Finding Immense Wealth in Transformative Wisdom: A Conversation with Larry D. West III

Transcript

[Mattias]
Welcome to the REI Agent, a holistic approach to life through real estate. I’m Mattias, an agent and investor.

[Erica]
And I’m Erica, a licensed therapist.

[Mattias]
Join us as we interview guests that also strive to live bold and fulfilled lives through business and real estate investing.

[Erica]
Tune in every week for interviews with real estate agents and investors.

[Mattias]
Ready to level up?

[Erica]
Let’s do it.

[Mattias]
Welcome back to the REI Agent. It’s just Mattias today. Our daughter is home today and so I have actually two podcasts to record.

And Erica will not be able to join us on it, which is unfortunate. We’ve really, really been enjoying the dynamic that she brings, that we both kind of have this back and forth. She kind of has her areas that she can ask questions on, and I have my areas that I can ask questions on.

And definitely have fun with the banter in the beginning. So actually, this is maybe the first thing I wanted to do, is ask the audience a little bit. If we were able to record the intros at least together, would that be a preference for people?

Or is it strange to have it be both of us and then it just be me in the interview? But if you can leave me a comment, leave me a review, leave me something that would indicate that you have a preference there, that’d be curious for me to hear. Go ahead and hit that subscribe button as well.

Help us grow, guys. We put a lot of time into this and we’ve invested a lot of money into the equipment and just mostly just time. It’s just taken a lot of time to produce it.

We are loving it. But all that, the comments, the reviews, the subscriptions, following us on social media, all that kind of stuff really, really helps. So just not going to try to bombard you guys with these kind of messages, but a little plea to start this interview off.

But this interview is with Larry D. West III. Larry D.

West is a tax strategist coming out of north of Dallas. He was recommended from Veena Jetti to have on the podcast. And so glad she connected us because it was an awesome, awesome, awesome conversation.

Now some people may not be very excited about taxes and thinking about accounting and that kind of thing. It might seem boring. But I think it’s a really important skill you should be thinking about or have a little bit of a knowledge for.

I know money, wealth, taxes, all that stuff can be a bit of a hot topic or a controversial topic and a lot of people struggle with things in that nature. Me personally, I see all those things as another skill, another life skill that everybody really should learn to some level or not. I’m not saying that everybody should seek to be wealthy.

Everybody should seek to live a fulfilled life and be well-versed in things that help you get there. And one of them would be we can’t avoid in our society money at all. So it’s something that I think is a skill that everybody should learn.

And I think that people will always be needing to earn money and needing to pay taxes on that. And I don’t know of anybody that would not take their deductions when they can, if they have children, things like that. I don’t see that as a possibility, really.

I think that no matter what aisle you sit on, politically, it is something that you are going to take advantage of, that you know of. And tax strategy is all about knowing what laws are in place, what tax laws are in place that you can take advantage of. And understanding them will help you create a path towards paying less in taxes, ultimately.

And for me, all this really boils down to is trying to be efficient with what I have and be more free to do things like this podcast. Have freedom in what I’m able to do in my life. I like to do things, new things, different things, travel.

And I like to have the freedom to be able to do that. So that’s kind of where that all boils down for me. But yeah, Larry is an expert.

When he talks, we go through a lot of different things. If you’re a real estate agent, you are in for a treat. You should definitely listen to it.

Because I think even if you’ve been in the business and you feel like you have everything sorted out, you probably gained some knowledge from this podcast. I definitely did. And if you are a real estate investor, there’s definitely elements of it as well, because we do get into the real estate professional status, which you would be as well as an investor typically.

So it’s definitely a great episode to listen to, take notes and follow along. But without further ado, we have Larry D. West.

Welcome back to the REI Agent. I’m here with Larry D. West III.

Larry, thank you so much for being here on our show. You were a recommendation from Veena Jetti, said you were a great person to talk to about tax strategy. So I’m super excited to have you on.

Thanks so much for being here. Thank you for having me. I’m excited about it.

Larry, where are you based out of?

[Larry D. West III]
Based out of Dallas, Texas, or just north of Dallas in Frisco, actually.

[Mattias]
Okay. Yeah. So I know Frisco from our hometown has a college football team, James Madison University.

And before we went to D1, we often played there for our championship. So there’s a lot of people flying to Frisco from my area.

[Larry D. West III]
Yeah, there’s a lot of stuff happening. Frisco has just kind of boomed these last couple of years.

[Mattias]
That’s I’m sure that’s exciting to see. Larry, how did you get into the exciting world of tax strategy? That’s not from everybody.

[Larry D. West III]
You know, and it’s funny too, because when I initially got started in this space, tax was the furthest thing. Tax and accounting, I didn’t want to touch them at all. But as we know, life happens.

And so when I graduated with my MBA in finance and accounting, I thought I was going into investment banking, had an opportunity to go to either Chicago or New York. But I ended up in Abilene, Texas of all places. And Abilene has nothing related to high level investment banking, like I thought.

And so I kind of fell into this space. I started working for a registered investment advisory firm out there, and they didn’t have any good relationships with accounting firms. And so they were like, look, we need you to figure out this tax thing.

So we’re going to sit you in a room. When we come up with financial strategies for our clients, you figure out the tax implications. And that’s where I really got started.

And so from there, I built a career on the accounting and the tax side and went on to earn a couple of designations and really get deep into the space. But, you know, I just fell into it and I fell in love with it when I did. But it was not my first choice.

[Mattias]
Yeah, that’s fascinating. And, you know, I think that, you know, when you hear about accounting and tax, you don’t think creativity. But I really do feel like there is that level of creativity that I think I would personally enjoy about it.

Because, I mean, you kind of have to tailor a strategy for an individual client, right?

[Larry D. West III]
Exactly, exactly. And that’s the fun thing that most folks miss when it comes to the strategic part. It’s not just about doing a tax return and saying, here’s what you owe or here’s your refund.

