Wealth Factory founder Garrett Gunderson believes that the only way to protect your wealth is to make an impact in the world and face the future armed with the right gear and knowledge. In this episode, he talks about investing in and treating yourself as your greatest asset. Garrett goes deep into defining what is the investor DNA and why it matters when looking for things to invest in. Furthermore, he talks about economic independence and how it differs from financial freedom, all the while tackling how to avoid deferral and spending, build up your liquidity, and expand your means.
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Robert Kiyosaki, the author of Rich Dad, Poor Dad once said, if you want to stay poor or middle-class, listen to Suze Orman or Dave Ramsey. If you want to improve yourself and get a financial education of the rich, listen to Garrett Gunderson. That’s my guest. Garrett is an amazing guy, a wealth of information. One of the things he talks about is to invest in yourself and to treat yourself as your greatest asset. You invest only in things that align with what he refers to as your Investor DNA. That’s something we’ll talk about. What he’s saying is you put everything into things you know about and nothing outside of that. You go and let go of all the noise that surrounds you when everyone else is telling you you’re crazy. The only way to get wealthy and make an impact in the world is to be crazy enough to face the future with confidence when everyone else’s cowering with fear. This is going to be an amazing interview. You’re going to learn a lot. I know Garrett has an absolute wealth of knowledge.
If you missed our last episode, be sure to listen to Three Immutable Laws Of Real Estate Investing
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How To Grow And Protect Your Wealth with Garrett Gunderson
Garrett is an entrepreneur, a financial advocate, and the Founder of Wealth Factory. Garrett brings a bunch of energy and excitement to debunking the many widely accepted myths and fabrications that undermine prosperity. Even the joy of millions of people, including investors, professionals and business owners. You may know him and he is the New York Times bestselling author of a very well-known book called Killing Sacred Cows, and What Would the Rockefellers Do? He’s appeared on TV shows, including ABC’s Good Money, Your World with Neil Cavuto on Fox and CNBC’s Squawk on the Street. His firm was also named to the Inc. 500 which is impressive. Most importantly, Garrett makes personal finance simple, immediately actionable and even enjoyable. With all that, Garrett, welcome.
Thanks for having me, Marco. I appreciate it.
It’s an honor to have you on, Garrett. I’ve been following you for several years since you came out with Killing Sacred Cows back on July 1st of 2008. It’s a great book. You’ve got ten myths in there that you dispel that are so widely misunderstood. Congratulations on having such great content and educating the world like we love to do.
I felt like that book is a classic from the standpoint. I did the audiobook and I was wondering as I read it, I was like, “What am I going to think? I can’t believe I knew this back then.” I thought I was still learning this stuff and it was brand new material. It’s stuff I’d shared several years ago. That book is like permission to succeed. It’s like, “How do you avoid the missteps and misinformation that help hold people captive and hold them back in their finances?”
Let’s start off with some general concepts. Even though there are a lot of people familiar with who you are and what you talk about, at the same time, there are a lot of people that don’t understand some of the terminology and concepts that you do talk about, which are powerful. Beginning with the basics, as they say, you talk about this thing called Economic Independence. We, as real estate investors, talk about financial independence. You’ve taken a broader scope to that concept. What do you mean by economic independence?
We’ll make a distinction. Economic independence is different than financial freedom. Economic independence is a state where you have enough recurring revenue to cover your basic expenses. I’m all about cashflow investing. When you can create that from your assets to trading that cashflow to cover expenses or even entrepreneurial-based income, which could be income that shows up, even if you don’t go to an office or open a computer that day. When that comes to your basic expenses, you’re economically independent. Why that is substantial is now you can truly swing for the fences in everything you do, knowing you have that foundation handle. If someone’s married, they typically marry a different money personality than them. If they’re a real estate investor that wants to continue to grow, the person might be asking safety and stability and a lot of cash sitting in a bank account doing nothing. Economic independence brings those two people together a lot of times. You now know that’s handled, now you can go all out knowing that every active dollar you earn can be reinvested. It could go towards growth.
