Saving Real Estate Investors Millions of Dollars with Ryan Bakke

Quick Summary

It features Ryan Bakke, a CPA and real estate investor, on the Short-Term Rental Pros podcast. It focuses on tax-saving strategies for real estate investors, investment approaches, and insights into leveraging the tax code to maximize returns. Bakke shares his personal journey from corporate accounting at Deloitte to becoming a sought-after CPA and real estate investor, specializing in short-term rentals, multifamily properties, and creative financing strategies.

Key Points

• Real estate offers tax benefits through cash flow, depreciation, equity, and appreciation.
• Strategies like bonus depreciation and cost segregation can significantly reduce tax liabilities, especially for short-term rental investors.
• Bakke emphasizes starting with manageable investments like house hacking (renting out part of your home) to build equity and gain experience.
• Knowledge of tax strategies, such as accelerated depreciation and 1031 exchanges, is crucial for real estate investors.
• Using depreciation offsets income from other sources, often resulting in a "phantom expense" that reduces taxable income without impacting cash flow.
• Fixed mortgage payments become less significant over time due to inflation, creating a long-term advantage for property owners.
• Debt and tax management are pivotal in maximizing financial returns.
• Investors should focus on pro forma analysis, including cash flow, financing, and tax benefits, to determine a property's value before purchasing.

Full Transcript

Check on the full podcast on:

1. YouTube
2. Spotify
3. Apple Podcasts

Jeremy: What's up, guys? Jeremy here, host of the Short-Term Rental Pros podcast. I'm here with Ryan Bakke, who is the top CPA in the game, speaking at all the top short-term rental conferences, working with tons of folk all over the country, helping them save money on their tax bill.

Ryan, man, how'd you get where you are? Tell us about yourself.

Ryan: I love to help people, man. I think I have a gift to take things that are extremely complex in nature and boil them down to something that everybody can understand. Everybody can understand saving money, and so that's what I do for a living, man. I help people save money on taxes, tax strategy.

I've been a proponent of teaching how to build generational wealth, financial independence. I started in real estate, and it's expanded into other ventures. So I have investments like other businesses, short-term rentals, glamping, RV parks, multi-family, laundromats, hair salons, and then other small businesses.

Jeremy: Damn, you're doing a lot! Yeah, so tell us—obviously, for this podcast's purposes, the short-term rentals—tell us about your background. First of all, Ryan, how old are you?

Ryan: I'm 25.

Jeremy: And only a short couple of years ago, you were working that big four consultant life, weren't you?

Ryan: Yeah, I started at Deloitte. I spent about 18 months at Deloitte before I finally said, "Enough's enough, and I'm out."

Jeremy: And when you were at Deloitte, did you start doing some side hustles? Just kind of walk us through that. Once you started working at Deloitte, you were 21, 22?

Ryan: Yeah, I started working at Deloitte in 2020, and I want to say that probably about a year after I was working at Deloitte, that's when I started side hustling. From when I really started side hustling to when I took it full-time was a little bit under a year, and I'll never look back. I don't think I'll work for somebody else ever again.

Jeremy: Okay, and this side hustle at the time—was it accounting work, or did you start with short-term rentals? Just walk us through your business progression and getting to where you are today.

Ryan: Yeah, it was accounting work at first. So just doing smaller tax returns, tax strategy calls. I got really plugged into real estate when I understood how the tax code favors people who own real estate.

When you look at the tax code, it's written by members of Congress, and in Congress, they're all business owners. They have investments, and then they own real estate. So if you can park your money in those three vehicles, you're gonna save money on taxes.

At Deloitte, I was helping people save money on taxes, but it was already people who were super rich and wealthy—people I never saw in person before. It was just a blanket company. I didn't really see who I was helping or serving, and that's why I wanted to help the—I’m not the everyday person—change your family tree.

But I think there's one person in every family that has the power to change a family tree, and that's the person that I serve today.

Jeremy: Yeah, and you're totally right on it. Guys, you hear it growing up that real estate—90% of the world's millionaires are through real estate. And the real reason is because the tax code and just the capitalist system we live in were written by people who are trying to find an easy way to make money—our politicians.

They gave themselves and their friends huge tax advantages through real estate. That is the reason why 90% of America's millionaires are through real estate. It's because, effectively, we're in a rigged game, and it is what it is. You can be mad about it, or you can just learn the rules.

And a guy like Ryan is the guy who probably knows the rules better than about anybody else. I've been working really hard myself to learn those rules, and to be frank, I get my tax bill this year, and I'm like, "Damn, this isn't that bad."

It's because I just happen to do real estate, and I know about depreciation, bonus depreciation.