It’s more about pulling apart the pieces, understanding all the different dynamics of that person’s profile, how they make money, where’d that money come from? Is it passive? Is it active?

And all these different components that can work together. And now you can apply strategy to put it together in a way that really saves them money, whether it’s now or in the future. So that’s the fun part for me, where we get to put the puzzle pieces together.

[Mattias]
Yeah, absolutely. And I would venture to guess that a lot of people that are hiring accountants are not getting that strategy part. Can you talk a little bit about the differences between just having an accountant filing your taxes and having a tax strategist?

[Larry D. West III]
Yeah, you know, it just comes down to being proactive and reactive. The traditional model is more the reactive side, where it’s we go throughout the year, we earn our money, we do all these things. And then when, you know, February, March, April comes around, we say, hey, Mr. or Ms. Accountant, here’s my stuff, tell me what I owe. And then you get the list of the shoulda, woulda, couldas. These are the things that you shoulda, woulda, coulda done last year. Where the other side is more proactive, and that’s where we’re having conversations right now, before the year is over, about the things that we should be doing to get that tax bill as low as possible.

Whether it’s taking advantage of deductions, whether it’s, you know, setting up specific structures, all these things that can happen right now to save you in the future, as opposed to reacting to it later down the line.

[Mattias]
Yeah, that makes a lot of sense. And I think that’s a lot of times what people maybe expect when they hire an accountant. When they first shift from doing their own taxes to getting an accountant, and then they realize that it doesn’t necessarily mean they’re gonna get this, you know, team of people, like, breaking down their life.

And so, that’s a huge, I’ve been talking to a buddy about that. He keeps switching accountants, and I’m thinking, you know, I think you probably are looking for an account strategist. You’re not looking for just an accountant.

And, I’m sorry, a tax strategist. And, yeah, so maybe he’ll listen to this podcast and give you a call here soon. Yeah, yeah.

Well, speaking of agents, tell us a little bit about what an agent might take advantage of when they’re kind of getting started. You probably don’t need to do, I mean, there’s different levels of complexity you can get into kind of the further you go on down the road. So, like, what would be something that would be kind of baseline that you should start looking into if you’re an agent getting started?

[Larry D. West III]
Yeah, you know, the first place to look is going to be the structure, the entity structure, because that’s going to be one of the most important things. And, depending on the state that agents are in, they may have an abundance of choices or they may have very limited choices. And, that’s going to be dictated by the state regulators.

So, essentially, you’re either going to be a sole proprietor where you take commissions in your own name, in your own social security number, you don’t have an LLC or an entity, or your commission allows you, excuse me, you’re allowed to be paid your commission into an entity. And, if that’s the case, then you have a lot more flexibility. Typically, you’ll see agents start with an LLC, limited liability company, and then they’ll make an election, a tax election to be taxed as an S corp.

That’s the most common path that you’ll see most folks follow. And, the reason that that happens, it’s really one main reason there, and it’s to shield a portion of your income from social security and Medicare tax. Because, when you’re a sole proprietor, you’re going to pay, I mean, we call it employment tax, but you’re going to pay seven and a half percent employment tax, and you’re going to pay that as the employee and the employer.

But, when you do an S corp election, a portion of that income is not subject to employment tax. So, you kind of get that seven and a half percent savings. And, that’s usually where most folks are going to start.

From there, again, after that entity structure is set up, then we start having conversations around, let’s take advantage of deductions that doesn’t require you to spend any extra money. And, that’s important, because the number of folks that come to us, they’re like, hey, it’s the end of the year. I made a bunch of money.

I got to spend it down. I got to go buy a car. I got to go buy a property, all these things.

It’s like, pump the brakes. Let’s look at the areas of your world that you’re already spending money, but now that you have a business, has business implications. Where are some easy places to find that?

That’s going to be home office deduction. If you don’t have a dedicated space at your brokerage or anything like that, and you primarily use your home as your main office, we can look at the home office deduction. We then look at vehicle mileage.

We then look at cell phones and the multitude of other things. Because, the point there is, whenever you spend money on a deduction, it never comes back to you dollar for dollar. So, where are the places that you’re already spending money that now have business tax, that have business implications, that we can now take as a deduction?

And then after that, we’ll get into more of the advanced planning in terms of bolting on perhaps retirement accounts and some more advanced strategies and things like that. But those are the primary places to start. Let’s get the entity structure right and let all the places you’re spending money that don’t require you to have any new cash flow going out the door.

[Mattias]
Now, do you think there’s like a minimum for income producing? If you’re getting started and you sell two in the first year, hypothetically, let’s just say that, do you think it’s worth getting that rolling right away to get your S-corp entity set up? Or do you think it’s after you’ve established a little bit of a business and it makes sense to take that step?

Because there’s going to be a couple fees involved with setting all that up, right?

[Larry D. West III]
Absolutely. So, it’s hard to give a threshold and different professionals are going to say different things. We’ve seen people say, 50,000 is the number, 100,000 is the number and so on.

It’s going to depend on each person’s specific situation. But I will say that to do it right away doesn’t typically make a lot of sense economically because of those extra costs. You’ve got the extra costs of perhaps an accountant, a set of books, payroll administration costs, an extra tax return.

You’re probably looking at at least, I’d say probably $2,000 to $5,000 annually to do a conversion over to an S-corporation just on the compliance side of things. And so the savings have to justify that additional cost you’re taking on. And so if we’re doing perhaps one or two properties or we’re just getting started in the business, the S-corp, the election for the S-corp doesn’t necessarily have to be the primary motivation there.

As you get established, it’ll likely show itself and become more valuable for you.

[Mattias]
Yeah, it makes a lot of sense. Another thing somebody could think about is there’s that whole burn the fleet mentality where you’re dedicated, you’re 100% going to make it in this business and nothing’s going to stop you. So I think there’s some element of like, this is a step you’re going to want to take eventually, right?