It can become exponential where financial freedom is more a state of mind. It’s a state where the money is no longer the primary reason, nor the excuse why we do or don’t do something. If I broke that down, it comes into three phases or three measures of worth around money. One is price, that’s what people pay. People that only pay attention to price are transactional. That’s why retailers will say, “This is on sale,” and people will think they saved money because they bought something. That’s not saving money. The second thing is cost. Cost is the economic impact. It’s a matter of fact. I can have something with a high price and a low cost. I get an amazing accountant, understands what it means to be a real estate professional. For tax purpose, I have massive amounts of deduction and depreciation. What if they were three times more expensive than any other accountant out there, but they save you a couple of $100,000? It doesn’t matter if it costs you $6,000. You still walked away with $194,000 better off. Cost is the impact.
The third piece is value. Values is your overall feeling of joy, satisfaction, fulfillment on a personal level and people that are financially free look at value first, cost second, price third. People that are not financially free only almost always look at the price, and maybe if they’re sophisticated, look at the cost, but almost never consider value. I believe in value-based spending. I believe in economic independence being the foundation of finance, and ultimately, financial freedom being that choice where we have this opportunity to be creative. We have this opportunity to be at peace. We can truly consider ourselves as successful at that point because when we’re financially free, we’re not doing things merely in the exchange of time and effort for being paid. We can be more about our vision. We can be more about our quality of life. We could be more about living a life we truly love.
I remember a few years ago, I did an episode on the difference between price and value. A lot of people think they’re the same thing, but they’re not. I’ve heard you talk in a speech about your investor DNA. What does that mean? I’m grasping at the concept of an investor DNA.
Investor DNA is a risk isn’t in the investment. Risk is in the investor. What kind of investor are you? As real estate investors, we know some people could buy a piece of real estate and lose money. We could go in and buy that and make money immediately. Maybe because we know about fractionalized ownership, seller financing or the three rooms that make the biggest difference to get better rents. We have a better exit strategy or there are many different ways. Investor DNA is discovering who we are as an investor. There are four main things that you look at to break it down. One is the core competencies. Where do you have that knowledge? Where do you have that wisdom? Where do you have that insight that would make you a better investor? If you know nothing about technology, technology is going to be a terrible investment for you. If you know nothing about real estate, you’re going to get your butt kicked by other real estate investors. Where’s the competency?
We look at the drivers, the things that you go, you feel driven to do, that you want to learn about, that you’re excited about and that is enticing. We take competencies and drivers. We have values. Values are what you personally value. When you break it down, it helps you to decipher this last piece, which is the focus. Wealth is built through focus, not diversification. Diversification is a preservation strategy that for far too many people becomes about neglecting and advocating responsibility. It becomes diversification because they spread themselves thin and the things that they don’t even understand. I like Andrew Carnegie’s philosophy, “Focus, don’t diversify. Put all your eggs in one basket and watch it like a hawk.” It doesn’t mean you have one piece of real estate. It might mean that you master one category of real estate before you move to another. You’re not all of a sudden diworsified, doing things that are mediocre level. You become excellent at something and you discover what your personal investor DNA is. You invest and align with that.
In case anyone didn’t catch that, when you said it twice now, you didn’t say diversify. You said di-worsify, with a W. I want to make sure that’s clear.
Diworsification, that’s what the masses are involved in. Putting their money into retirement plans and mutual funds and waiting for the long haul, but neglects cashflow. They don’t understand why the companies are making money when they’re making money, what the exit strategy should be. It becomes this nebulous thing that 95% of Americans at age 65 are not economically independent. That’s according to the US Department of Labor. We have a 95% failure rate at accumulation. Why I love cashflow, and this is why this is profound for real estate investors, is the financial institutions would make a lot of money. They completely focus on cashflow. They’re not taking money in a bank and putting it in a 401(k). They’re taking that money and lending it out. They’re paying 2%, charging 4%. That’s 100% markup. Their entire business is around cashflow. They’ll even charge you less interest if you’ll pay them back faster because that’s a more powerful cashflow.