But so, tell us, Ryan, you're an accountant in general, so you work with people who have businesses. But what are some of the unique things about real estate that make the tax advantages so much better?

Ryan: Yeah, so it goes back to real estate having those four different pillars of how you can make money. Oftentimes, in short-term rentals, people really focus on that cash-on-cash or that cash flow number, but there are four different metrics that you can use to make money in real estate.

Number one is going to be the cash flow, which, by the way, is considered passive income. That means, right away, the money you make in real estate is taxed a lot less than if you were to go to a W-2 or a day job and make that same amount of money.

If I make 100K in real estate versus 100K at my W-2 job, I'm not subject to Social Security or Medicare taxes like my W-2 paycheck is. So, right away, I'm saving seven to eight thousand dollars in taxes just because I made it in real estate and not at my W-2 job.

Jeremy: And on that Schedule E.

Ryan: Yeah, on the schedule—that's where rich people live, is the Schedule E. Everything other than line one that says "W-2," that's where rich people are.

Jeremy: Actually, something interesting—and this might be an advanced topic for this podcast—but like Michael Chang, we were talking about him earlier, he puts his arbitrage on Schedule E.

Ryan: I know.

Jeremy: I was like, "What the heck? That's crazy." Like, what?

Yeah, maybe you can—I don’t know—maybe that's too advanced. So it's hard. Just explain, what is a Schedule E?

Ryan: Yeah, let me give you this. We'll get there in a second. So, cash flow is the number one way you can make money, but then there's also—you also get the equity, right?

So as the tenants are paying, your national tenants are paying you, you're paying your mortgage down. Well, the IRS doesn’t see equity as a taxable event. So as your equity builds up and up, and then, obviously, the property's going to appreciate in value, you can borrow against that equity tax-free.

It’s not a taxable event. So as your property value rises, you can borrow against it completely tax-free. So that's another pillar.

The third pillar is appreciation, right. So, as that asset goes up in value, we can put 10% down but still get appreciation on the full amount.

And that's why real estate's important. If I have 50K and I put it in the stock market, and let's say I get 10% appreciation in the stock market, I only have 55K afterward. But if I take 50K and buy a $200,000 rental property, I get 10% appreciation—my net worth just went up 20K, not 5K.

Jeremy: Levered gains baby

Ryan: Using the leverage. And then, of course, the capital gains tax. The capital gains that you have can be tax-favorable because capital gains are tax-favorable. But you can also do things like a 1031 exchange. You can do what are called DSTs, or statutory trusts. There are all these things that you can do to actually get out of paying the capital gains tax.

And then the fourth pillar, lastly, is the tax benefits, right? If you're able to tap into some of the tax code—and I talk a lot about it in my podcast—you could potentially use the tax benefits of real estate to help offset your W-2 or your business income.

Jeremy: That is—that, I don't even know what a DST is. Like, I'm telling you, Ryan, I've been diving into the tax game myself, but I don't even know—there's just half of the stuff that's going on there.

I feel like I know that base level, but depreciation, bonus depreciation, cost seg—one thing that's awesome is during the Trump COVID outbreak, or just whatever during COVID, depreciation was allowed to be—or just, tell us, what is this bonus depreciation thing? Why is it more now than it normally is?

Ryan: Yeah, so generally, before 2018, depreciation, you typically would take the life of the asset. So, if it was a short-term rental, it would be 39 years, and you'd depreciate whatever the purchase price is divided—

Jeremy: What is depreciation for someone who has no idea?

Ryan: Yeah, so depreciation, I always consider it like a phantom expense because we don't come out of pocket for it, but we get to show it on our profit and loss.

Typically, I would say, in the Midwest and in the South, a long-term rental might have $10,000 of net rental income—that's cash that hits your bank. But your depreciation is normally 12K or 15K as it sits. So, even though 10K hits your bank account every single year, you get to turn around and tell the IRS that you actually had a loss on that.

Jeremy: And what's awesome is you show the IRS you have a loss, so you don't pay taxes. And if you show a loss, you can actually carry forward the losses, or you can offset it against other businesses or potentially even your W-2 income.

But what's great as a real estate investor is banks don't see it as a loss, so you're actually able to borrow the same as if you were making money and lever up more, but then not pay taxes. So, there's no downside to depreciation.

Ryan: Yeah, and then—so, in that example, instead of—accelerating depreciation allows me to just get the depreciation on a faster schedule. So instead of getting maybe $12,000 the first year, I'm getting $60,000 or $70,000 the first year.

Here, it depends on the location of the property, your taxable income, etc. I have a whole podcast on that part. But let's say if I bought a property for $390,000, I have $390,000 of taxes that's in that property, right? But they get stretched out over 39 years if I don't do anything. So it's just $10K, $10K, $10K every single year.

