“It’s not how much you make; it’s how much you keep.” The entrepreneur community is really good at discussing blowing things up and making things happen and money, but few people talk about keeping money.
Taxes are the single largest expense anyone has in their entire life. You are losing about 40% of your wealth. If you make $100K a year and you can keep it versus $60K, think of what you can do with the extra money and how much faster you can grow your wealth by investing.
Real Estate & Taxes
This is the most tax favored asset class in America and most historically proven asset class in the world. Wealthy and middle class people can potentially eliminate their tax bill. You will pay other forms of tax such as sales tax. In terms of income tax, the holy grail of tax benefits is depreciation. It allows you to take a tax deduction (non-cash write-off or ‘phantom’ write off).
If you want to save on taxes traditionally, the two basic forms of tax-write offs are if you are self-employed or own your own business then spend more money on your business or donate to charity.
You could have a property that is increasing in value at between 6-10% per year, has positive cash flow, yet because of depreciating, the IRS allows you to take a loss on a property that is making you money.
Inflation Induced Debt Destruction
One of the great characteristics about real estate is that it is a multi-dimensional asset class. There are so many ways to earn a return from it, and the thing beyond interest deduction is inflation induced debt destruction. Which is the way that tens of millions of people already created massive wealth. The mortgage was being paid off by the tenant and inflation.
The reason you want to keep your properties leveraged and financed is to engage in a process of equity stripping. Use the property portfolio in the most tax and wealth creation efficient way. Real estate investors are essentially outsourcing their debt to tenants.
Renting High End Property
Jason believes in being a renter of high-end property. What happens is that the rent to value ratios (RV Ratio) gets out of whack. If you live in a property that is worth less than $200K, you should own it. If it is worth more, then you should rent it and own inexpensive properties that you rent to other people.
Land to Improvement Ratio
You want to be holding property in low price markets that are under $200K. The Hartman Risk Evaluator, which entails the LTI ratio (land to improvement ratio). You want to be in areas where you get cheap or free land and all of the value of the property is in the improvement (the house or the apartment complex that is sitting on the land).
Not everyone can easily qualify for depreciation. If you make more than $150K per year in adjusted gross income, then you can’t immediately take your depreciation write off unless you can qualify as a real estate professional. This is an IRS classification and has to do with the number of hours you spend investing in real estate.
Thou Shalt Retain Control
Don’t relinquish your money and financial future to somebody else. Be a direct investor so you are in control. When you give your money to someone else to invest, you are susceptible to three things: 1. You might be investing with a crook, 2. You might be investing with an idiot, and 3. They will take a huge management fee off the top for managing the deal.
Investing In Yourself and Your Body
Anything you want to do takes physical and mental energy, and everything you buy, do, and think, everywhere you spend your time, and everything you and how you eat and sleep has a direct financial return in what you earn.
The concept of age has dramatically changed, and there is a big movement towards biohacking, which is focused on making the body and mind more effective. The quantified self movement is about tracking biology to accumulate data through apps such as Sleep Cycle.
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Links to Resources Mentioned
Perfectly Passive Income