If you don’t have enough collateral, they’ll charge you private mortgage insurance if it’s a piece of real estate. If you pay for the appraisal to protect them, they’ll make sure that you make that down payment. You show your last three years taxes. You have a good credit score. These are all ways they mitigate and manage risks, but their big business is in cashflow, not accumulation. It doesn’t take money to make money because they’re not lending their money. They’re lending other people’s money. The reality is there are two very different rules to the game. To rig the game in your favor, it’s all around cashflow. To have it rigged against you, it’s all-around accumulation and waiting for 30 years while other people make money on your money. When you look at the stock market, there are many people that there’s flash trading that’s skimming money from people. There are expense ratios that are skimming money from people. There’s actual versus average returns, which are two very different things and volatilities taking money from people.
People who are not investing in a cashflow sense and haven’t created economic independence are putting their future at risk. They’re completely predicated upon speculation. I have this entire philosophy of “Make money on the buy.” Making money on the buy is you find a distressed seller, you find something you know is undervalued and you’re buying it. You find ways that you immediately cashflow from day one when you get that. That’s more of what I look at with investing in. When you add Investor DNA where you only invest in things that you know, you can build a good foundation. That means you don’t have to have diversification. People that diversify skip too many steps. They don’t have enough liquidity. They don’t have the right asset protection. They don’t do certain basic things. Therefore, they diversify thinking that’s enough. All that’s going to do is limit their upside potential and assure them that they’re in more things than they know how to understand or control.
I had dinner with Robert Kiyosaki one day and I remember him saying that there are no bad investments, just bad investors. That’s so true. I love your concept of an investor DNA. It makes a whole lot of sense. One thing I’ve said many times is that you can’t save your way to wealth. It’s not possible. I was listening to you do talk to a small group of entrepreneurs and I heard you say the same thing. A lot of people don’t realize that you can’t save your way to wealth. I’m of the belief that you should save as much as you can, as fast as you can and go broke, meaning deploy that into income-producing assets. I know you have a framework and an infrastructure on how to do that and that’s part of the reason why I have you here. As we get to that, maybe talk about how to avoid the restriction of budgeting because saving and budgeting go hand in hand. It’s hard to create wealth doing that.
I spoke to a group of high school students. It was like the top 50 students in the state. I decided I would address this notion of The Millionaire Next Door. The entire thought process is if you pinch pennies hard enough until you get blisters on your fingers, that one day, someday, you could be a millionaire. The bottom line is when you die, sixteen and a half months later, your heirs have blown that money because they didn’t even know that you had it and it’s never a part of the topic or conversation. There are three ways to live within your means. The first way is where most people get stuck and that first way is to reduce and lower expenses. The problem is not all expenses are created equal.
Some expenses are destructive and we should use to get rid of those for sure. That would be like vices or bad habits that lead towards death, maybe. Other expenses are lifestyle expenses. We want to pay cash for those. Those are the things we enjoy in life. Other expenses are protected expenses, which is everything from liability, insurance, asset protection or liquidity. We want to address those. Some expenses are productive expenses. You put in a dollar more than a dollar comes out. Why would we ever want to eliminate or reduce productive expenses? It’s a faulty notion. That’s a reductionist mindset instead of a production mindset. That’s the first limitation with thinking of living within your means is people think about budgeting and budgeting is a constraint.
The two other ways that I advocate to live within your means is number one, to be efficient within your means. The way you can be efficient is four main I’s. One is the IRS. 93% of people tip the government unnecessarily. You people in California do more than your fair share of that. The second is interest. Structuring your loans properly because you have the right credit, the right collateral, the right cashflow reporting and the right connections. You renegotiate interest rates or you restructure loans or you reallocate where you have underperforming assets with higher straight loans that you might pay off. These are all ways that you could boost and be more efficient. Even in investments, are there hidden fees or commissions? Is there a lack of downside protection? There’s no reason to forfeit or give up wealth when the economy changes when you do it properly. The last I is insurance.