Or I can accelerate the depreciation. Maybe I get $80K in the first year, and then every single year onward, I probably only get maybe five or six K a year.

But think about three things: debt, inflation, and taxes. So I'm using debt to leverage and get that purchase price amount that I'm getting appreciation and cash flow on. I get to utilize the tax benefits of that because why? The longer I wait to utilize the tax benefits, the less advantageous it is for me.

Because if I could have $10,000 of tax benefits, I want to take them in Year One. Why would I want to wait till Year Ten to take those? If I could have $10,000 in Year One or $10,000 in Year Ten, I'm going to take $10,000 in Year One because I can use that to earn and grow and multiply.

On the flip side, right, so if we have cash—if we have tax benefits—we want to use those as quickly as possible. But what happens with debt?

So with debt, we want to pay that back over 30 years. Because if I have a $1,500 mortgage that's fixed, I want to pay that off as long as possible. The $1,500 that I pay a month three years from now is not the same as the $1,500 I pay now because of inflation.

Jeremy: Yeah, you're getting fixed, or you're getting cemented at today's USD. So the USD—everyone talks about, "Oh, maybe the value of the dollar is going to go down, and the U.S. is going to lose its status as the reserve currency in the world," which could totally be its own conversation for another day.

But all right, if that happens, the USD is devalued. When inflation happens, we have massive U.S. government debt. What are they going to need to do to pay the debt? They're gonna need to print more dollars.

What's going to happen? The dollar is going to get less and less valuable.

And for those who own the assets, for those who own the real estate and have that 30-year fixed mortgage, that's music to your ears because you're locked in. I'll say, yeah, one of the early houses we bought—$450,000, 3.2% interest rate. I think our payment's like $1,800 a month.

Honestly, to me, like, two or three years ago, $1,800 felt like a lot more than now. And that's two or three years later, and we've had what—23% inflation and 20% inflation in the last three years, or whatever it is.

That's two or three years. Think about 30. Think about how inconsequential—like, you're paying $10 for your sandwich at lunch today that you paid $8 for a couple of years ago.

Guys, what I'm telling you is, 30 years from now, you're paying $25 for that sandwich. So you're getting your fixed monthly mortgage payment at today's currency, and then you're getting that discount in the future.

So, Ryan, okay, the advantages here that you're talking about are appreciation—properties generally go up in value over time. You can borrow against that appreciation tax-free. You're getting this depreciation, bonus depreciation—tell me, I didn’t realize, did that start in 2018? I thought that was a COVID thing, the whole speeding up your depreciation. Can you correct me there?

Ryan: No, bonus depreciation was pretty much put in when President Trump overhauled the tax code in 2018.

Jeremy: I wonder why, guys. We wonder why he made a huge advance for real estate investors.

Ryan: Yeah, so for tax years 2018 until the end of 2025, you're going to have bonus depreciation. So, at the end of 2025 is when it ultimately was set to sunset, which means we don't get any accelerated depreciation after that.

Jeremy: Are they going to—is it set to renew, or is it gone forever? Is this like a one-time tax freaking lottery that's going on?

Ryan: Yeah, so currently it's set to expire. However, there are bills being written in Congress now to basically—what are called extender bills—to extend the bonus depreciation.

I know a lot of states are lobbying to extend it. I think, you know, how this next presidential election goes—we’ll see what that means for real estate investors. But I think a lot of it also depends on the way the economy is.

So, yeah, one good—you know, if the economy is not like spending money, and people aren’t building houses, people aren’t selling houses, people aren’t transacting as much, people aren’t buying enough. But this isn’t just real estate, though; it’s also machinery.

If they want the economy to ramp up and start spending money, one of the best ways to incentivize people to spend money is to give them tax cuts. So I think whether or not it gets repealed, then it keeps getting extended, is going to depend on what the economy looks like come that time when it’s set to expire.

Jeremy: Yeah, that’s a good point. And I think a lot of people, they think about interest rates too—oh, what way is interest rates going to go? Should I buy right now, and with a 6.5 interest rate, or do I wait five years? And I think, you know, what Ryan just said—like where the economy’s at—is the best indicator for where interest rates are going to go.

Or, I guess, what are your thoughts? This is a little bit of a pivot here, but for those who are like, “Oh, I want to wait until lower interest rates,” like, what’s your thoughts on buying now or trying to time the whole interest rate game?

Ryan: So, I always tell people that they should always be running numbers and deals, even if you’re not in the capacity to borrow money. Let’s say you don’t have capital, you should always just be like getting those reps.

You think about the greatest basketball players ever—it’s like they’re never not playing basketball. Well, take LeBron James. Being 6’8”—that’s a gift, right? That’s a gift.