But you don’t have to do it right away because that is going to be an extra expense. It’s going to put stress on your already, maybe not making quite as much money coming from another career. But getting a little bit further into it and seeing that it’s going to be a good time to do this, let’s go ahead and make the jump.

I think it’s just something to understand is a step along the way and to, like you said, weigh the costs of it all. I wanted to talk a little bit about the mileage thing if we can. I thought that was an interesting point you made because there’s kind of two paths there, right?

So you can buy a car in the business, like you could buy it in the LLC and then all the expenses related to that car would just go through the LLC. So gas, all that stuff would happen and you wouldn’t have to track mileage in that circumstance. But that is, you can spread that out, not the cost of maintaining it, but the purchase of the car over five years at most.

Is that correct?

[Larry D. West III]
Yeah, you can depreciate it over five years.

[Mattias]
And so you have to kind of balance, weigh that out if that’s better than versus, you’re getting a lot of miles as somebody in real estate, typically you’re putting a lot of miles on your car. So you can do better with the mileage route. And like you said, you don’t actually have to spend all that money on buying a car because you’re putting gas in your car as it is, right?

[Larry D. West III]
Yep, yep, absolutely. So the mileage thing, it’s a hidden deduction. I think that could be worth a couple thousand dollars to some realtors, especially those that are in larger metro areas where you do a lot of driving.

And the way we look at it really is on one end, you could purchase the vehicle and depreciate it. But there’s some things that come along with it. It’s not all the glory of, hey, I’m just gonna go buy this heavy vehicle for over 6,000 pounds and write it all off.

The way we look at that is essentially, there’s a purchase price of the vehicle and then there’s the percentage of business use. And so if you go buy a, let’s call it a $100,000 vehicle, but you only use it 60% for business, well, that means only 60% of that 100,000 is eligible to be deducted and written off if it meets all of the rules and standards that come along with it. And so when people only have one vehicle, you’d be hard pressed to prove to an IRS agent that, hey, I use this vehicle only for business.

And the IRS says, well, what do you use to run down the street to Whole Foods to get your eggs? Is it that same vehicle? Because now we’ve got personal use in there.

And so you have to be very careful with that part. And this is why mileage is pretty good because basically any business miles that you drive can be a deduction. So driving from your office to execute business, that could be office to meet a client, that could be office to go show a home or something like that.

Those are all miles that rack up. And I need to check here before we jump off. I believe it’s somewhere around 68, 69 cents per mile that you can deduct.

And I mean, 10,000 miles, that’s a $6,900 write-off that’s sitting there waiting for you.

[Mattias]
Yeah. And I think I’m probably 15,000 plus a year. And I mean, I think it could be tempting to justify buying this fancy car.

And I think that’s probably something that a lot of agents have a lot of ways they want to justify. Like, I want to look successful, all that kind of stuff. But if you really do the math, if you really break it down, I think often that that mileage tracking is the better route.

So just definitely food for thought. Thanks for bringing that up. Yeah, absolutely, absolutely.

So you said that’s kind of the standard, that’s like the baseline of tax strategy for a real estate agent. Is there, where would you go from there if somebody continues to be successful, has a surplus of money coming in, et cetera?

[Larry D. West III]
Yeah, absolutely. So then we’ll have the question in terms of where their career is going, whether they are an independent agent or whether they plan to build a team. Let’s talk about the independent agent first.

From there, we start to look at, well, what’s the plan for retirement? And what assets are you building now to get there? More often than not, we’re going to start with conversations around traditional retirement accounts, perhaps a solo 401k, an SEP, or we call them SEP IRA or something of the like.

Because these are plans that now allow you to put money away on a pre-tax basis to reduce your taxable income and also plan for the future. Similar to when we have W-2s, right? We get into a job, our employer gives us a match.

You can do that same thing as the business owner. The beautiful thing about it is, instead of being limited to 20, 22, $23,000, as if we were W-2, now we could potentially push that number up to 60,000, almost $70,000 of a deduction. It has to be structured appropriately, but that could be a massive tax deduction and also some future retirement planning that we can get into as well.

Then we’ll have more and more conversations around the spaces that they decide to invest their money. We don’t talk about it from the perspective of, hey, we’re going to allocate your dollars and put money in the market. It’s more of, what are some good investment strategies that give you good tax implications, but also good ROI.

As a realtor, real estate tends to come up. Then we have conversations around, how does rental property fit into your portfolio from a tax perspective? Whether that’s single family, multifamily, commercial and syndications, which I’m sure we’ll talk about in a bit.

We started to put those things together in terms of allocating the dollars to keep the tax efficiency rolling. Because once you take the money and run, there’s always going to be a tax waiting for you somewhere. When you can start to allocate those dollars in tax efficient spaces, then we get into wealth building.

[Mattias]
Yeah. As the title of this podcast may hint at, I’m a big fan of the investing real estate side of things. And I think one of the big advantages of that is being able to use that money as it, you can sell a property that you bought previously.

You can take advantage of the equity built in it. There’s a tax savings. And also there’s the passive income that you can actually take advantage of.

Whereas, and I think it’s probably wise, and I shouldn’t say you should put all your eggs in one basket. So it’s probably wise to do a bit of a balance with both. We personally have a personal goal of our own step IRA as to how much we kind of want to get built up in the stock world as well.

And we were heavier on that earlier in our careers. And so we’ve kind of got to jump on some of that as well. But yeah, it’s perfect to talk to somebody like you about the intricacies and the ins and outs of the advantages of either option or how to structure so it makes most sense for them.

Because if you buy a single family rental, you’re going to have to deal with tenants potentially. So there’s always downsides to that as well. At some point along the way, would you also suggest that agents get into a trust situation to kind of help manage their assets as they’re building wealth?

[Larry D. West III]
Yeah, we have this conversation often. The moment you start making money and accumulating assets, estate planning, aka trust planning, has to be a part of the thought process. And this is a part of our evolution.

