Ready to navigate the choppy waters of real estate investment with some invaluable advice from a seasoned professional? Tune in as we are joined by marketing and brand developer turned real estate maestro, John Tripolsky. We dive right into John's fascinating journey, beginning with his real estate initiation - a downtown Charleston condo purchase made possible through owner financing. John shares how a business networking group introduced him to owner financing and how this first dip into the property market sparked a passion for real estate.
As we move through this illuminating conversation, John opens up about the difficulties of managing long-term tenancies and properties from afar. He shares an eye-opening account of dealing with an untrustworthy tenant and why that experience prompted him to switch to short-term tenancies. His insight is a treasure trove of wisdom for landlords, offering practical tips to sidestep potential pitfalls in tenant management. We also get to pick John's brain on contractor dealings, where he highlights the importance of knowing the history of your property and understanding the necessary repair work to make informed decisions.
In the final segment of our chat, we delve deeper into the world of real estate investment and tax flow. John outlines the criteria to identify passive and non-passive activities and what it takes to qualify as a real estate professional. He discusses the benefits of being a real estate professional and how passive activity losses can offset W-2 income. We also learn about his new ventures - "Teaching Tax Flow" and the "Monthly Recurring Revenue Institute", where like-minded professionals can gain valuable insights. If you've ever pondered over cash flow versus appreciation in real estate investment, John's perspective is a must-hear. Buckle up for an informative journey into real estate investment and beyond with John Tripolsky. Let's get started!
1. The importance of networking and mentorship in real estate: John Tripolsky emphasizes the significance of finding good mentors and connecting with people who can offer different perspectives on real estate investing.
2. Learning from tenant challenges: Tripolsky shares his experiences with long-term tenancies and the struggles of managing properties from a distance. He highlights the advantages of short-term tenancies and provides advice for landlords to avoid similar issues.
3. Working with contractors: Tripolsky discusses the importance of understanding your property's history and the need for renovation work. He suggests getting multiple quotes from contractors to ensure you're getting the best value.
4. Understanding tax flow in real estate investment: Tripolsky guides listeners through the complexities of passive and non-passive activities in real estate and what it takes to qualify as a real estate professional. He also shares insights on offsetting W-2 income with passive activity losses and emphasizes the importance of working with a knowledgeable accountant.
5. The role of education and continuous learning: Tripolsky shares his favorite books and introduces his new projects - Teaching Tax Flow and the Monthly Recurring Revenue Institute. He also invites listeners to join the mastermind groups at the Institute for further professional development in the tax industry.
0:00:00 - Vikas Gupta
This is the hacking real estate podcast, episode 19.
0:00:05 - John Tripolsky
I mean fight, find good mentors. I mean really, really find people that that are in your circle. You don't have to agree with everybody all the time. It's actually better that you don't See different points of view, right? I mean you think about business partners, networking groups, conferences, an array of stuff that's out there. Just find people and not saying, latch on to them like a, like a leech, and just try to take everything you can. It's, it's incredible.
0:00:31 - Brandon Hall
Welcome to the hacking real estate podcast, where we dive into the stories of seasoned, hands-on and tech savvy real estate investors. We'll learn the strategies and tools they use to maximize returns and minimize hassle, all while navigating the rapidly changing real estate market. I'm your co-host, brandon Hall, and managing partner of Hall CPA, and I'm sitting alongside my co-host, vikas Gupta, ceo of a Azibo. With our combined 15 years of experience in real estate investing and entrepreneurship, we're here to help you up your real estate game. Let's get hacking.
0:01:03 - Vikas Gupta
Welcome everyone to today's episode of the hacking real estate podcast. Our guest today is John Tripolsky. John is an experienced marketer and brand developer, currently residing in the Ann Arbor Michigan area. He's operated a nationwide digital marketing agency for over a decade and worked with clients everywhere from S&B to the Inc 500, and his passion is deeply rooted in creative improvement marketing tactics. He's a founding team member of teaching tax flow and the monthly recurring revenue Institute. John is also the co-host of the teaching tax flow the podcast and the mr R show, which can be heard across all main podcasting platforms. John, welcome to the show.
0:01:43 - John Tripolsky
Yeah, thanks for having me. That's a. It's a pretty good intro man. I feel like I need to stand up a little little straighter when I hear that, so I appreciate it.
0:01:50 - Vikas Gupta
Well, I'm glad you like it. We try to do our best here. John, in your own words, can you tell us about your real estate journey?
0:01:58 - John Tripolsky
Sure, sure. Well, if you can't hear in the background, I'm sure if you listen carefully here a bunch of nail guns. So it's kind of the story of my life, right, like construction never stops, whether it's a marketing, brand building, etc. So even this, you know, focusing a little bit more on on REI, so on the real estate side of things, I can even look back. I'm trying to. You know, I think about this all the time exactly what year this was and I can never remember because I had kind of a We'll see a phase in my professional career where life was just kind of spinning and spinning and going through the motions as I was filled in my agency.
So I graduated down in Charleston, south Carolina, so from colleges Charleston, and was lucky enough to to get into a condo right downtown. You know, here I am, you know the the entrepreneur fresh out of college which, by the way, I went to college full-time for Maybe we'll have to edit this part out about nine years I kept changing my major. So I mean I decided at one point, as we do anything from economics to Business management, I actually went to school originally for upper-ingent performance, so to build race card cylinder heads and intake manifolds. Being from Detroit, you know, thought there was a Fantastic way to go until you realize that there's not a lot of money in it Unless you're really really good or well-funded. Let's give it a head a little bit. Got into that condo writing downtown Charleston when, kind of a brown if anybody's familiar with it, you know Michigan, I can do the hand people are watching this. Charleston you kind of do do one of these as a peninsula. It's right towards the bridge, not the, not the best of areas we should say, but a really cool, really modern structure. That was there and I learned a lot in one Really condensed time period. Right, so I identified the property. So this was great. You know, it's awesome. I'm gonna be right downtown, it's gonna be fantastic.