Yeah, his height and his speed is a gift, but he has skills, and he develops those skills by being the first guy in practice and being the last guy out. And those skills in real estate investing—because a lot of us aren’t—like our parents weren’t real estate investors. We don’t come from a real estate background.

My dad was an electrician. My mom worked at a plumbing company. Really, when I bought my first house when I was 21, they thought I was absolutely crazy.

So, you use those skills, and you have to keep practicing that.

That being said, I will always tell people, I think it is not smart to just say, "Oh, just if it makes sense, buy it now so then the rates come down, and you can refinance." I think that’s—I think that’s stupid. I think that’s very impractical.

But if you can buy now, even if the rates are high, and the property still cash flows and meets your metrics, you know, you don’t want to discount your—if you’re like, “Hey, I normally only buy properties at cash-on-cash 20,” don’t discount that metric down to 12 or 15.

Wait your time off to find that property that meets your metrics. But imagine, typically for every one percent increase of interest rates, the purchasing power decreases by about 10%.

So if I bought—let’s say I bought a property for $300K with a five percent interest rate, and now interest rates tick up to seven percent, well, my property, in theory, probably just lost that difference in value. My property is now 10% of $300K, and then another 10%. $300K is $60,000 bucks.

So the property that—yeah, the property that I paid $300,000 for, now it’s really only worth $250K because interest rates went up two percent. Because the next person that comes to buy that house from me, they have a liquidity issue.

But imagine if you bought a house at a seven percent interest rate, right, and it was this nice big house, and it cash-flowed for you, and it got you in the game, and then rates come back down to five percent. What’s going to happen to your purchase price of your property?

Jeremy: It’s gonna go up.

Ryan: It’s gonna go up!

Jeremy: And honestly, I liked when—and actually, you said, I bought a house in November, which I think was the peak. Well, November or October was about the peak of the interest rates.

And yeah, I had to put 25% down, which, like, to me—I make a lot of money in the summer. My business is extremely seasonal, so like, I had a lot of cash at the end of the summer, and I wanted to deploy it, and I wanted to buy.

And I also actually wanted to do a cost seg before the end of the year. Unfortunately, we got hit by an ice storm, and we had to cancel—like, I don’t know if you guys know about the East Coast Christmas ice storm situation—had to cancel a couple rentals.

And you need, for a cost seg—alright, I mean, I feel like we really could talk all day about all this stuff—but if you’re gonna do a cost seggregation study, and you want to show a house as a rental, you need three groups to stay there in a year. We only had one.

So, unfortunately, failed on that, but we can just do it this next year, which isn’t a big deal.

But we bought a house. This was the most expensive house I’ve ever bought—$750K, 25% down, the most I’ve ever put down on a house, 25%. But dude, this house we would not have got—I was like, I swear, if this house was on the market five months ago, when interest rates were—what were interest rates? I don’t know, let’s just say like June, May, June of 2022—I don’t know if you know off the top of your head—I’m thinking like four percent maybe.

And then, I think in—I think in February—yeah, so I was like, this house, you know, the house was listed at $770K or $775K. We got it for $750K.

I was like, this is May or June, this house is going for $925K, like $950K, because like you just said, interest rates shot up three percent or whatever, three, four percent.

What’d you say? That’s a 10% decrease in purchasing power?

Ryan: Every 1% the interest rate goes up it’s typically a 10% decrease in purchasing power.

Jeremy: Yeah, exactly. Okay, so like, that being said, I literally found comps on this house that sold in the summer that were over a mil, and I was like, I gotta go for this house because I just think this is a—you know, this is an insanely good deal.

And now we’re six months later. Interest rates—I guess last week, as of filming this, April 28th—they did go down to 6% or under 6%. Now they’re back up a little bit, but like, we’re building a deck right now—like a thousand-square-foot deck.

Once that thing’s complete, I’m hitting that refi button. We’re pulling out cash, debt-free, tax-free, doing all these things Ryan’s talking about. So just to put an example on the point you were just saying.

Yeah, that’s really interesting. So, I guess your thoughts are just like, always be flexing those muscles of running the numbers on deals.

And tell us about some of your deals. So, Ryan’s cool and just, like, why is he credible to talk about this stuff? Well, he puts his money where his mouth is. So tell us—I want to hear about your personal investing journey.

Ryan: It started with just the regular house hack, which is what I always recommend people to do if they want to get into real estate. Or maybe if they’re even on the fence about getting into real estate—they’re like, “I want to see if this is worthwhile”—well, you should start house hacking if you can.

I’d recommend getting a side-by-side rather than a top-bottom. That’s the mistake that I made because I can hear my tenant.