We call ours the precision growth model. And so as you grow through different stages, we’ll kind of roll out these different strategies for you. But we bring the estate planning in pretty early.

Most people wait until they’re older, ready to sunset, and then thinking about transitioning before they do estate planning. And I think you’ve almost done it too late. Again, the moment you’ve made money and you accumulated assets, let’s talk about the estate plan and let’s talk about the trust.

Where we typically start, and again, every situation is going to be different, is we want four elements to be ready for you. We want the will, the power of attorney, the medical directive, and at the very least, a living revocable trust. And a living revocable trust is exactly what it sounds like.

Living, meaning you’re still alive. Revocable, meaning you can put things in and revoke and take things out while you’re still alive. That’s all it essentially is.

Otherwise, it’s just a pass-through entity that allows your assets to pass to the next generation without going through probate court. So before we get into all the fancy stuff of the tax implications and all that stuff, the trust is mainly, the living revocable trust is mainly set up so that your assets don’t have to be decided by a judge who you’ve never met. They can pass to your heirs in the way that you intended them to without having to go through probate.

So that’s where we suggest most people start, living revocable trust.

[Mattias]
Okay, that makes a lot of sense. You hinted at the tax part and that’s kind of where we want to go with this, I’m sure, but at some point also, I wanted you to talk about the spendthrift trust. We had a guest on the show talking about those and I was curious if those are strategies people often use or if there’s other types that you think make more sense.

[Larry D. West III]
Yeah, I think there are a number of types that could make more sense. The point I’ll stress there is that the spendthrift, when we use the name spendthrift trust, I think it’s a bit of a misalignment of the name because the trust itself isn’t a spendthrift trust. Spendthrift is a provision of the trust, meaning it’s just an element of the trust itself and all it typically means is that you’re going to have a high level of creditor protection but these things were initially designed to protect us from ourselves.

Let’s just say the trust was set up for me and I was very irresponsible with money and so the spendthrift is there so that, think about the name, spend and thrift, right? We need to be thrifty. We don’t want Larry to blow all of the assets of the trust and so we have very, very stringent stipulations on what this money could be spent on and it’s typically going to be something around living arrangements.

So like house, clothing, shelter, food, things like that. The things that I need to live off of. You typically aren’t going to be able to spend money out of that trust on some of the other luxury things that we normally enjoy in life.

Now that said, there are some unique ways that this could be set up to potentially accomplish those goals but what it does not do is create a situation that immediately absolves you of all income tax liability because the dollar has to fall somewhere and depending on where that dollar falls, something, trust or someone, individual has to pay that tax and so the spendthrift provisions need to be studied in detail before you say that that’s the one that I want.

It does work for some folks and it has, again, a high level of value but for the general public, it’s not going to be something that they probably want to get involved with. You’ll probably do better starting with the living revocable and then as your world gets more complex, as you gather more assets, start to add additional provisions to the trust as things go along.

[Mattias]
Okay, that’s really helpful. Yeah, I had heard that it was no, it wasn’t just income tax, it was specifically to no passive income tax and then also capital gains. So I was like, why isn’t every investor in the whole world doing this?

Okay, that makes a lot of sense and what you’re describing, I think it was also discussed as it being like something that Rockefellers have set up for their heirs or whatever, which could make a lot of sense that they have an insane amount of wealth and they don’t want that to just be squandered, that it’s set up to be more specific to the basic needs, is what it sounds like.

[Larry D. West III]
Yeah, and again, trusts get very, very complex. What happens is on the marketing side, we kind of put the names together and they sound amazing. Rockefeller Trust, Spendthrift Trust, a business trust and when you talk to estate attorneys and even estate specific accountants, they’ll kind of tell you that, look, all that is not the way it actually works.

But again, that said, there are ways that you can use these trusts into very, very unique situations to help preserve family wealth and help preserve generational wealth. It’s just that very, very few options out there will help you avoid income tax, which is what most people assume they’re doing.

[Mattias]
Okay, yeah, that’s really good to know and talk to a professional. Right, right. Awesome, so from there, is there anything else you wanted to cover?

Trusts for somebody that’s, or may already have one and maybe look to see if they need to enhance that at all with what you’re talking about?

[Larry D. West III]
Yeah, yeah. So I’ll kind of go basic and then kind of touch on the advanced side because again, once you get into the real advanced details, it becomes very meticulous. And so I think on the base level, what I described initially was a living revocable trust.

You’re live, put things in, take things out. On the other side of that, you have what’s called an irrevocable trust and that basically is almost the opposite. You can still be alive when you put these irrevocable trust together.

It just means it’s a lot harder to take things out there. They’re considered permanent to an extent. Now changes can happen, but they’re very expensive changes if you want that to happen.

And when you have an irrevocable trust, it becomes an entirely separate entity. Living revocable, almost like a flow through, you all are one. Irrevocable is almost like a separate entity where the trust now owns and controls whatever is inside of it.

And that’s essentially separate from you as the grantor or perhaps even as the beneficiary of that trust. And so those are typically going to be the first two places you start, revocable or irrevocable. Once you’ve got that set, then you start to layer in provisions like spendthrift and some of those other things.

But what I’ll say to all the listeners out there is you have to go in with a plan for how you want your assets to be divvied up in the event that something happens to you. And that’s the whole point of the estate planning. Do you want your assets to go to your kids or do you want it to skip a generation and go to the grandkids?

Do you want them to have certain accomplishments or certain provisions that they have to meet before they have access to the assets or the funds inside of the trust? That could be having a certain degree, that could be hitting a certain status in life and all these things. You can set this up in such a way where your wishes are carried out precisely how you want it, but you have to have that thought process going in.

And these are typically going to be two, three hour meetings, a couple of those meetings over a few weeks or perhaps even a couple of months with the estate attorney to get it all right. So it’s not a one and done process, but it’s something that everybody needs to do once they make money and have assets.

[Mattias]
No, it makes a lot of sense. Thank you. Now, you had talked about the difference between somebody that’s doing their own thing and somebody that’s building a team and how that might have some nuances, some differences.