At the time I was living in Mount Pleasant, south Carolina, which is right outside of Charleston, on the other side of the bridge, got into this car should say not gonna do it, yet Identified it, decided I wanted it. I had no idea how to get a mortgage, not, not a clue. You know everybody says, oh, this is good, it's gonna be a heck of a process. How are you gonna show income? Well, I have that. My aspirations are up here you know, of course I'm gonna make this much. Well, they don't care how much you make, right? So here I am fresh. I mean, we're talking fresh, odd. I college like a couple weeks and here I am pulling my credit report, doing everything I can do.
Lo and behold, it was owner finance the guy really didn't care not to give out any names he was. He had a lot of money Well into the seven, that eight figures, possibly nines, and he just needed off this property. So I got really skewed, I got into that thing. Oh, this is, why is everybody so worried about this right, this, the?
0:04:30 - Vikas Gupta
easiest process. No wait, John, Can I can actually interrupt your story. I'm really curious. Oh, please do so straight out of straight out of college. How did you even know owner financed was a thing I didn't until?
0:04:43 - John Tripolsky
he told me. Actually, you know, what's funny is you say that straight out of straight out of college. It's like the straight out of Compton shirts, right, like I feel like I need to make one of those. I had no clue. So here I am, up my my real estate agent was actually in a it wasn't a B&I group, the business networking international, I think, is what it goes by. But she was in a networking group of mine and I basically went to her said, hey, I want this place, what I need to do, right. And she I think she very politely was telling me like Good luck, buddy, it's not gonna happen, but okay, we'll go through this together, kind of again, kind of skipping forward a little bit. I've tried this a very long story that I'm trying to condense down and it rolls into some other stuff which please interrupt me at any time because it gets kind of wild. So, yeah, got owner financed, I think I gave him ten thousand dollars down, without going into too much detail. It was, you know, maybe the property I think was like 200 grand, so nothing crazy. I had no idea what HOA fees were. I had no idea about anything. I really didn't even know. I mean, I knew he had to pay property taxes, but I didn't know how it worked right. So if I, if I remember this part right, I couldn't have gotten finance because the condo, the association, was in some litigation, so that was a whole nother thing. But, lo and behold, ended up getting it.
So I moved into this place and, having a little bit of a construction background and a handy background, I immediately want to start doing renovations to it. Really didn't need them, I just wanted to put my own spin on it, so started, you know, putting up some stone walls and this basically was a concrete structure. You know, it's kind of the column, a maker, break you either. Make it, you break it apart, put it together, lived in the thing for about two months, three months tops and then came back to Michigan. I forgot what the reason was for. But just, you know, for a week or two, and everybody was talking about this thing called Airbnb, I'm like, well, what in the world is Airbnb like? Is it air? Like it's our bed and breakfast, and that you know the Planned like I don't know, I have no idea. So I ended up writing a little We'll call it a BS description, no photos, put it on there thinking, oh cool, you know, maybe I'll get some stuff, I'd say.
The day I got on the road to drive back to Michigan, it went crazy and and literally booked up the entire time I was gone, I think, from like three or four guests. And Then I ran into the other problem. Right, it's like great. Now I got people coming in. I don't even know if this is legit company. Maybe they're gonna pay me for this, I don't know, but we're gonna find out. Then I realized that there's this thing called housekeeping, that I was kind of lacking and I couldn't do that from a thousand miles away. So, anyways, you kind of, you kind of learn how it goes, but looking forward which was really cool about this, you know, from from an investor side of things. So if I were ever gonna write a book about this story, I'd call it like the accidental, accidental landlord. It actually ended up funding us hiring our first employee for a marketing agency.
I basically moved out of that condo and one got an apartment somewhere right down the street and then I kind of took over a little bit of the, you know, did a little self-management on my side, which, again, airbnb was not really a thing, even in Charleston at that time. I shouldn't say this too much, going into detail, but I even I knew that I shouldn't have been doing it because they stopped. But three months after it they basically put a halt on you know absolutely no short-term rentals in that condo. But they didn't even really know what short-term rentals were at that time. So it was kind of a gray area, I think. So I'll, you know, I'll put myself on the, on the the shopping block a little bit, me being a Smarty pants or something else you might want to call me.
We ended up making so much money with this place that I basically wrote the HOA and said you know, okay, you haven't allocated a specific fine to this, can I just prepay it? That was the worst thing I could have ever told an HOA, let's be honest. So they sent me a nice little letter and I ignored it for a little while and then put a long-term tenant in it and eventually sold it and, you know, built somewhere else. But that's how I got to do it. So, so sorry to kind of cram everything at you. They're really fast, but it just goes to show right, like technology in the real estate space it's.
It wasn't always a thing right. So now that it came to the forefront, it was great. Now, obviously, your B&B is completely. I mean, they've gone through a rebrand since then once, if not twice, but it was very interesting to see how somebody could get into that with no intentions of actually. I mean, I thought I was gonna live in this condo forever. I thought it was gonna be this great place and of course you know, being a young chap, I would a great place to raise a family. Right and 850 square feet, a total bachelor bad. Every woman would want to move in there with a child.
That be the envy of the block, but you know I enjoy it. It's almost like one of the best stories of my life that I don't have any regrets with right, like I don't. I don't regret anything, mom, maybe writing the letter to the HLA, let's be honest. But Everything else I think was was pretty good.
