a high-level overview of what are opportunities zones? Are they worth looking into, and if so, things that you should be paying attention to if it's something that may be a strategy worth pursuing?
Brandon Hall:
Opportunities zones are areas that have been selected by the government to basically inject capital to improve the economy. You're going to be looking at very local areas in most cases. It's just a way for the town or city of whatever size to receive a lot of capital injection and then grow that city as a result. Opportunity zones come with a lot of risk. Our clients have been asking us all about it too, and what we're saying is, these can be really great for you because there are tax benefits -- which I'll touch on in a second -- but they could also be pretty risky because you're investing in areas that really might not grow. You're taking a chance on enough capital being injected and that capital being managed well by the government to grow that city. It might not actually turn out the way that you plan.
So, opportunity zones can be great. They can also be a great way to lose money. What we're telling clients is just be very, very careful, and extra diligent in where you're investing. Now, we are waiting on technical guidance from treasury. There's going to be technical guidance coming out in how we handle opportunity zones. Also, what areas are actually considered opportunity zones. I don't think that those have come out yet, but we're waiting on that. So, an opportunity zone is going to allow an investor to inject capital into, again, a low-income community. The idea again there is to promote long-term economic growth. When investors invest in this area -- it's a fund, you'll be investing into a fund -- you get tax deferral on the capital gain that you invested in the opportunity fund. If I've got a property that I want to liquidate, I can liquidate that property and then invest it into an opportunity zone fund and not pay capital gain tax, at least immediately.
You'll then have an elimination of up to 15% of the tax on the capital gain that was invested into the qualified opportunity fund. Then you'll also have the potential elimination of tax when exiting a qualified opportunity fund investment. It just depends on the hold periods and depending on the tax benefits. The big benefit is that you can roll in and not have to pay capital gain tax immediately. It's kind of like a 1031 Exchange; if you hold it long enough, you can eliminate a lot of the capital gain that you rolled into that fund initially.
Matt Rodak:
My understanding of how it differentiates from a 1031 Exchange is, you could take a capital gain from anything. It could be the liquidation of stock, it could be the liquidation of bitcoin, and invest that capital gain into one of these funds or even another real estate asset. Where the 1031 Exchange requires some like-kind and quality of asset this doesn't. Is that a statement of fact or somewhat fact?
Brandon Hall:
Yeah, that is our understanding as well, but we again are still waiting on treasury guidance. That might change. They might specify exactly what property it can be invested in.
Matt Rodak:
Brandon, this is very helpful and I think we could probably speak all day about different tax strategies. But we are running out of time. I want to wrap with this two-part question: What is next for you? What is next for your company? You talked about 12 employees and 300+ clients. Where do you want to be, let's say, two to three years from now if we were to get back on the podcast? Secondly, you can wrap with this is, if someone's listening that’s interested in being a client, who's the ideal client for you? Who do you help out best, and then how do they get ahold of you?
Brandon Hall:
Awesome. The first question there sounds like a challenge. Whatever I'm committing to here -- I have to be careful with what I say. Within the next five years, we want to be a 10-million-dollar CPA firm and we have significant capability to scale. It's just when do we want to turn on the jets? Right now we're figuring out all of our operations. We're figuring out our technology, and we're kind of laying that foundation. I think that we could probably hit $10 million within the next two to three years, so I'll commit to that. We want to have a pretty large firm in terms of employees. We want to service clients not only in the real estate space, but also expand out into other niches -- kind of like what we started in real estate -- but just provide a ton of value to clients and show clients that you really don't need a local CPA. You don't need to see your CPA face-to-face to have an awesome experience and to save a lot of money in taxes. So that's where we want to be in two to three years.
Matt Rodak:
Who should reach out to you? Which type of investor do you serve best and how do they get ahold of you?
Brandon Hall:
We best serve accredited investors, syndications, private equity funds and people who are aggressively growing a real estate business. You can be a flipper and have one property, but if you have the capital on hand to expand to 10 within the current year, we can definitely help you out. If you're a smaller investor, we have ways that we can help you, but we're not going to be able to add the value that we want to add to your tax position, but we'll be able to point you in the right direction and help you out there. I don't want to say super large investors, but the medium-sized to the larger size investors. Those are the folks that we're looking for at this point and providing a ton of value to.
Matt Rodak:
How do they get ahold of you? Email, Twitter, what are those video emails called?
Brandon Hall:
Yeah, BombBomb.
Matt Rodak:
Should they send you a BombBomb?
Brandon Hall:
You have to email me to receive a BombBomb. BombBomb isn't a social network. It's just a plugin, but it's amazing. I highly recommend that you all check it out. You can connect with me on LinkedIn. I am going to be getting more active on there and people know me as a little bit rough around the edges -- not really afraid to speak my mind. Sometimes that works really well. Sometimes it doesn't, but you can follow me on LinkedIn and you can go to our website, www.therealestatecpa.com. Check us out, fill out a web form. connect with us. We're more than happy to have a conversation and walk you through some things.
Matt Rodak:
Awesome, listen, appreciate the time. Check them out, guys. Obviously from listening here, you know that he knows more than anyone should ever know about taxes, and that's what you need to run a successful real estate business. So appreciate the time, Brandon. Thanks for coming on. This is Real Estate Investing Unscripted. Until next time, Matt signing off. Thanks a lot.
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