There are a lot of duplicate coverages, improper structure. Ultimately, the IRS, investments, insurance and interests, if we find ways to plug those leaks, that can boost 10% or more of our income with zero budgeting. Why go budget if we could keep a lot more of what we make? The third thing that’s a game-changer is to expand our means. Number one is you can budget. Number two is you can be efficient. Number three is you could expand your means. That’s production, that’s growth, that’s being an investor. That’s the mindset that’s required to be wealthy. If you’re always in elimination, even if you can accumulate $1 million or $2 million, you’re never going to enjoy it. You’re never going to experience it. The slowest track in getting there where production is the key, it’s adding value, it’s reaching people, it’s serving others in a way that has magnitude, reach or depth. Once you have that, you have wealth.
I have an issue with the scarcity mindset, the scarcity mentality and trying to create wealth through, through a scarcity strategy. It’s impossible. It doesn’t exist. The only way to do is expand your means, expand your income, become more valuable and become more productive. That’s the only way to do it. Tied in with everything you said, it got me thinking about what’s at the root of most people’s money problems. Is it a scarcity mindset or what’s at the root of most people’s money problems?
One is that they don’t understand money. If we broke it down, money is the byproduct and there are two more precious resources that drive all money. One is our mental capital, which is our idea, knowledge, wisdom, tools, insight strategies, systems, structures and mental capital. The second is relationship capital. People in networks, organizations, mentors, friends, family, customers and subscribers. Mental capital times our relationship capital determines our financial capital. People feel like they’d got a money problem, that’s only the symptom. The real issue is either their thoughts, thinking, mindset and perspective or the people they spend their time with. The bridge between mental relationship capital is business. That business bridge takes our ideas and improves people’s lives.
The more people we can reach with our mental capital, the more money we can make. The more deeply we reach those people and impact them, the more money we can make. The bottom line is dollars follow value. If you want to create more value, you’ve got to take insight, knowledge, wisdom, and you’ve got to apply it to serve and solve problems for other people and deliver that value. The byproduct will be you’re going to have more money. We’re one relationship or one idea from a new level of prosperity. If we look at any issue we have, if we can write a check and make it go away, it wasn’t a money problem. If you can’t, it’s the thinking or the people. That’s what it comes down to in people’s lives. It’s the thoughts or the people they spend time with.
That’s at the heart of what a lot of entrepreneurs think, do and believe, maybe not consciously but unconsciously. They realize that creating value creates more wealth in their own lives. The more you give, the more you receive, it’s deeply rooted in that abundance mentality. You said it very well. Let me shift gears a little bit here. You mentioned retirement accounts once or twice. I know I’m in the general topic or theme of growing your money, but a lot of people think that the way to grow their wealth, at least for the future, is to have retirement accounts. I know you have a big issue with this. General question, what retirement accounts should people avoid? This may be a totally loaded question, but how do we improve our existing retirement funds? A lot of the people reading this already have 401(k), Solo 401(k), self-directed IRAs. They’re using those funds to invest with us in various things. That’s all well and fine. I know you have a lot to say about this. We could probably spend an hour on this one topic.
I have zero love for any retirement account. If you want to be middle class, use retirement accounts. If you want to be wealthy, you’re going to end up with an adverse effect in a retirement account. Your business partner is the government and the $23 trillion in debt. Do you think that they’re going to lower taxes in the future? I don’t think that they’re going to be capable of lowering taxes because of the addiction they’ve created to all these programs, these payrolls and all that stuff. The way that they raised funds for that is through taxes. They have restrictions on these plans. The worst plan out there’s a defined benefit plan for those that have that. We look at the 401(k)s, the SEPs, the SIMPLES, the IRAs. I don’t care. Roth or traditional Roth is probably better, but not ideal. All these retirement plans typically neglect cashflow, have government control and have limited exit strategy.