Jeremy: That one’s personal, you could put on some ear protectors for that one.

Ryan: Yeah, but so, that house, I think, is great because for a young person, you know, early 20s, mid-20s, just starting in their career, that cuts your largest expense per month in half, if not whole.

You’re not gonna completely eliminate your mortgage with just a duplex, but if you bought a triplex or a quad and you lived in one, you’re definitely not paying a mortgage, and in fact, you’re probably making money.

So the numbers on mine were—so, I bought a duplex. My PITI was $1,600 a month. I was renting out my upstairs for $1,250, so I was paying like $400 bucks or less per month to live as housing. Whereas the rest of my friends were paying $1,200–$1,300 a month.

Jeremy: If you live there as a primary, can you depreciate and cost seg like it’s an investment property?

Ryan: Okay, so that—I didn’t want to get into that, but okay. So, when I teach people, like in my tax academy program and like anybody that works with me, it’s the idea of the negotiation.

When you go to a closing table or when you go to a deal, you really want to come prepared with one of the comps in the area. What is this property really gonna appraise at? And that’s where you can get these really sweetheart deals.

So what happened was, I knew this property was going to appraise right around probably $260K to $265K.

And so, when I bought my property, that was when interest rates were like 3%. There were no seller concessions to be had ever because sellers were just like, "Oh, I could just sell the house to whoever else; they'll come and pay it," right?

So I was able to lock the property under contract for $245K. I unlocked the property on a contract for $245K, knowing it would appraise for $260K–$265K. And sure enough, it did.

At that point, what you're able to do—if the property appraises for more than what you paid for—what you should do is go to the seller and say, "Hey, I want to renegotiate the contract. I'm going to give you $260K. So, I'm actually going to give you $260K, but I'm gonna need $7,000 or $8,000 back…

Jeremy: As a seller closing cost?

Ryan: Yeah, as a seller closing cost. Yeah, towards my down payment and closing costs.

So basically, that $8,000 that I got—it was actually $10K, but $8K in this example—that money that I got at the close towards my closing costs and down payment, instead of having to come out of pocket for that, I was able to lump that into my 30-year loan amount, right?

And so now, I'm decreasing my total cash invested, and now I'm paying that off over 30 years using an FHA 3.5% down loan. I was only—basically, I was out of pocket—I think it was maybe $4,000. That’s how much I had to come to closing between earnest and the purchase price.

And so the best part, to your point, is the upstairs is considered a rental unit, which means I can get tax benefits from that. So I actually did cost seg my rental unit upstairs.

At the time, I was making less than $150K, so I was actually able to take long-term rental losses against my W-2. And I actually saved $6,000 in taxes by doing that.

So I was $4,000 out of pocket, $6,000 saving in taxes. I actually got paid $2,000 to buy the house.

Jeremy: So he closed on a property with cash in his pocket. He now has a depreciable asset for years to come. Even if he bonused some of it, you'll still be able to depreciate over the long term.

Now, I’m assuming you've moved out. Do you have both—did you move out? Are you still—

Ryan: No, I’m still here right now.

Jeremy: Okay, are you upstairs now though? So you switched?

Ryan: I’m still down.

Jeremy: He's still down. So, thank you, whoever’s upstairs. I guess they’re at work right now or something?

Ryan: Yeah, he works.

Jeremy: Okay, all right. You’re still downstairs, but at some point, are you gonna move out downstairs, do the same thing, and get both sides—or wait, both floors—rented?

Ryan: Yeah, so when I rent this unit out, I’m gonna get probably $1,500 a month for this unit because it’s two bedrooms instead of one. I’ll be cash flowing about $1,100.

So, I was just doing math, but in the town that I live in, you have to pay a license every single month. It’s actually like $50 a month, and for a year, it has to be your primary residence in order to STR.

Jeremy: So wow, yeah, that’s no fun.

Ryan: That was how I got started. And then from there, I actually—the guy that I bought this property from, he worked with me for a seller finance deal on a four-unit that he had, which is in the same town.

So I picked up a four-unit multi-family, rented that out.

Jeremy: And then, what were the terms of that deal?

Ryan: Yeah, so that one was a little bit more steep. I was able to get seller financing on that one, and the purchase price was about $450K–$455K, I think.

Jeremy: Were you out of financing at that point?

Ryan: Yeah, that’s why I had to do seller financing.

Jeremy: For those who don’t know what seller financing is, if you’re going to give the TL;DR on that.

Ryan: Yeah, seller financing is where the seller basically becomes the bank. The seller is going to give you some of their proceeds from the sale of the property towards your down payment, and then they're essentially going to be the ones that are holding the note.