0:09:26 - Vikas Gupta
So that's how I, how I cut my teeth and that space a little bit, okay and well, that's quite the story, quite the start to your real estate journey and fast forwarding to today. What does your, which is your portfolio, look like?
0:09:41 - John Tripolsky
Sure, sure. So actually, right now I right now I don't hold any properties, but we're actually on our primary here. So we live in a downtown area, so we live in a it's a right side of my Ann Arbor, as you had mentioned there. So we're actually in the process of building a large garage on our primary here and doing an adu above it. So with that we're gonna, you know, pop a long-term in it. We can't do short terms here in town, even with a permit for adus. Obviously it has to be your, your home, or I mean I could get creative again and poke the bear and build a breezeway Over to it or something, but I don't want to get too crazy. I put I put the poking the bear days behind me a little bit, or I like to think so. I'll play by the rules for for one time. But yeah, we have even speaking with my wife. I mean it's, it's one of our I should say it this way short-term goals to get more into short terms. I really enjoyed it. I mean to be totally honest with you. It's.
We had a not so great experience with a long-term tenant when we sold that condo in Charleston, just about six miles down the road. We ended up doing a new construction, lived in that for about a year and then ended up moving back to Michigan and we put on Airbnb. Same deal with that. It was great, but it became kind of a managerial nightmare, just being so far away and not having good resources in town at the time. With the short-term side, put a long-term in it, we had an issue with our property management company. They say they, they vetted this gentleman. They I don't know at what happy hour they, they vetted this guy because it was not a good situation.
I look forward to it again. I just like looks for a short with that. When I I enjoyed the short-term side more. I really enjoy from a social aspect, just interacting with the guests myself. Honestly, it's there's still probably Six or ten of them that I still talk to that were guests when we had that condo. I'm some really really cool individuals too, which which was nice, right, so I Enjoyed it. So hopefully adding more of those. My wife has to keep me in line though, right, she likes to be the design.
0:11:38 - Vikas Gupta
John, if you don't mind, can you go into more detail on that long-term tenant and what went wrong? And then, what would you do differently Now if you could do it again?
0:11:48 - John Tripolsky
the biggest thing I would do differently is probably not build that house. But in all honesty, I can't really blame the, the property management company, entirely for it. It's just it was kind of a loophole, I guess. As this will, we'll refer to it as this couple. Okay, so basically what it what it came to be after they were there for about a year or maybe 14 months ish, and what happened is the primary on the application was this gentleman, but I won't tell you where it worked or anything. It was a large tech firm but she travels around the around the world but it ended up being he was he was on the application, very well qualified on paper his Significant other. They had a child together. They weren't married, they weren't engaged, nothing. It ended up being that he he said it was for both of them moving to Charleston. It ended up being just for her and the child and he never moved in it. He still lived up, I think, in Connecticut, new Hampshire, somewhere up there. I'm kind of carried on his world, though I've talked to him a couple times. They were interested in buying the property.
When we ended up listing it it kind of sounded like he just wanted to appease her and get her out of his state, because I think they were living in close proximity together. So basically where where the big issues were with that, it's not like they destroyed the property or you know they they did anything malicious to it, it was more just what they wouldn't do. So he obviously was was the main Senior tour on that lease and when it came time to, you know, check in, I believe, the property management company every six or eight months. He was in the contract that they would, you know, could physically go into the property Just check on things, see how things are, if anything's it needed repair. Maybe the tenant didn't realize they would then report back to us and we would move forward with it. She wouldn't let him in, even with a week's notice. She said absolutely not. I won't say necessarily that she had mental health, health issues, but it kind of seemed like it was that way. It just became a giant thing. Borderline almost had to get a sheriff's office involved just access the property just to list it and etc. So they ended up not moving out on time. So they're kind of squatting a little bit past their lease.
When we originally wanted to sell this property I Was getting some very important documents We'll leave it at that mailed to that property and she either destroyed him or did something with them because I never got them. And this was during the time period that I was moving back to Michigan, so naturally, you know, mail forwarding doesn't catch everything. So it was that kind of rubbed me the wrong way, which, by the way, I didn't realize until we got to the closing table, kind of let the let the mind wander a little bit with what that means. But overall it was really just, it was a bad situation and and again I kind of I say I can't exactly blame the property management company because it would be kind of easy to skate around that right, like if, if you knew what you wanted to do is, as a on a lease, moving into it, you could kind of Beat around the bush per se, so as he seemed like he kind of had his act together, at least in talking with them, or he was really really good at BSing me, let's be totally honest when I was talking to him about listing that property. But again, overall you can't really can't really do a whole lot with it. So, if you know, kind of answer your question and go full circle. If I honestly, if I ever Did want to do anything differently, I can't say it was one thing specifically. It kind of comes with the territory right, especially when you live a thousand miles away. It's not like I can just drive by and you know see if somebody is living in that space.
You know, I had a similar situation in commercial. We had an office that we sublet out and then there was a forget the actual term but basically assigning it but staying on a lease in a commercial, but that's a whole, the whole nother game where they never moved in through during cove it. And you know, people aren't the most honest sometimes. So I like to think people are for the most part, but Not every one of them are. I enjoyed it again kind of the it was. It was a different story too with that one because we couldn't. We could short-term that property but they were also in the process because it was very large community I think there was 2600 homes in that in that community and they were in the process of really updating their HOA. As far as for, like you know, the not straight up banning short terms, but they obviously didn't want them.
So it's not like I could have gone back to short-term knowing all that, going through that experience, how would you do it differently next time?