You have to wait until 59 and a half in most cases unless you do a 72(t) Distribution or you come up with a few other offsets. Ultimately, as people stay away from being able to access that money and it’s far too distant in the future. If you’re not getting cashflow, there are a whole bunch of fees associated with it. Government is your partner and they’re not a good partner in these. Why would you be funding these? Especially if you don’t have plenty of liquidity, you’re not earning interest instead of paying it. I get some people using self-directed to invest in real estate and that’s fine, especially if it’s a Roth. My concern is if it’s not a Roth, what if you’re buying real estate that you’re going to hold longer than a year?
You put all real estate into a retirement plan and it takes it away from a capital gain treatment and it moves into ordinary income. That’s fine if you’re doing a fix and flip. That’s not so good if you’re holding apartment complex for a longer period of time. Now you’ve gone from long-term capital gains to ordinary income. You cannot depreciate a retirement plan, so you’ve lost that tax benefit. Those are a couple of issues right there. I get that if you’re selling properties, you’re not paying upon the sell, but you lose the value of maybe doing a 1031 or you lose the value of doing a charitable trust.
A charitable trust is one of the coolest strategies when you have real estate and you’re going to exit where you can get a partial tax deduction, you pay zero tax on the sell, regardless of how much it’s depreciated. You can take an income for the rest of your life of between 5% and 50%, depending on the underlying assets because of the charitable trust. You can’t do that with a retirement plan. You start brushing your options. You start to kill your cashflow. You start to fall into a trap where you have a silent business partner that’s ruthless and is absolutely going to confiscate your wealth in the future. I mark my entire career in life on that.
I always think of that famous line from the Star Wars trilogy where they’re going after the Death Star and that guy, I forgot his name, the captain, he says, “It’s a trap.” That’s essentially what retirement accounts are because you’re essentially deferring or trying to defer taxes. You’re having to spend in order to save, which is counterproductive because it’s an opportunity cost that you’re missing out on. You could have put those funds into better, more productive use now instead of in the hopes that it will be worth more down the road where you’re going to be taxed an arm and a leg on it.
I was employed when I was nineteen years old by a financial firm. They gave a 3% match on my 401(k). I was putting in 3%, getting a 3% match saying, “This is free money. I felt okay about it and this is tax-deductible.” I would say those words. One day when I was looking, I’m like, “If I get a tax deduction, why is that money not in my pocket? I didn’t pay tax on it, not because it ends up in my pocket. It’s stuck inside of the plan. I can’t go access the money to spend or to do something with unless it’s available inside of the plan. It’s a deferral, not a deduction.” We have all this language of calling somebody a tax deduction when it’s merely pre-taxed. It’s merely deferral. I’ve now looked at it as if someone’s promoting it as a major tax advantage, I consider that lazy and uneducated. Lazy because there are much better tax advantages that are real and not deferral.
Lazy because I get that if you don’t plan and you go, “April’s coming up. What could I have done for last year?” You’re late. I had a tax meeting with my entire tax team. I had this guy, Jeff, that was leading the strategy. I have a tax attorney, Andrew. I had Brett, the CPA. I had my controller, Rosen, and we were brainstorming for an hour. By the way, this is way before the end of the year. We have a runway. Now we have the action items of things we’re doing before the end of the year so that we can maximize all the deductions and I do zero into a retirement plan. I cashed out my retirement plan a long time ago. As a matter of fact, I decided to cash out and put it in a yard. That way when everybody was bitching that their retirement clients weren’t growing, I collect out all my drafts growing and I can feel good about it.
I didn’t do that. I closed mine eighteen years ago, but I didn’t invest in a yard. That’s hilarious.
I cashed it out. I paid the penalty. I looked at the penalty like it’s 10% one time. I think all of us that are investing in real estate would take a 10% loan if they only charge 10% the first year and no interest for the rest of the life of the loan. That’s cheap money. I went to a Catholic school. Penalty meant punishment from the nuns. I was scared of that word. That’s brilliant marketing to call it a penalty.