You pay the seller, not the bank. And the terms on that—your seller financing right now, as this podcast is being recorded, is pretty popular now.

Jeremy: Massive.

And subject-to also, because people are-- you’re locked in at low interest rates. Taking on their financing is also another thing people are doing.

Ryan: Yeah, a lot of deals that we’re working on now—a lot of the money in the deal is literally just buying the low-interest-rate debt, buying the—yeah—3.5% debt right now.

When the cost of borrowing, especially in a business or an LLC, you’re paying 6.5–7% to borrow money, some people are doing sub-two deals just to lock in a super low interest rate—3.5%...

Jeremy: And they’re not even caring about cash flowing or anything like that. They just want to deploy. They want to get in. They want to buy real estate.

Ryan: And yeah, if I have an asset that’s appreciating at seven or eight percent a year, and the debt on it is only three percent, and I’m getting that asset with inflation, it’s a no-brainer.

So then, short-term rental—and then I made my biggest jump. I went from short-term rental to a glamping-slash-RV park project that was $3.8 million.

Jeremy: Let’s go! Yeah, tell us about that deal. Break it down for us.

Ryan: Yeah, so that’s $900K raw land, 13 acres. Building, I believe, we’re gonna have close to 60 RVs on there, 20 glamping tents, a couple of single-family homes, and it’s just going to be—it’s not fully constructed yet…

Jeremy: in Missouri? Down here in Missouri.

Ryan: Yeah Missouri, I can’t—it’s gonna be a challenge to drive my car down there. I’m gonna have to figure out how to fly.

Jeremy: Hey man, take a camper van. Park it at your RV park.

Ryan: I might— I might have to come borrow your boat.

Jeremy: Yeah, I’ll let you. You can totally whip a boat from North Carolina to Missouri. Pontoon boat will get you there in no time.

Okay, so you’re in Missouri. So that deal is—yeah, just like—how much total deal size? How much financing, if you don’t mind sharing? Partnerships?

Like, I’m someone who’s, you know—and I think Ryan and I are good examples. We’re like, look, we’re not talking to you as folks who have been in this game or just been in business for 35 years and we just have so much money and assets that we’re doing massive things and have unlimited cash to deploy.

We’ve got to be scrappy. You know, Ryan talked about that first hack he did. He didn’t buy a $7 million house. He bought a $265K house that he got a deal for. He got it for $245K, raised the purchase price in order to not have to come out of pocket any cash.

That’s scrappy. That’s—you’re hustling. You’re starting without unlimited means. So every deal, like for myself, every deal I did early on, and even to this day, has got to be creative.

Yeah, I’ve gone from the $100K houses to $750K houses. Sure, I can go a little bit higher in that regard. But that being said, the deal’s got to pencil out. They’ve got to be really opportunistic.

So yeah, tell us about this deal. Or any partnerships you have—how does that work?

Ryan: Yeah, I would say that’s the NBA equivalent to like Patrick Beverly or something. Yeah, so this is something that actually, at the first STR Wealth Conference I attended this year, 2022, Johnny said in real estate, you need three different things.

You need time, you need experience, and you need capital. But you don’t necessarily need all three yourself. At first, people might have all three, but at some point, they get tapped out.

My debt-to-income was tapped. I wasn’t able to get the financing, but I might have had the time and the experience to get the deal done.

And so, in partnerships, I think it’s really just aligning your interests with people who have what you do not have. I tell people all the time, focus on what you’re truly gifted and skilled at and leave the rest to everybody else.

In a partnership, I have the time and experience of underwriting deals, doing pro formas, getting the deal to the finish line. I don’t have the experience of managing a campground—that I cannot do.

But I can pro forma about what I think these things are going to cost to run, how much money these things are going to make, and do deal analysis on that.

So I was able to find partners—boots-on-the-ground people that actually live in Branson—that can help manage. And I was able to bring my skill sets of accounting and finance, as well as a little bit of capital raising, to the table.

Jeremy: Gotcha. So, how did this deal—you raised money, or what? Yeah, what’s it look like?

Ryan: Yeah, we raised close to a million bucks. I think it was about $850K.

Jeremy: Did you bring cash to the table?

Ryan: I brought cash to the table as an assignment.

Jeremy: Like, your own out-of-your-pocket cash to the table?

Ryan: Yeah.

Jeremy: Good. And I personally am a believer—even like, I’ve raised money where I probably could have come without any cash—but to me, I just like that incentive alignment where it’s, “Dude, I’ve got money here too. Look, I’m putting my money where my mouth is as well.”

Ryan: Yeah.

Jeremy: So, I just think that also, as someone who invests in other people’s deals now, I want to see them bring cash to the table and put their own skin in the game.