I have some ideas as to what I’m doing personally as a solo agent that would probably be a problem if I had a team, but I’m curious as to what you wanted to say about those differences and what somebody that is in a team or is thinking about building a team should do.

[Larry D. West III]
Yeah, absolutely. So one of the primary things to think about, sorry, I have to plug this in. I got the low battery cue here.

Sorry about that. So when you have a team, one of the primary things that comes to mind is, all right, now we need to get into a more detailed structure around the accounting and the business planning side. On the solo piece, you’re responsible for you.

And so you’ll have your books, you’ll have your financial data, but when you’re building the team, it becomes a lot more intricate. So your financials and your accounting system needs to look totally different. You then move from perhaps having a bookkeeper up to having either an accountant or perhaps even a controller that oversees a lot of the things so that they can help you cashflow plan, forecast, pay out bills, make sure commissions are cut and make sure everything is balanced appropriately.

Only when that happens can the more strategic tax planning then come into play. Then you get into, because as that grows, your income prospect is gonna grow as well. Then we get into larger planning with respect to the value of the team.

We’ve seen some transactions where books were sold to other teams or to other brokerages. And so we need to get into planning around that and whether the tax implications there. We’ve seen creative splits between teams, whether it’s the 70-30 model to essentially 50-50 to zero commission and what that looks like.

On into perhaps does it make sense to get into larger defined benefit plans? I mean, the list goes on and on. The point there is the complexity grows, the opportunity for tax saving grows and it’s just a different dynamic there.

[Mattias]
There’s a lot to get into there. Wow, so I mean, essentially what I hear and what you’re saying is, I mean, you should be treating your business as a business if you’re in the sales. But when you grow a team, you’re really creating more of a traditional business that could potentially be more than just you.

And it’s something that, again, can be sold like you talked about. One of the things that I was thinking about is I’ve created health insurance as a benefit for myself and my S Corp, for my family. And that would be something that I would have to apply to any employee that also came in with me, right?

If I hired a full-time employee, my understanding is I would have to also give them that same benefit, is that correct?

[Larry D. West III]
Yep, yep, that’s correct. And so that’s another, that and retirement accounts are a huge point there. And that leads us up to how you bring people into the team, whether they’re contractors or employees, but you’re spot on.

If you bring a full-time employee in, perhaps it’s an admin, marketing coordinator or something like that, then yes, they’ll need to have access to those same benefits you can’t discriminate.

[Mattias]
And so in that regard, so hiring somebody as an hourly employee or a salaried employee instead of getting a commission based on their production, that would be one of those ways to designate the two, right? I mean, if they’re getting, if they’re an independent contractor getting paid per what they produce in your team, that would not necessarily be a employee that would have to receive the same benefits, is that correct?

[Larry D. West III]
That is correct, that is correct. And different states are gonna treat this, are gonna treat this differently and they’re gonna have different rules around what constitutes an employee versus what constitutes a independent contractor. And some states are more aggressive than others.

California, I’m looking at you and a few other places. So you really wanna be careful in terms of how you set those dynamics up, but again, you’re spot on. W-2 hourly employee, perhaps a salaried employee, typically is gonna have access to those benefits, whereas an independent contractor, that’s their responsibility, it’s considered totally separate.

[Mattias]
Okay, that’s really interesting and something that people should definitely think about as they plan to grow their business. And I think that a team structure could be a really good way of having an exit at some point, retirement. If you build up a business, book a business, there are ways of selling it and I think you can go onto a referral status, et cetera.

But you could probably get a lot more if you built up this business, this team that you could come out of and not the whole thing falls apart, right?

[Larry D. West III]
Yeah, I think a huge one, which we haven’t jumped into detail yet, I’m sure we’ll get to, is how does that look when you then get into real estate investing as a passive investor? Because when you build a business, and we’re talking about building a team, but it’s still like building a business. When you build a business and you don’t materially participate, meaning you don’t have to be there to run the day-to-day, you don’t make the managerial decision, you have someone who’s instilled in place to do this, you essentially become passive in your business for all intents and purposes.

And then you also invest in real estate, which by itself is immediately categorized as passive. You’ve created an avenue where you could make more money, but not pay more tax because passive losses from real estate offset passive income from the business that you don’t participate in. That could be a valuable thing where it’s a powerful tax play, and it doesn’t even require anything like real estate professional status or anything like that.

[Mattias]
Okay. Yeah, that’s interesting. That’s super interesting.

And I guess, but you brought up the real estate professional status. I think we should probably jump in and to explain that a little bit unless you wanted to touch on that point more.

[Larry D. West III]
Yeah, actually I’ll drive that point home a little more and then we’ll jump into reps because some people may say, well, wait, what exactly does that mean? And this will be important when we get to real estate professional status the key term that everyone should understand is material participation. And all that basically means it’s a seven part test from the IRS.

You have to meet one of the seven, but material participation essentially means you actively manage and run the business. You make the day-to-day decisions and there’s essentially no one else who does more for the management of this business than you. And that’s typically us when we either start our business, start our teams and different things like that.

But as it grows, if we do this right, it requires less and less of our participation and time. We typically then have people who essentially run the business for us and we become passive investors. If you think about Robert Kiyosaki, he talks about that cashflow quadrant and moving from employee to self-employed to business owner to investor.

It’s moving all the way around that board till you get to the investor, which basically means you don’t have to show up this thing runs without you. Then you’re considered passive. Okay.

Rental real estate, we know about depreciation. You purchase a property, you get the depreciation deduction. And typically on paper, your rental real estate is gonna be net negative.

Even though cash flows in real life, it’s gonna be a negative on paper because of depreciation. Well, that negative loss that you get from depreciation is passive. The positive income that came from your business is now passive.

Those two things marry up and they net each other out. So you’ve made money over here that the tax deduction from real estate is basically eaten up. And by the way, your real estate is actually really cashflow and if it’s underwritten appropriately, so you’ve made more money and paid less tax.