That begs the question and it’s something you’re an absolute expert on. What are the best ways to create that predictability and growing your wealth? Obviously, we are being lied to and misled particularly by the mainstream media that these investments that I call alternative investments are the mainstream investments that we should be looking at. We have to diversify within these paper assets across these different markets and all that stuff. That doesn’t work for me. I never bought into that. How do you create predictability and growing your wealth?
I’m going to break it down into a few things starting very simple. The first thing is we build up plenty of liquidity. The more cash you have on hand, the more power you’re going to have when there’s an economic downturn because most of the world’s caught up on building net worth. When you’re building net worth and neglecting cashflow, you become susceptible to downturns where you might have to liquidate quickly. That’s when you can make money on the buy when you have enough cash. Make sure you’ve got enough cash. Second is to make sure you’ve got good habits. What I’m going to say is something you may have heard from George S. Clason if you read The Richest Man in Babylon. Maybe you even heard from David Bach, but I view it completely differently. He says pay yourself first, but he’s saying put money in a 401(k). That’s not paying. That’s investing. I want you to pay yourself first by taking a percentage of personal income and setting it in a separate account that is used for liquidity. Once you have six months liquidity, you’re automatically saving and continue to grow it. When the right investments come, you choose to deliberately invest. Automatically save, deliberately invest is the mantra. You invest because you’ve got purchasing power with cash.
I bought what I would call a cabin, but it’s maybe more like a family lodge. The only reason I got this property over to other people that were looking to buy it and I got it for a little bit less. I didn’t get a massive discount. It wasn’t even double-digit off what she was asking for asking price, but it was in high demand. I had cash. I could close in nine days. Everybody else was going to finance. I once lost on a $2.2 million property that I knew would sell for $1.5 million. I knew it would be worth $2.2 million because it had been, but there was the lending criteria during this time, it was like 2012. It was loosening up again. I knew it would be going for $1.5 million. I’ve gotten down at $1.6 million and then someone came in as a cash buyer at $1.5 million and they bought the property. I missed out because I was financing. I want people to pay themselves first, build liquidity, and the real way that you’re going to build exponential wealth is investing in a business and being a business owner.
Whether that business is real estate, treat it like a business, not like a side hobby. Become extraordinary in what you do in that and focus on cashflow first. Once you achieve economic independence, you have a ten times advantage over everyone else that has to take their income to live off of it. When you don’t, everybody else is trying to save 10% and earn 10%. You’re saving 100% and focusing on creating even more cashflow. The more cashflow you get, the more substantial wealthy you can build. By the way, in business, the more cashflow that doesn’t require you every day, it builds more equity. Don’t focus on equity and don’t focus on net worth. Focus on cashflow first and let equity and net worth follow and you’re going to be ten times advantage over everyone else. That’s in this a slow, dogmatic compound interest accumulation retirement game that has been an absolute failure that people somehow are still abiding by it.
I’m listening to what you said and you could have replaced the word business with real estate and everything you said, it’s exactly what I say all the time, “Focus on cashflow. Cashflow is king.” If you have that sustainability in your portfolio, your equity and net worth will grow over time.
I feel like if you’re getting to do real estate, go all in. Turn it into a business. The business of acquiring and being a real estate investor so you could build your expertise so that you could totally get dialed in. That’s where you get a competitive advantage. There are things I like and dislike about real estate. What I like about it is any insider advantage you have is legal. In the stock market, it’s illegal. You get rewarded for insider information in real estate you get punished for in the stock market. You’ve got the potential for equity and growth. You’ve got cashflow and you also got tax advantages. You’ve got this triplet structure there.
If you’re spending more than 750 hours a year on it, you get even more tax boost and benefit by being designated real estate professional for tax purposes, which is one of the biggest loopholes and advantages that are out there. I say treat it like a business and get good at something. Once you master it, you can move into something else within that realm. If you’re trying to be great at fix and flip, at the same time on residential rentals and commercial, that’s going to be a little bit overwhelming. If you get it dialed in on one, build infrastructure and capability, you can dial in on another. That’s different than diversification. That’s the intelligence of building more cash strings.