But okay, so you raised a million dollars.You underwrote it. How was the—did you—what's the financing? Is it a commercial bank or a local commercial bank? Tell us, what's the financing look like?

Ryan: Yes, it's local. It's a local commercial. Now, the construction loans are a little bit different because oftentimes there's an interest-only period during the time that it's under construction…

Jeremy: and then you kind of refi it?

Ryan: Yeah, it rolls because the land loans typically are 15 years, but the construction loan, once the construction is complete, it's gonna roll into an amortization schedule just like any other. But I would say that’s for another conversation.

Jeremy: Yeah, we could talk about so many things all day. But yeah, some folks who want to go stay there—what’s the estimated completion date?

Ryan: Probably this fall. Hopefully, get some bookings in before this fall. I know Branson kind of freezes during the winter, but hopefully get some bookings in before then.

Jeremy: Not to Chicago level.

Ryan: Not to Chicago level, no.

Jeremy: Yeah, but that's actually cool. Personally, I’m trying to—so I have a campground. When I say that, I have one camper there, and then I have an estate I manage in Western NC, where we're putting tiny homes around it and increasing the value and the appeal that way.

But like, really trying to level up, and that's what I get. It’s cool that Ryan started with a house hack, you know, and now he's leveling up to a 60-unit campground.

But guys, stay following us. We're gonna keep—we're gonna keep things going to the next level. I don't even know—10 years from now, what type of deals do you want to be doing?

Ten years from now, 500-unit apartment buildings? Or what's your goals and ideas for the future?

Ryan: Yeah, right now, I’m under—trying to get some—well, first, I have to secure a new primary residence. That’s in the pipeline. Yeah, I like being a sta…

Jeremy: I think we found a pain point for you. It’s fckin crazy, guys!

Ryan: I actually have a deal under contract now. It's a little over a million-dollar purchase price in Miami. It’s a five-bedroom, three-bath house.

Jeremy: Primary?

Ryan: No, I wish.

Jeremy: But I was like, damn, I didn’t know that.

Ryan: It'll be a short—it’ll be a short-term rental. Hopefully close in the middle of May.

Jeremy: The partnerships? Financing partnerships?

Ryan: It's a partnership with a husband and wife that I actually met in Destin. I did an event in Destin with Avery Carl and Rachel Gainsburg last winter.

Jeremy: Oh, good.

Ryan: Found out that they were both—they were from the Chicago area, and so we've just been connected ever since. And now, six, seven months later, we're doing a deal together.

Jeremy: Are they second-home loans? They’re carrying the note, and you’re bringing it as a DSCR rate?

Ryan: It’s a DSCR product, interest rate. Yeah, and I think for people who’ve listened to podcasts—so, DSCR is the wildcard when it comes to financing.

So I always tell people this too—my students and people on social media—what now? If you can utilize your ability to borrow money, low interest rates,

Jeremy: and conventional financing

Ryan: Yeah, as well as in your own name, whether that's through a house hack or FHA— I guess, going back, I would say I wouldn't do FHA 3.5% anymore. I would rather just pay the—I'd rather just pay up to the 5% conventional.

Jeremy: Conventional five.

Ryan: Yeah and the reason is because if you have an FHA at 3.5% and you get to 20% equity in the home, in order to drop the private mortgage insurance (PMI), you actually need to get an appraisal done on the property, and you need to do a refinance to close into a new loan.

Versus if you just go 5% conventional house hack from the start, all you need is the appraisal on the property, and then the bank will automatically drop the PMI.

You don’t need to refinance. To refinance. Because think about it too—if I had—so, I bought that house, 3% interest rate. Once I have 20% equity, and if I want to drop the PMI, you have to refinance and do a higher rate.

So I’m not going to refi it. Even though I’m from the house, I’m not going to refinance because it’s going to kill my monthly—my monthly payment’s gonna freaking shoot up by 50%.

Jeremy: So you’re gonna keep paying PMI for years, effectively?

Ryan: Unfortunately, yeah. Until the rates—

Jeremy: Or you have to just pay down—you have to pay down principal.

Ryan: Yeah.

Jeremy: So you have to put cash into the property to stop paying, what, that $200 a month of PMI?

Ryan: Well, that’s the problem with FHA, from my understanding, is you have to close into a new loan in order to drop the PMI.

Jeremy: Oh, not even if you just hit that 20%?

Ryan: Well, that's why the appraisal will come in and say you have 20%.

Jeremy: Yeah, because the value of the property will go up, and you'll capture—you'll have those levered gains. You'll capture that appreciation.

But what if you just pay down the mortgage each month, and let's say you're at three and a half percent? Now, I would assume that might take 10–15 years to hit that 20% pay-down. Like, you now, through your monthly payments, have paid down 20% of the principal.

