In my last post I shared the first part of my conversation with my accountant regarding my plan to quit my job. This conversation with my accountant went in two parts. The first part was leading up to when I quit my job and the second was how to plan for after I actually quit.
Let’s jump right into the rest of the conversation and lean my accountant’s take on my plan.
Obviously income is a concern for everyone and if they will have enough money when they quit their job. With my rental properties, the income that I bring in every month from the rents will cover all of our expenses and allow us to save and invest for the future.
The question is if you will have enough money when you quit your job?
Rental income is not like income from a job where you get a steady paycheck every single time. There are evictions, repairs, carrying costs, etc. that can eat into your income each and every month.
So if you make a gross profit of $6000 a month from your rents, you may only take home $3200 at times. It just depends on all the expenses that come up. If you don’t consider the expenses in your projections when you quit your job you will find that you will not have as much money as you once thought.
Here’s a small list of expenses that can come up with your properties:
Accounting/Legal, Advertising, Capital Reserves, Association Fees, Electricity, Insurance, Lawn Care, Management Fees, Payroll, Pest Control, Property/RE Taxes, Repairs, Secretarial, Security, Services, Supplies, Trash Removal, Utilities, Water/Sewer, Vacancy, Mortgage, etc.
Create More Income Generation Stream
Another idea was to generate income in other ways. We talked about all the opportunities I may be able to take advantage of.
With my real estate investment business, I have helped many people start investing in rental properties for free for a long time now. My accountant suggested that it may be wise to find a way to generate income from helping all those people. It could be something like managing the properties myself for the investors, or even getting a referral/finders fee for the properties and/or clients.
Another way I could create more passive income would be by writing more books and sell them online or in stores. I currently am writing another book that I will sell on Amazon and an actual physical books. This next book is not about financial freedom or passive income but about marriage. My wife and I have been teaching about marriage for many years now as well as counseled many couples. Since I already have the majority of the content, I figured it would be great to put it in a book!
Once I have that book written it will be for sale continuously and I won’t have to do any more work on the book. It’s great receiving money from sales of your books without doing any further work. I recently created the audio version of my book “How to Quit Your Job with Rental Properties” and it has been selling on audible.com very well.
I basically just uploaded it and make money every month from it.
Since I’m already doing real estate and I have a good understanding of how a real estate business would function, moving into other areas of real estate may be a good idea. There are many TV shows of people fixing and flipping houses. That type of business is not far off from what I am currently doing.
Where I buy a house, fix it up, and rent it out, all I would need to do is sell it instead of renting out. Personally it’s hard for me to sell any property that makes me money each month because I love rental passive income. It is an idea for me to look into though.
From income, the conversation moved on to taxes and how I can utilize the tax code to benefit me in my business legally. Once I quit my job, I will be a “Real Estate Professional” which will give me a lot of new benefits in regards to my taxes.
A real estate professional status is based on how many hours you work doing real estate activities.
Becoming a qualified real estate professional, as deemed by the IRS, you can take an unlimited amount of real estate loss against your other income no matter how much money you make. If you are not a real estate professional, you can take a loss of up to $25,000 per year if you make less than $100,000. So it’s a much greater advantage to be a real estate professional because you can write off 100% of your real estate losses against your other income.
My accountant also advised me that having your houses paid off is a great thing, but for tax purposes you are losing a lot of money in taxes that you would be able to keep. An easy way to understand it is that every PIG needs a PAL.
Every PIG needs a PAL
A PIG is an acronym for passive income generator and a PAL is a passive loss activity.
I will write about this more in future posts but in essence, the IRS allows you to have deductions on your taxes. As an investor having a mortgage on a property gives investors the ability to deduct all the interest charged for your mortgage. This is called “qualified residential mortgage interest”. This is different than investment interest which I won’t go into but is heavily taxed.
Qualified residential mortgage interest allows you to write off the interest of your mortgages against your taxes as deductions. This lowers your taxable income which allows you to pay less in taxes. So every PIG (passive income generator – rental property) you need a PAL (passive loss activity – mortgage interest) which will help you offset your taxes.
If you look at the B.R.R.R.R. real estate technique of buying real estate, every property you have should have a mortgage on it. The best part is that your tenants will be paying all the interest and YOU get all the tax savings!
The beautiful part about pulling the equity out of your rental property by refinancing it, all the money cashed out of the property is tax-free! The IRS considers it a loan, which it is, and does not tax that money. The tenants are paying off the principle AND interest while lowering my taxable income and help me to pay even lower taxes!
Financing of More Properties
A big concern of mine is how I would get mortgages on properties if I do not have a W-2 from a job that shows stable income. Banks heavily rely on a W-2 from your job to prove your ability to repay back alone.
He told me that the banks will have to look at cash flow as well as your previous tax returns to show how much money you make. If your taxes reflect income enough to handle the new mortgage you are trying to acquire, lenders are willing to lend you the money for your next investment property.
A great suggestion my accountant had was to stay away from the large banks like Chase, Wells Fargo, and Bank of America. These banks are big and don’t concern themselves with little guys. He instead suggested making relationships with local small banks. These local small banks would be more interested in your business because larger banks are concerned about the big dollar customers the ones that are in the millions of dollars range.
A smaller bank would look at a smaller profitable business like mine more closely. After proving the business model, my historical income and expenses for the business, and my ability to repay the lone, they would be willing to lend me money because they will be able to make money by doing business with me.
Using Cash as Collateral
Another great idea was to take $100,000 of my own personal money and allow the bank to hold that as collateral and borrow against it. The great thing about that is they can only charge 2% over the going rate by law. I can use the same $100,000 in collateral against multiple properties over and over again.
This could be a great way to purchase new properties and still have assets in the bank. I will have to do more research on this but it sounds like a promising way to purchase properties
There were many other things that my accountant and I talked about that I have to leave out of this post. The information I learned was invaluable. Another great aspect of having a good accountant is that they may have other clients you could network with.
My accountant told me of another person who does real estate and put me in touch with him. We have already been in contact and we may be able to develop a business relationship. I personally would love to learn as much as I can from him as well as help him in his business.
My accountant has many other clients that I may be of the network with. If not, I already have one contact I am very excited about networking with and hope we can help each other in our businesses.
All the wisdom and advise my accountant gave me a lot to consider and think about. I have not changed my plan much but there is still a lot to consider. I will think about these things over the next few months as I go through my plan to quit my job.
Let me know what you think about the aspects of quitting your job and the things my accountant shared.
Leave a comment below so we can all join the conversation.