Yeah, that’s awesome.

[Mattias]
Yeah, yeah, that’s a really, really cool point. I had not heard about that material participation piece of that business. That’s really interesting because I think one of the things that a lot of people get stuck in, they graduate from being employed to being self-employed and that kind of ends as a real estate professional right there.

And they kind of get the curse of doing everything themselves and being that solopreneur. And I don’t think everybody needs to go into the other side of the quadrant necessarily. I think that there is, and not everybody needs to be self-employed.

I think you can be very happy as an employee. I think it’s all about what you want. I think if you are really trying to maximize things and free up your time, it’s a natural progression.

That was awesome. Thank you for that.

[Larry D. West III]
Absolutely. And it’s one of those hidden rules where everybody comes to us and they say, hey, how do I qualify for real estate professional status? It’s like, hold on, let’s pump the brakes.

Let’s see if we even need to qualify for it. Let’s look at your entire world to see how we could put this together without the stringent rules that may come with reps.

[Mattias]
Well, yeah. Now tell us what reps are. And I think a lot of listeners may not even understand what you’re talking about there.

[Larry D. West III]
Yeah. So reps, also known as real estate professional status, it is one of the highly coveted designations. And we say designation, there’s no like official certification or designation out there.

It’s really just a standard from the IRS. And here’s what it says. Rental real estate under the IRS code 469 is considered passive income, which basically means when you have passive losses from real estate, which we just talked about, it cannot come through and offset your active income, meaning the losses from real estate cannot just immediately offset your W-2, offset your active income as a realtor or anything of the like, right?

Unless you meet the standard of real estate professional status, which basically says that your primary and so your primary occupation, the majority of your time is spent in real estate. So there are three rules that need to happen here. Number one, 750 hours in real property trade or business, okay?

That’s your job as a realtor. You probably do 750 hours. It’s about 10, 15 hours a week.

So I’ll do it every week. Yeah, exactly, exactly. More than 50% of your time needs to be in real property trade or business.

That’s number two. And these are all ands by the way. These are not and ors.

These are all ands. So 750 hours and more than 50% of your time, which basically means if you have a side job, another job, another business, real estate better be more than 50% of it. Otherwise you don’t meet the standard.

And then the last one is material participation, which basically means you have to actively manage your rental portfolio. When all three of those are true, then you could qualify as a real estate professional, which means those passive losses can potentially offset the active income. If that doesn’t happen, then you’re kind of stuck with two different kinds of income and they don’t exactly mix on the tax return.

So that’s why a lot of people go after real estate professional status because they want the losses from real estate to offset the income that they’re earning as a realtor. And the last thing I’ll say too, before I yield on this in a moment is just because you have a realtor license does not mean you qualify for real estate professional status. Remember, this is not a certification or a designation that anybody gives out.

It’s a set of rules and activities that you have to qualify for. All three of the things that I mentioned have to be true. None of those things mentioned having a license, which means people who are not realtors can qualify for reps and people who are realtors can actually qualify for reps.

[Mattias]
And one thing that you mentioned that I want to ask about is, so if I were to take my rentals and put them in a property management company and not actively manage them, does that then disqualify me from this status?

[Larry D. West III]
Not necessarily, because as long as you have ownership, I believe I will have to check to confirm this. I believe as long as you have ownership 5% or more of that property, then you can still hit the rules related to real estate professional status. Now, the activity is going to matter here very much more than anything else.

And so if you’re actively managing the property as the property manager, you have a chance of hitting those standards. If on the other side, though, you outsource the property management, then you’ve almost effectively destroyed the opportunity because typically your property manager is going to do more for the property than you because otherwise, why did we hire them? Right, right.

That’s an interesting point, yeah.

[Mattias]
Okay, so then let’s get into accelerated depreciation and how that could potentially be beneficial to people whether they’re investing in a syndication or whether they’re investing in their own single family, small multifamily properties along the way.

[Larry D. West III]
Yeah, yeah. So we know depreciation is a deduction that you get to take based on the purchase price of the property, right? You go buy a $500,000 property, let’s assume it’s residential, you divide 500 by 27 and a half, you get about a $18,000 deduction every year.

That’s your depreciation deduction. When you do something like a cost segregation study, it takes components of the building and it says, hey, these things are not going to last 27 and a half years. We’ve got a roof, we got an AC unit, we got all these things that won’t last 27 and a half and so now we segregate them, hence the name cost segregation.

We segregate the cost of those into different buckets and now instead of 27 and a half years, we can take that depreciation over five years, seven years or 15. That right there will tell us that if we divide something by five versus 27 and a half, five gives us a bigger piece of the pie. Same with seven and 15.

On top of that sits the accelerated depreciation rules which basically says if it falls into a useful life bucket of five years, seven years, basically anything under 20 years, if it falls into that useful life bucket, we can accelerate the depreciation and now you don’t have to wait five years. You can take 60% of it right now and then the other 40% go in the next five years. You can take 60% of it right now and then the other 40% go seven years and so on.

So now we’ve gotten an even larger slice of the pie. That’s the basics of accelerated depreciation. So now we’ve gone from an $18,000 deduction with a half a million dollar property to maybe a 40 or $50,000 deduction.

Those are real numbers, right? And those that can make a huge difference. When you now expand that to mid-size multifamily, commercial multifamily or even commercial or industrial buildings, all of a sudden, the $500,000 acquisition is 5 million, 15 million, 50 million and that $40,000 deduction is 400,000, 4 million, 14 million.

And so it just gets larger the larger you go. Syndications are good because essentially there’s a sponsor or a fund manager who’s doing all the work. You kind of give your money.

They do the responsible thing, acquire the property, manage the property, hands off and you get your distributions like clockwork either monthly, quarterly or however those schedules work and you get that return on capital. And all the while, you’re still getting a piece of those tax benefits. And so now instead of, you’re basically getting a percentage of that 400 or 4 million or $14 million depreciation deduction that comes back to you without all the work that goes into it.