0:16:11 - John Tripolsky
convince my wife to stay in the house that we built. Start my own property management company. Honestly, to answer that I don't know a hundred percent exactly what I would do again, kind of that Maybe be more involved if a property management company would let you be potentially involved with vetting some tenants, but it kind of comes with the territory, right. That's why you're really paying them as to is to do the job that you think they would. But Maybe there there's things and again, I've only worked with one, one pm. I haven't worked with a slew of them over the years, but maybe look at the Really the agreement in place with them, right.
So if there's something where somebody's on the lease doesn't move into it, maybe there's something legality reasons you know to move forward. I mean you don't want to evict somebody, just not for moving in specifically. But they're nothing good came of that right, like you kind of shoving her away. If that really was the case, I mean it's a very unique situation. I hope everything is good with both of them now. I haven't talked to him in a couple years but there's not a whole lot. I mean, again, in my mind you could do to avoid that, right, unless I'm missing Something. I've gotten over the the very sour part where, like, my blood pressure just doesn't, you know, blow the lid off the pot Every time I think about it. I but yeah, I don't know exactly what it would be. It's kind of a cop-out answer for that question, but I'm not exactly sure.
0:17:35 - Vikas Gupta
You have a not great long-term tenant experience. You seem to really like the short-term rentals and have great experience there, but you're going to put a long-term in your ADU. Is that purely for regulatory reasons? If you could do it a different way, would you stick to short terms?
0:17:53 - John Tripolsky
I would. I think the short-term side and again, it's all based on locale. So exactly where you are. To be honest, even if we didn't put a long-term tenant in there, we have plans for that space. Again, we'll most likely do that. It's a perfect space for it. Being in a downtown area. We have a wedding venue across the street who brings a lot of people to town, so a short-term would be great for that.
But we can't actually do that. So really, if I'm forecasting a couple years out, michigan is a. Our seasons are great up here, except for winter. I'm not a winter person, so chiseling icicles off my beard is not exactly what I would call a hobby of mine. Of course, to do it sometimes. But looking at something on the west side of the state, I would love to get into build up a portfolio, maybe a couple of years. Nothing grand, I mean, we're not talking million-dollar properties or anything, but we have so many lakes and just not down the Great Lakes. We have so many smaller lakes and chains all over the state. I think it'd be fantastic to get into that and we would self-manage those.
Again, it's having a construction background and that kind of being my hobby. I really enjoy it and I think that would kind of alleviate the stress of having to find somebody to fix the problems. If, say, we have somebody in there for a week or over the holidays and they message oh, we have a plumbing issue, it's not like I'm frantically freaking out trying to find a contractor to get in there to fix it. Really it would just be me. Obviously, time is important. Can't really buy too much of it. Going to take care of that and again, while I'm there, in my mind just kind of doing an analysis of the property as a whole and just maintaining it, so keeping it in good shape.
I mean I've stayed in a few Airbnb's specifically that weren't so great maintained. You can tell that it was just kind of a set and forget it. I sound like an old man when I refer to the easy-bake oven I think kids used to have, but I think that's the way sometimes people approach short terms, which is not the best. Unless you have all those really good resources at your disposal, like we'll definitely outsource all of our maintenance. So I mean when I say maintenance, all of our housekeeping, because I really don't want to be flipping linens from two hours away after a weekend stay. I think my wife and my daughter would absolutely kill me for that. But again, kind of the construction and physical maintenance side, I think is something we look forward to handling. Being a material participation, to say the least, will be not an issue.
0:20:20 - Vikas Gupta
Other than what you just mentioned, being able to do your own maintenance. How else have you found? Your construction background and or your GC license help you from a real estate perspective? Does it help you better identify properties? Does it help you find some things that inspectors don't Tell us? Some more about what that background gives to you?
0:20:44 - John Tripolsky
Excellent question. So it's kind of a little back story too. So my primary residence was built in the 1850s, so that's really how I got more of we'll call it an appreciation. It's almost like you know, everybody sees us doing this, doing all this work on our home here, and they say, oh well, it must be a labor of love. It depends what day you ask me. Usually it's just labor. The love part has, you know, kind of whittled away a little bit, except for when I get an invite to my wife's Pinterest board that she's created. I know I'm losing 10 days of free time because she has an idea.
But as far as for the costs, like you asked, you know, does it help identify properties? Yes, absolutely, especially looking at ones that are in certain price points that need work. I'm not really. I don't have a whole lot of interest right now, I would say, in fix and flips, just because it's a, it's a time thing for me, right, like it's. I have a lot going on, obviously day, job, family, my own home. It's not something I'd really want to commit to so much, but it's also, I would say, really a blessing and a curse, because you do look at it as saying, oh, wow. Okay, this is say you have property A, b and C. You're looking at three different options. They all need different things done. I mean you could even go in and buy a multi-million dollar home and there likely is some stuff you either needs repair or you would want to change right. So why I say it's a blessing and a curse is it's it's a huge benefit because you can identify some of the things that may be needed and also prioritize them.
But then on the flip side too, I consider myself to be more of an optimist than a pessimist in a sense, where I could absolutely get myself into trouble because I might look at one and say, oh, we can, we can do all that. You know, when it's a cost savings because we do it ourselves, like take, take an old home, for example you really don't know exactly what you're getting into until you start ripping all the walls down right and you're looking at the bones. Then you could. You could either strike gold or you can get a basically a bag of coal when there's more issues and you know you can't really cover up a whole lot or you shut it. That's a whole nother ethics conversation, right, like you could absolutely put band-aids on things and pretend you didn't see it, but you know it all comes to bite you in the butt in the long run. So but yes, identifying property is huge from a cost savings perspective, absolutely, even around here.