When people get diworsified is when they go buy one thing and they immediately shift to another strategy and immediately to another strategy. These are all brand new strategies for them. I was on a Kiyosaki’s podcast and he says he doesn’t recommend real estate anymore. I said, “Why?” He goes, “Because I recommend it. Someone goes and buy stupid ideas and stupid properties and they don’t know anything about it.” What he ring with is investor DNA essentially. It’s got to be your investor DNA. You’ve got to treat it like a business. Early out in my life, I didn’t treat real estate as a business and I made too much money early on through luck because of timing.
I found out there was a difference between all boats rising with the tide and you finding who’s swimming naked when the tide rolls back. As Warren Buffett said, “I was swimming naked,” being overleveraged, not focused enough on cashflow and with bad business partners. I had a little bit of turmoil in real estate for a while. That came about because of my first several deals, I made huge returns. I put in $25,000 to escrow, got back $50,000 in the first three months. I put no money down on a property, walked away with $90,000, one I’ve sold a year later.
When I was in my early twenties, I had that arrogance. I wasn’t treating it like a business and I was getting involved in way too many different deals. A golf course deal where they were building properties, development with the four-plex, I got spread thin. If I would have said, “Why don’t I focus on getting an amazing crew for fix and flips?” Why don’t I focus on four-plex or smaller with real estate that’s cashflowing from day one? I’m going to focus on real estate commercial with this type of cap rate. Get so good at one of those and you can build more infrastructure and more capability and delegate higher so that you have the ability to stay as a visionary.
Let’s wrap up with a little bit on taxes and how to save taxes. I know you talk about insurance structures and comprehensive financial plans to help alleviate that. You and I have so much content we could talk about. We could go on for hours and hours or days. Maybe we need to bring you back next time to continue where we leave off here. I know what you do and what you offer is going to be super helpful for a lot of the people reading this. Let’s talk about taxes. We talked about growing your wealth and now let’s talk about protecting it. What advice do you have, if any, on the best ways to save on taxes? I heard you one time talking about it, either a three or five-part framework for saving taxes. I don’t know exactly what that’s all about, but maybe you can touch upon it at a 30,000-foot level.
Two things to avoid is deferral and spending. It never makes sense to spend $1 to save $0.37. There are a lot of people that buy stuff they don’t want or need in the name of saving tax. They’re burning money there loosely. Deferring taxes, taxes could go up because from 1944 to 1981, the tax bracket was above 50%. Right now we’re at 37%. You might be deferring into a higher tax bracket if you’re not careful. Here’s a three-part framework. It’s three by three by three, and there are two other pieces. The three by three by three is there are three main people you need on your financial team. You need someone that does bookkeeping and data, or that’s a controller or a CFO. You need someone that does tax strategy, which might be a CPA, but not all CPAs are tax strategists. You want an attorney. That might be a corporate attorney when you start out, it might be a tax attorney as you go on. Some people only think of tax attorneys as someone that battle the IRS after the fact. When you use them practically, they’re extraordinarily valuable.
In real estate, you might need a fourth person on your team and that’s an engineer if you’re doing commercial property for cost segregation and accelerated depreciation. Every three months, meet with the tax team. Get on the phone with them every three months and brainstorm. You come up with ideas on the things you could do to save on tax and they can tell you yes or no. You can say, “Are there any other circumstances where that could be a yes?” Every three years, look back and have a different set of eyes on your taxes to see if something was missed because you can amend returns. We’re constantly looking at brainstorming around that. The second bucket of the three-part framework is you want to maximize your deduction. The way you maximize your deductions is number one, you have a business. Number two, you ask every expense you have how does it relate to your business.