[Mattias]
Yeah. Yeah. So based on how much you invested in on the beginning is how much you would get of that piece usually, right?

Exactly. Yeah, it’s a really awesome strategy. I think especially if somebody is not eager to be hands-on and would prefer, you know, they make a lot of money doing what they do, selling real estate and they would want all the benefits of owning real estate and don’t want to do the work at the tenants club.

That’s a really good thing to get into. And what a great, I mean, great strategy for this designation that a lot of realtors would have and may not be aware they could take advantage of and it could greatly offset their income if they had some sort of goal of, let’s do, I mean, there’s a lot of these places are going to have minimums of what you can invest in. So it could be a big chunk, right?

But let’s say, like, let’s have this goal of, I want to invest $50,000 every year or $100,000 every year, you know, and an option and something that, you know, it would be great to talk to you about Larry if somebody is considering this is do I put this $50,000 into a syndication or do I put that into a self-directed or a SEP IRA? And what is going to impact my finances better on the short term and the long term? And it’s going to depend on the deal.

I mean, that’s, you know, getting into how to figure out what’s a good deal and how to trust the operators for syndications, the topic for another show. But in theory, I mean, so I have this anecdotal, you know, I got a really good syndication I got into here last year. I invested $50,000 and I got $66,000 right off.

And that is to me an obvious clear choice. And I’m getting, you know, anywhere from 11 to 13% dividends quarterly. If you put them out sort of annual.

So it’s a great deal. So, yeah. So it’s definitely something that I think I want to use this platform to kind of preach a little bit because I feel like a lot of people don’t have no idea what a syndication is, have no idea what a SEP or have a real estate professional is all these things that are tools at their disposal that they could really do a lot with.

[Larry D. West III]
Yeah, I agree. You know, I think there are two points to really hone in on there. One, ownership is the key to a lot of wealth building and tax efficient planning.

We know that just as realtors in general, because we’ve got a sense of owning our business. Now we’ve got access to tax deductions that we wouldn’t have had as W2. But then when you get into owning assets and then the larger assets, you can just see the tax efficiency grow.

I mean, what you just described there, you got a $50,000 investment, yet you got a $60,000 tax deduction, right? And people are just, how does that happen? Like, how is that even possible?

And it’s when you get into investing in ownership, that’s the key. If you don’t own anything, your tax efficiency is going to be, I just can’t, it’s just going to be trash. It’s not a lot you can do.

But ownership is definitely going to be the key there. And then the other part is, you know, you can go far by yourself but further with others. That’s kind of the crux of the foundation, excuse me, of the syndication model where how long would it take one person to get enough capital to go buy a $15 million building versus 50 people coming together to go buy a $15 million building, right?

And so, you know, 1% of something is better than 1% of nothing. And now it just allows you to grow quicker and go bigger, faster. Yeah, absolutely.

[Mattias]
And then the power of scale, again, a topic for another podcast. But if you’re looking at the cap rate game and how you can improve an asset at $15 million, the amount of money that people are able to generate, it’s like flipping a house but at a much bigger scale. And it can really have huge benefits.

But the beauty again is that, you know, you don’t have to be the operator. You don’t have to understand that. You don’t have to, like, you have to know enough to be able to analyze the deal.

And trust the person that is operating it. And that’s a whole other skill, again, topic for another day. But you don’t have to be the one that actually implements this plan.

But it’s a really crazy plan that, you know, it’s millions of dollars that is created by doing this. And you’re creating a better housing for people in the process. I mean, it is improving something that’s probably not been managed well, that’s been run down, proving an asset and creating something much nicer for people to live in that they enjoy.

So it’s a really awesome strategy, in my opinion. Yeah, I agree. Larry, let me jump into the book section.

I’m curious as to what you would recommend people to read or things that you found fundamental for you that you currently enjoy. I’d love to hear what you’re reading.

[Larry D. West III]
Yeah, you know, that’s a great question. So initially two come to mind, but now I’ve actually got three. So I’ll kind of mention all three.

One is Blue Ocean Strategy. And the reason I love this book is it’s a very common business book. And I think it was actually written by some Harvard business professors.

But what they talk about essentially is strategically, as you grow your business, looking at the blue ocean as opposed to the red ocean. The red ocean is the bloodied water, shark infested water, where it’s saturated. Everybody’s in that space.

We know what’s going to happen there. And, you know, it’s a death fight, right, to grow the business. Whereas you could take the approach of strategically looking at the blue ocean side, which is the uncharted territories where not a lot of people have gone yet.

And it doesn’t require a ton of innovation to actually get there. It just requires a little bit of change and strategy in your thinking to go there and start to build and scale business. One of the things that comes to mind, and this is just an example from an excerpt that I heard from Jeff Bezos, when you think blue ocean is a lot of people are stuck trying to innovate, innovate, innovate in all these spaces that are completely oversaturated.

Where Jeff takes the approach of our blue ocean strategy is we’re not trying to innovate and create anything new. We’re trying to double down on the stuff that we know is always going to be here, what the consumer is always going to want. And he made the statement that, look, I have a hard time believing that 10 years from now, consumer is going to say, Jeff, I want my products delivered 10 days slower than what you’re doing right now.

And I want them two times more expensive than what they are now. So their strategy is doubling down on efficient and fast delivery and keeping costs as low as possible, a space that not a lot of people are focused on or jumping into. So anyway, all that to say, I like blue ocean strategy.

I think it’s a book that’s worth checking out. The second one. Oh, yeah, absolutely.

The second one is more of a personal one and personal health journey. It’s called Eat Right for Your Blood Type. And it takes a different approach to the fad of healthy eating, where you have like keto diets, paleo diets, vegan, vegetarian, pescetarian, all this stuff where they really get down into the science of the human makeup in terms of how does your body, your blood type specifically, respond to different foods and different types of food?