You know I'm at my primary now. It's a lot of the work we do. It's either. I have a very small group of about three guys that will come and do a lot of stuff. I mean I could absolutely do framing. I tend to stay away from plumbing and electrical myself and I always have just because I don't want to flood my house or burn it to the ground. So I let somebody else deal with those problems. But having that small group of guys that I can always rely on that are super honest with stuff is huge. I think that's a huge value. Now, if we pick up our projects and move them two hours away, it's that'll be some challenges right.
So we'll have to either find a different group of guys or the cost is obviously going to go up tremendously because there's trouble.
0:23:34 - Brandon Hall
Let's talk about working with contractors a little bit. You're GC and your own projects and everything. I presume you work with a lot of contractors on various various points of the project. So what are some tips for working with contractors? Getting pricing make sure that you're not getting fleeced when that you're working with somebody reputable that's going to produce good quality and that they're not like crushing you on price. Talk to us about your experience there and what a you know if somebody hasn't done this before, but they're buying a rental and they're going to be doing a big rehab project. What are some things that they should be looking out for when working with contractors?
0:24:11 - John Tripolsky
Great question, great question. So there's one of them. I always tell people and this may seem kind of weird or some people may feel differently about this is anything to do with masonry. So in Michigan we have a lot of brick, a lot of stone. This home, for example, is built on a. We had a Michigan basement before we moved in. There was no concrete floor, crawl spaces. All the walls are literally all field stones. You know they're about 12, 14 inches.
There could be tons of problems with that. Where you get into bigger problems is if you actually and we won't say, go with the lowest bid on something. But if somebody gets in there and really starts messing around with that whether it be a stone fireplace on an exterior or a stone foundation it could absolutely cause more problems than it's worth. And not just by them doing work but not telling you that they see something that could be a potential issue and it may not even be. They're not telling you because they don't want you to know. They might not know what to look for, maybe a thing. So that's just one example.
One big suggestion I've actually given this on a lot of Facebook groups that I'm a part of is you know, people go out and say, oh, I really like this guy. This is the quote he gave me. Even if you love that guy, you love the price, you love his references, do yourself a favor and get two or three calls. I never say, oh, absolutely, just get three. And you know, don't get anything less. But even if you know who you're going to go with, you at least feel more comfortable on that decision than not talking to anybody else. I mean, I have these guys that we work with and I still tell them I say, listen, you know, I kind of blame my wife sometimes, to be honest. I'm like, oh, you know, my wife wants me to talk to these other two guys, but it's, it's me mentally just going out and talking to more of them and just seeing where their expertise is.
And if you're very open and honest with people and I don't mean crass and mean in a sense, just telling them say, listen, you know, I have a budget for this. This is what I mean. You if whatever, somebody's comfortable in conversation, right? So hey, I budget, I've allocated X for this. Can we get it done in this, or you know? Oh, you know, this is what I'm thinking on. How much is it going to cost me? It's all about the relationship. I mean. Some people say, oh well, I would never tell them how much I want to spend on something at a time, because then they're going to max it out. Well, if you tell me of $10,000 spent on a project, they tell you it's going to be $9,999. They're probably just trying to max out your budget. I mean, that's just my, my gut reaction to it.
But talk to people, talk to neighbors, talk to other people have done it in their in the real estate community. I will say this the more active I've been on these Facebook groups and just in conversations and at conferences with people they love sharing information Like I have not met one that's, you know, kind of throwing up their arms saying, no, go, get away from me. I don't want to tell you anything about what I do. It's absolutely fantastic and it's, I think the whole community is a whole is great. And I mean you could almost go on some of these home builder forums and groups and say, hey, I'm located in, you know, detroit, michigan, I'm looking for a masonry guy or I'm looking for an electrician, who can you recommend? And you'll probably get tons and tons of information on it. So it's, there's no one answer I would give. Somebody says this is the one question you need to ask, to vet them if they're the best fit for you or not. But really just feeling them out, I can give one one personal example that the most recent one is we're having a again, this is an older home balloon construction If anybody's familiar with that and basically what it is. If you're not, is you know?
You build a new home now and they basically build a floor by floor. They don't build two stories at one time. So if you imagine your studs in your wall going up you know one story stopping completely, then really in a sense creating a box for that first story and then building the second floor upstairs, which is usually like a master suite or a second floor. That's the new way of doing things. Back in the day they would basically throw up studs. You know vertical studs that are two stories high. So in this house there's nothing stopping the first and the second story. So now we call it putting in a fire block. So it's basically for fire code. If there were a fire to start in your wall, it's not immediately going to crawl up the first story. Go to the second, go all the way to attic and burn your house down really fast.
The problem with that is when it came to insulation and again, our house is very unique that we're ripping down the siding and we're having to insulate from the outside in, not the inside out, which would normally be the case I had no idea what to do in that situation. As far as for insulation goes like back in the day they use a product called cellulose, basically recycled paper product. They had some fire retardants in there and you blow it into your wall. It's basically like paper maché. But now, going from the outside in, we need to do something different. So we're doing something called injection foam. So it's like a soft. It's basically your spray foam, but they don't necessarily spray it in it's. It's much softer. It's more water based.
I didn't even know this existed, to be honest with you. I messaged somebody on a group. I said hey, you know, our house is made 1800s. I'm going from the inside out, we're removing all the cellulose, I'm putting sheathing up which is basically plywood, and then new siding and kind of walk through the process. I probably had 10 people that made recommendations on this and it was great just to hear people's feedback, their experiences, their pros and their cons with each one of them, and then recommendations started flowing in. They always asked well, where you located at you know what? Are you looking for? A DIY option? Are you looking to have it done? And before you know it, here I am taking my own advice. In some situation is talking to two or three companies where there there's two main ones here in Michigan that we spoke to and I was very certain I was going to go with the first one. Like the sales guy was great, very informational Ended up going with the second one. So my me blaming my wife kind of came back to bite me in the bottom a little bit. It ended up working better just because they they had other offerings right so, even though the price was the same, this is something.