My tax team meeting, I bought a Maverick 1000 X3 turbo Can-Am. It’s like a golf cart. I said, “I was going to be up at one of the offices where I hosted my podcast that I’m launching. If I have clients that are using it, guests that are using it, what percentage could we write off?” We came to the conclusion of 50%. I’m like, “I also have a truck and a car I bought this year.” We came to the conclusion 75% on one, 80% on the other. That’s what we’re going to write off and feel comfortable with. That was part of those conversations because I documented the expenses and asked how they relate to the business and then we came up with that assessment. You want to maximize deductions and that’s what that call is going to be helpful with. The third thing is where the game changer is, reclassification. Reclassification mostly comes from an attorney. There are four main categories. Number one, how do you turn an active income into passive? Real estate is beautiful for that.
Active income has self-employment tax as if you have Medicaid. It’s up to 15.3% higher tax on active versus passive income. The second thing is how do you turn the ordinary income into capital gains? Once again, we have a champion with real estate here because your appreciation with the real estate is a capital gain. If you tell them for longer than a year, you’re at a capital gains rate instead of ordinary income, therefore saving tax. Number three, tax-free. The charitable trust could be a thing with the real estate to do the tax-free type of district sell. There are advantages there. Number four is arbitrage. Arbitrage means you spend $1, you get more than $1 back. I’ll give two examples, even though both of these, you have to do them right. One is a conservation easement. If you own a piece of land that you never want to develop, you can donate the development rights. If it’s in a great place with high value for that development, you might be able to get massive tax deductions, maybe even more than what you spend on the property.
I had a guy that had a property in West Texas. It had a lot of sand on it. We got it evaluated that if it was fracked and they would have to do fracking there, what would it be worth? He didn’t want to do it. He donated that massive deduction. We had someone else in Florida had land that had those turtles that dig. He was able to do a conservation use on that, get a huge tax deduction. Another thing is the historical easement. If you ever find a historical easement in real estate, it can be magic because you can rent the building out. You can never tear it down. You have to preserve the historical facade. You get a major tax deduction for donating the facade where you keep the real estate. These are a couple of examples of many tax arbitrage ideas. Reclassify as how you structure your income. Deductions is what you can write off, which everyone needs to learn about the Augusta Rule. You don’t know there are fourteen days of major tax deductions for you there. In the first category, it was building the right team, proactively communicating with them and retroactively looking back every three years. That’s the quick, dirty, fast tax strategy.
You’re a wealth of knowledge and hence the reason you could probably call it your company the Wealth Factory. Maybe there are other reasons.
It’s one of the few things I didn’t name. That wasn’t my idea. Someone else came up with Wealth Factory name.
Garrett, this has been extremely valuable. I know that you’ve certainly enlightened and helped a lot of people reading this to set their bearing straight. Probably you’ll hear from a number of them. Share with our readers how they can find you and/or get more information about what you are and what you offer and what you do.
You go to WealthFactory.com/podcast if you want to check things out online. Those are some great resources. If you want a copy of What Would the Rockefellers Do?, you can text (801) 503-9667 and put WWRD in the subject line will contribute to download the book that’s on me. If you want a physical copy, I’ll cover the investment of the book, you cover the investment of the shipping and handling, which is a single digital amount. It’s a small amount.
Garrett unless you have anything else to add, I appreciate you taking the time and coming.
Thanks for having me. It was a lot of fun. I appreciate you knowing so much and asking great questions and following the work for several years. It means a lot.
Keep up the great work. I appreciate it.
I will.
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There you have it. It’s an amazing interview and great advice from Garrett. Download your free report, the Ultimate Guide to Passive Real Estate Investing available at PassiveRealEstateInvesting.com. Get your free strategy session with my team. If you are thinking about real estate investing or taking your real estate investing to another level to grow your portfolio and increase your cashflow, something we talked about with Garrett in great detail. Do you have a question about real estate investing? Fire that over to me. Click Ask Marco at the top of the homepage at PassiveRealEstateInvesting.com. Remember to subscribe, help us spread the word, share this with other like-minded individuals. Thanks for reading. We will see you all on our next episode.
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