Because depending on your blood type, your body will be more resistant or more accepting of certain foods there. And so they break it down from the perspective of even ethnicity, right? In terms of what African diets are versus Asian diets and so on and the history of blood type itself.

And so that’s been an interesting book within itself. Actually, I’m down 15 pounds, actually. Oh, wow.

I’m following some stuff in that book.

[Mattias]
That’s really interesting. I just wanted to comment about that real fast, if you don’t mind. I just think that it could be a good answer to, I think, you know, I was a skeptic about all the health food science out there for a long time growing up in high school, college, just because it seemed like it was a moving target.

Like it was like, you know, eat eggs, don’t eat eggs, eat eggs. Like it always changed. And it just seemed like it was like, how is this science?

If it’s just like a moving target and you’re going to contradict yourself, like, you know, it’s going to be completely different. If you want to have a low fat diet, now you want to be a carnivore. Like it’s like, like, what is like?

Yeah, like what’s the ideal mix here? So it just it kind of made me like think that this is pointless. I’m not even going to pay attention to it.

But the differences of people, I think, are huge. And I think that’s why that what this book is getting into. And I think it makes a ton of sense that, you know, we would be different.

We would be evolutionary, maybe different from others. And part of that’s our blood type, you know, and that we would respond differently to foods that we were kind of designed to to consume. So that’s that’s super fascinating.

I’ll have to check that out.

[Larry D. West III]
Yeah, it’s pretty cool. And I’ve just picked up the other part of it. So the in the book is broken down into the different blood types, right?

Like you’ve got B positive, O blood types and so on. And it gives you a list of, hey, here are the the the poultries. Here are the breads.

Here are the dairies that are specific, that are really good for your specific type. And you can compare that to the other types out there. But they’ve got a second edition called Eat Right.

Excuse me, not Eat Right, sorry. It’s called Cook Right for your blood type. And so they’ve kind of given you the the recipe book, if you will, on how to create a lot of these different dishes.

So not only are they telling you what’s the right thing. Now, here’s the recipe book to go along with it so that you can start to meal prep and prepare those things accordingly. OK, that’s awesome.

Pretty good, pretty good. And the third one I’ll tell you is more of a shameless plug. And it’s just dawned on me here a moment ago.

I’m writing a book that’s coming out. So our book is called Precision Growth. And it’s a model that talks about smart planning from a tax, accounting and data analytic perspective in terms of how you grow and scale the business.

And so that’ll be released December 5th. And it’s it’s more of a of a framework that talks about a lot of the stuff we discussed today. But when you start your business, there are certain financial systems that need to be set up and certain financials and they need to be set up a certain way to give you access to answers to grow and scale the business on into the tax planning side, on into the data analytics side.

And so I’m excited about that rolling out. So it’s called Precision Growth and that’ll be out December 5th.

[Mattias]
That’s awesome. Yeah, perfect. That’s exactly what people mean.

And I think that if you don’t like, it’s good to rely on your professionals to handle things, but you also kind of have to know the questions to ask and who to ask them to write. So a little bit of self-education is going to be very helpful. And that sounds perfect.

I can’t wait to read it and want to have you back on when it’s out so we can promote it more. Absolutely. And make sure we get a copy over there, too.

Thank you. And hey, I want to put you on the spot a little bit. Do you have three people?

Veena told me to do this, by the way. She said, do this on air. Yeah, yeah.

Do you have three people you’d recommend to be on this podcast?

[Larry D. West III]
Yeah, yeah. Well, Veena would have been one, but since she’s already been on here. Yeah, she’s phenomenal.

She’s phenomenal. Worked with her for, she’s almost a decade, probably a little more than a decade now. Nick McGrew.

He’s a wonderful SEC attorney based out of L.A., out of California. But when you think real estate law, when you think syndications, and even when you think trademark and patent law, Nick has a lot of that stuff down pack. I think he’d be a wonderful guest here.

That sounds awesome, yeah. Veena is just an amazing ecosystem. This next person is also connected with her, but Ellie Pearlman is another one that could be a really valuable person on the podcast.

She’s a phenomenal real estate investor, sponsor, and fund manager, and she’s doing some amazing things. She’s also based on the West Coast. Well, all these people belong to the West Coast.

She’s also based on the West Coast there. I think she would be great. And then, let me think, who would be a third person?

She’s in the real estate space. Oh, you know, I’ve got another gentleman. His name is Akash Jain.

I’ll get you his information too. He’s doing some major things in the real estate space, but very entrepreneurial in terms of how he’s expanded his reach. Not only is he on the real estate and syndication side, he’s expanded into other markets and other areas of business that are synergistic with the real estate piece as well.

I think he’d be a phenomenal guest also.

[Mattias]
Man, that little tip from Veena was gold, but thank you.

[Larry D. West III]
Yeah, that is pretty amazing. She’s good at that.

[Mattias]
Yeah, thank you so much for being on here. Is there a good place for people to follow you, to go to your website? Will there be a website for your book?

I mean, what’s the best way to access your world a little bit more?

[Larry D. West III]
Yeah, absolutely. So follow on all social channels. It’s Larry D. West III on Instagram, @larrydwestiii. Veena hates that, by the way, but I had no other way of figuring out the third. So it’s @larrydwestiii on all the social channels.

And then you can visit our website, which is pbstrategiesglobalservices.com.

[Mattias]
Awesome. Well, thank you so much, Larry, for being on here. It’s been a great conversation.

I think anybody in this space listening will have gained something from this conversation. So I really appreciate it. Hey, thanks for the opportunity.

[Erica]
Thanks for listening to the REI Agent.

[Mattias]
If you enjoyed this episode, hit subscribe to catch new shows every week.

[Erica]
Visit reiagent.com for more content.

[Mattias]
Until next time, keep building the life you want.

[Erica]
All content in this show is not investment advice or mental health therapy. It is intended for entertainment purposes only.