If you ever go to insulate a home, especially in the north, have them do. People call it different things, but it's basically a thermal read and it will even down south Very hot. It's the same thing. If you ever do installation in a home, even if you have a tenant in these structures, consider it to just not for a cost savings for the tenant, but wear and tear on your HVAC system is just have, have them do with what's called the thermal read. So basically, what it is is I'll insulate, or if you insulate, you have it done. And then they basically go and they scan your house and look for air leaks. You know if your, if your house is leaking air or you know it's letting hot air in or cold air out, it's well worth the money couple hundred bucks. It's well worth it. So, and that was something that I I knew could be done, but, to be honest, I've never done it and you'd be surprised what you find out, that your contractors.
0:30:40 - Vikas Gupta
So I can say yeah, just a quick tip for the audience. If you are going to look into doing a thermal scan, check out your local utility and see if they have any programs. At least where I live, the local utility will send someone out and do it for free as part of their energy saving initiatives. You're a lucky man.
0:31:05 - John Tripolsky
Lucky man. No, that's great advice, and even not just for that. But there's a lot of credits out there. I mean pretty much every utility company now offers something, right, oh yeah?
0:31:17 - Vikas Gupta
Yeah, we've taken heavy advantage of that in our new home.
0:31:21 - John Tripolsky
What is it now? That the federal credits $1,200 a year, or $15?, $15,000? I forgot what it is, but I feel like I maxed that out like the weekend of the first of the year and then I just cry about it.
0:31:33 - Brandon Hall
I actually don't know that off the top of my head. I hire a bunch of really smart people that do this.
0:31:38 - John Tripolsky
That's the best way to do it. I think it's either $1,200 or $1,500 if it's changed, but yeah, there's a lot of incentives out there for sure.
0:31:46 - Vikas Gupta
Well, now that we're talking about credits, maybe that's a good segue into tax. Before I ask you about what you're doing with the Teaching Tax Foundation, I do want to come back to something you said earlier. You said you made a reference to material participation. I think that's come up on previous episodes as well. Brandon, keep me honest here, but for those who may need a refresher or those who aren't familiar, can you, John, or maybe Brandon, I can tag you in here go into a little bit more about what that means and what benefits it gives you?
0:32:20 - John Tripolsky
For sure, I'll let the CPA give that answer.
0:32:25 - Brandon Hall
Yes, yeah. So when you invest in real estate, real estate is considered a passive activity. The problem is that losses from passive activities cannot offset income from non-passive activities. So if real estate is passive and creates a loss, you cannot use that loss to offset non-passive activities. But my W-2 income, my business income, that's all non-passive. So essentially, the passive activity loss rules that were implemented back in 1986 prevent real estate investors from using losses from their rentals, which are passive, to offset their earned income, which is non-passive.
One of the factors to determining if something is passive or non-passive is whether or not you materially participated in the activity. When you invest in rental real estate, with the exception of short-term rentals, you have to qualify as a real estate professional and also materially participate in the activity in order to make it a non-passive activity. So a lot of landlords that have full-time jobs and a lot that even have part-time jobs cannot qualify as a real estate professional, because one of the tests for real estate professional status work more in real estate than you do anywhere else. So if I work 2,000 hours a year at my day job, I might work an additional 2,001 hours in real estate for a total of 4,001 working hours during the year as possible. But you have a significant uphill battle to climb in convincing the IRS and then the tax court and you won't. Many people have tried it. Nobody's been able to do that yet. Real estate professional status kicks out a lot of people with full-time jobs. But even if you could qualify as a real estate professional, you still have to show that you materially participate in the asset and there's quantitative tests to this. There's a number of hours that you have to work in order to meet these tests and qualify. But if you can, then think about the benefits, if I've got $300,000 of income and my spouse is a real estate professional and materially participates in my real estate portfolio and we do cost-ex-studies and use bonus depreciation and that creates a tax loss of I don't know $150,000, that's a $150,000 non-passive tax loss because my wife's a real estate professional and materially participates in my rental portfolio, which means that I can use that $150,000 to offset my 300K of W2 income or day job income. So it's really powerful.
But what we see in our practice? We service about 800 real estate investors across the United States. We provide them with tax planning and preparation services as well as outsourced accounting services. What we often see is people get together in real estate groups and John, you kind of mentioned it everybody loves to share information. Real estate investors are more entrepreneurial, they're more risk-tolerant. Then I would say the average American is.
So you go and you start looking for groups of like-minded people and you find them, and then you start taking bigger risks. Then you hear somebody say well, my CPA qualified me as a real estate professional this year. And then everybody goes well, I'm going to be a real estate professional too. But it just doesn't work like that. So we often at our firm have to battle the FOMO aspect of well, one of the physicians in the hospital, their CPAs allow them to qualify as a real estate professional. How much do they work? Oh, like 2,500 hours a year. It's like they're not a real estate professional. Well, their CPA is allowing them. Well, it's going to be a real day, a really sad and dark day, when the IRS comes knocking for those people.
So you really, the problem with the passive activity loss rules is that they are so complex.
You really need to make sure that you're working with an accountant that understands them, and there's many out there.
This is not meant to be an ad for my services by any means.
There are many great talented tax professionals, eas, cpas out there that can help you through this.
But you have to learn the fundamentals of this stuff so that you can kind of quiz your accountant to figure out how much they know. You do not want to work with somebody that doesn't know this stuff kind of on the top off the top of their head. I mean it's complex, but if you're working in it every single day it's not that complex. So just be really careful, because you're the one that signs your tax return and you're the one that puts your own name or your own butt on the line, and this is one of those things where you can't let emotions override logical decision making. So you really got to be impartial to getting all these wonderful tax benefits, especially if you're part of these groups that you know it's like a underground competition for whoever gets the most tax write offs. But that's not what this game is about. I promise and I say that as a tax pro that loves to get tax write offs for people this game is not about getting the maximum tax write offs.
0:37:31 - John Tripolsky
Yeah, brad, you say that. I'm kind of giggling over here, because it probably happens at least once I'd say once every two to three weeks where that exact conversation I see it spark up right, where it's like, oh well, I'm reps. It's like, no, how, how is that possible? Like like using the example of a doctor, right, it's okay. Unless you're a surgeon, that's maybe, and not nothing against surgeons, but if you have a really good one that only wants to work a couple hours a week, it's a completely different story. But yeah, it always starts with one person and then it's just it kind of spirals out of control, right, and then it turns into people kind of bickering.
0:38:07 - Brandon Hall
But, yeah, we typically see this issue with surgeons, with business owners and with salespeople because those are three and sometimes with attorneys, but those are three kind of core I'll call it career paths that are highly competitive, highly results oriented, and when you hear of somebody else doing something, you want to go try that thing too. So you get in these groups of like minded people and you're like, oh yeah, I can totally do that. And it's like, well, wait a second. First off, are they even correct? Second off, can you really do that, even if they are correct? And that's what we got to try to figure out. But, yeah, it's. We talk a lot of people off the ledge. They're often sometimes disappointed when they learn that they can't qualify, but I think, typically grateful that we're setting them up for success because I mean, I wrote an article is like a cash 12,000 word article.
It's like you can download it on our website, the real estate CPAcom, and I think it's like a 30 page ebook if you download it, but it's your ultimate guide to qualifying as a real estate professional. I wrote that back in 2020. And since then I have helped on numerous audits related to real estate professional status. People read the guide and they contact me and they say can you please help me with this IRS audit? And 99 out of 10, 95% of them I don't know, I haven't like tracked this, but it seems like almost every single one the taxpayer loses because they did this exact same thing.
They got into not like necessarily groups, but just areas that gave bad information. They started claiming this thing. You know, it's like the TurboTax thing oh, I entered this deduction and now my refund went green. That's a fun game. Let's continue that, right. It's like these are not legitimate tax strategies. These are not legitimate deductions. These are not. You really gotta be careful here, because the IRS does audit the heck out of this stuff and you have to be prepared to substantiate the position that you're claiming. And a lot of people they're not prepared. They're not prepared because they don't do the necessary documentation throughout the year or they're just basing the deduction off bad information.
Most of the people that I have helped with these IRS audits that lose. They are claiming research time and education time as real estate. Professional status time and we're very big components of that doesn't count for a number of reasons, but there's plenty of tax court cases to support that position, but they still claim it and then they lose and then they have to pay back taxes and penalties and interest and it's a nightmare. It can be very, very expensive. Those penalties can be huge if you're not careful. It's not like a 5% penalty, I mean. These things can get 20, 40%. It can be massive. So and you're talking about by the time that you are done with the audit you're like four to five years past when you should have paid the taxes right. So now you've got interest for four to five years and it can be pretty extensive.
0:41:10 - John Tripolsky
And even though some people aren't looking at it as a badge of honor, right? Like, oh, I qualify for RepStat, it's not saying go get a tattoo on your arm that says RepStat. It's because it's year over year. It's not a evergreen label per se, right?
0:41:25 - Brandon Hall
Yeah, well, that's that competitive nature that I was sort of talking about. Calling it a badge of honor is a very good way to phrase it, because that's what we see. I mean, people just get in these real estate groups online in person and they hear one person doing it and they're like, oh well, I want to be in that club too, that cool club of being a real estate professional. It's like, dude, you work 2,200 hours a year. Well, what if I don't tell the IRS about that? And like, yeah, they're going to find out. Man, these are not dumb people that are coming after you and looking through your stuff. I mean, these are very sophisticated accountants, well-trained accountants. It's not the people where you call up the random helpline and they don't know how to work the computer. I mean, these guys know what they're doing. So you just you got to be careful, absolutely absolutely All right.
0:42:15 - Vikas Gupta
Well, thank you both. Big warning, cautionary tale to the audience there Like good advice.
0:42:22 - John Tripolsky
Brandon, maybe you guys should get some gold chains that say like a rep status and just like pass them out every year and then you take them back, take them back to following. You have like an award ceremony, right, like you just got to give these things out. That would be hilarious. If you do that, I want an invite. Let's just leave it that way. I want to be on the live stream Sounds good Sounds good Well, thanks, john.
0:42:47 - Vikas Gupta
I think we are coming to the end of our time here. I will, at the end, come back to teaching tax foundation, but before we do that, let's go into our three closing questions. Are you ready?
0:43:00 - John Tripolsky
Absolutely hit me. I have no idea what these are, too. For anybody who's listening, it's not like they'd prep me for these. I'm usually on the other end of this doing our podcast, so this should be interesting.
0:43:13 - Vikas Gupta
Question number one what is your favorite book? And it doesn't have to be real estate related.
0:43:18 - John Tripolsky
Ooh, I'm going to go back to the first one that. So this sounds awful to say, but I've actually only read one book, cover to cover, multiple times, and it was Outliers Great book. I don't know what it was about that, but I just kept going back and reading it to the point that I remember the first or second time I read it I just started highlighting a lot of stuff. I was still in business school at the time and I wrote on it so much that I wanted to go read it for enjoyment and I just had too much crap on it so I had to go get another copy. So I'm sure there's a lot better books out there in the world, but that one just sticks with me as something I can always go to.
0:43:48 - Vikas Gupta
Is that the Gladwell 10,000 hours, one Exactly.
0:43:52 - John Tripolsky
It's somewhere. I think it's up there for those that are watching up on my bookshelf somewhere, but I'm not sure. My wife had probably taken over all the real estate up there.
0:44:01 - Vikas Gupta
Great, good, solid. I think I read that one too. It's a solid book recommendation. Question number two when you invest in real estate, from your perspective, what is more important, appreciation or cash flow?
0:44:14 - John Tripolsky
Ooh, that's a good one. 50-50. I'd say probably cash flow. But if you ask me tomorrow, it might be different. To be honest with you, and it's really just, you look at it from a perspective too of like, how long are you gonna hold this for? You know, sure, everything in theory will appreciate, but if it's not cash flowing, then great. I mean, it is what it is. You're basically holding a cinder block, hoping that you bought it for a dollar and you sell it for a dollar 50 later. But what's it doing in the meantime? Give us holding costs involved, et cetera.
0:44:47 - Vikas Gupta
Great. Another vote for cash flow. And our last closing question any other pieces of advice that you want to leave our audience with that we didn't get a chance to touch on?
0:44:58 - John Tripolsky
Absolutely, absolutely so. And again, I did not know these questions beforehand. So I mean, find good mentors. I mean really really find people that are in your circle. You don't have to agree with everybody all the time. It's actually better that you don't see different points of view, right? I mean you think about business partners, networking groups, conferences or an array of stuff that's out there. Just find people and not saying latch onto them like a leech and just try to take everything you can. It's incredible.
I was actually talking to Chris Bakura who founded Teaching Tax Flow and the Monthly Recurring Revenue Institute, which we can go into detail at a later time if you wish. But I mean I've known Chris for 22, 23 years where he was just getting into his private practice, where I couldn't even tell you how many times and he's 10 years older than me just the advice that I've gotten from him as a friend over all these years just getting into business things not to do, what to do. I mean obviously I've been skewed on the tax side because I've always had a really great tax guy, you know, cpa in a private practice, you know on my side. But just hearing that advice and then again kind of going to these conferences and finding people that you can learn from. And then, when you're on the other side of the fence, once you are more successful, think about the opportunities that you can help others too, not just moving on and throwing your hands up and say, yes, I won teach. Have the opportunity to teach to people.
I still love going around to universities. For about two years, I traveled around the country from Villanova, ucla, penn State, western Carolina, just talking to classes, and half the time it was on my own dime and my own time just to do it. But I always feel like I learned something from all these students, not just telling them what to do or how to succeed. It's a two-way street, to be honest.
0:46:49 - Vikas Gupta
Great, well, thank you so much, John. This has been a fantastic episode. Before we let you go, though, if you could, in 30 seconds, tell us about what you're up to at the teaching tax flow and the monthly recurring revenues?
0:47:04 - John Tripolsky
Absolutely so two separate entities. Teaching tax flow is something we've been working on for about a year and a half-ish. Think about that as the direct-to-consumer approach, so that basically it's an online platform based on education in the tax world. So really the goal of that is to legally and ethically reduce the taxes you pay over your lifetime, and it's just providing the resources. Of course, our podcast is a component of that. We're gonna be start doing webinars. We're actually gonna release a product soon for tax planning, so that's a different piece. And then the monthly recurring revenue institute, mri a lot of letters in there. The Mr R show, so which is the MRR part of it is our podcast. That's more of the two tax pros, so it speaks directly to tax pros. Again, slew of resources that are built in that. I would say.
The core of that organization is really the mastermind groups, so we opened up our applications to the masterminds, probably about three weeks ago or so. We're just at the tax posion in San Antonio, texas, last week. That's the national conference with NATP. Great feedback from that, met a lot of great people and yeah, we look forward to those masterminds with the other pros and really we just split it between. It's kind of a fork in the road. With that you have your tax pros that have been in it five years or less, which we refer to as the launch program, and then the transform program is those that have been in the industry for five years or more. So we look forward to that. So that's what we've teşekkürated.
0:48:26 - Vikas Gupta
Read your comments. That's what we have on you at NURA Challenge today.
0:48:32 - John Tripolsky
Something in common something in common which all of you I've heard were a. Let's go over my email notes what's new? Today? We're working on a mobile app component of it as well. It's probably your best place or wherever you listen to podcasts. Go on and just search Teaching Tax Flow and Teaching Tax Flow. The podcast should come up on there. I think we're rolling up on episode 43 next week, as we're in here in August.
So some great guests we've had on there and, as always, we love inviting people to our Facebook group, which is just Defeating Taxes. You could search that on Facebook or just go to defeatingtaxescom. It'll send you straight there. Great place. If you have any questions in there, shoot us a message and we love it. Have fun with it, though I mean don't feel intimidated by the group. Just the more interesting the questions, the better. I mean, clearly, my crazy tenant and Airbnb stories. It can't get any weirder than that. So if it does get weirder than that, I challenge everybody Post it on there and we'll just have Brandon, just make a different gold chain for us and we'll start a whole other award ceremony for the weirdest REI stories.
0:49:47 - Vikas Gupta
Great well, thanks again, John, Absolutely, guys. Thank you so much for having me have a great time.
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