Because if you guys look at an amortization schedule, you're paying interest at first. You're barely paying any principal.

Ryan: It’s so crazy.

Jeremy: And that's why real estate—like, it's a long-term game. Because by year 30, you're paying only principal. If you have a 30-year loan, you're not paying any interest in year 30. So I guess your point—you can't even just prepay principal and have the PMI taken away?

Ryan: That, I don't know. I didn’t think about that part. I would think so.

Jeremy: Damn, maybe Ryan's learned something from me. All right, let’s go!

Ryan: All right, yeah. So I would say this is what I tell people all the time. I work with a bunch of people who are trying to get out of their W-2 jobs or whatever they do for work.

And to state, I’m not necessarily saying it’s because they hate their jobs—although some people do—but they really want the time freedom. And I think the biggest hurdle that I see a lot of people—the way they fail to scale—is they don’t protect their DTI enough.

I was just talking to somebody yesterday. They're gonna go—they have a primary, they have W-2s, and then they're going to go buy a secondary home loan, 10% down. And it's like, what are you gonna do next?

Because now your DTI is 35%, 40%, 45%. You're tapped out. You have to go the DSCR or the commercial route or the investment loan, which is going to require you to put 20–25% down. You're going to have shittier terms, shittier rates. Sorry, but it’s like—what I try to tell people is—so I shoot pool a lot at the local bars and stuff.

Jeremy: Ryan's at your local dive bar, guys. Go down to Branson—Ryan’s there. Go to South Chicago.

Ryan: You’re the scrap— No, but I’m not focused on the shots; I’m focused on where my cue ball is gonna land.

So I think oftentimes when people are investing, they're not—they're like so focused on that one deal that they're not thinking about where they’re setting themselves for the next deal.

So I just talked to somebody yesterday too. They want to do basically hard money into an STR, and I told them why I think that’s a terrible idea.

Let’s say, let’s say I want to buy a $500,000 house, but I don’t have any money. So I’m going to take your $100,000—you know, I’m gonna take your $100,000 that you’re gonna give me as hard money debt to buy a $500,000 house.

Let’s say at best I can cash flow 20% cash-on-cash. So I’ve taken your $100,000, I’m netting $20,000 a year on the property. I still have to pay you your interest payment, which you’re probably going to want.

Jeremy: It's gonna be, what, 10%?

Ryan: 10%. So then, now I only have $10,000 in net income. And how am I gonna ever get you your $100,000 of equity back? Hard money doesn’t work in smaller short-term rentals because of that appreciation factor.

Because your short-term rental—typically, unless it's in like Smoky Mountains or a very tourist area—short-term rentals are going to be traded based on comps, like sales comps in the area. So you can’t just do your best to drive NOI and appraise at a higher value because they’re going to be traded based on sales comps.

So hard money and short-term rentals, in my opinion, they don’t really go too well together.

Jeremy: Yeah, they're not like…

Ryan: They're gonna buy that person out.

Jeremy: Yeah, and that’s what people talk about with home flipping. Home flipping is built for that. You know, literally, that is the model of being a home flipper, with the hope that home prices just go up.

Short-term rentals—home prices go up the same way they do any other type of house.

But they don’t go up more, like Ryan is saying. They don’t go up more because they’re cash flowing a lot more. They go up the same—they go up the same value as the neighbor’s house with the family who’s lived there for 20 years and doesn’t make any money on the property.

So that’s like one of the inefficiencies about short-term rentals. But do you think you see that changing in the future, where people are gonna be able to sell their portfolios based off NOI—net operating income—for those who don’t know.

Ryan: Yeah, that’s something that you could. Now, if you have a portfolio of, let’s say, five-plus short-term rentals, you might be able to get those grouped and appraised based off of, you know, based off a cap rate. The case—net operating income before debt service on all those properties.

And then, you might be—I’ve not that I’ve heard, but I’ve seen people do that. But you get to that portfolio of where it’s five to seven properties, where somebody—a bank—will come and loan on the whole portfolio.

But yeah, you know, that requires you—if you have partners on those properties—you have to get them bought out, or you have to work with the bank to get them bought out or shared too.

Jeremy: Yeah, so like, the financing game in short-term rentals…

Ryan: It’s—it’s murky.

Jeremy: DSCR is like a relatively new product for short-term rentals. Historically, DSCR has been there for long-term, right? Well, DSCR is a debt service coverage ratio loan. Effectively, if you can prove to the bank that the earnings of the house are going to easily pay the mortgage, then they’ll give you the loan. Am I correct in that understanding?

Ryan: Yeah, typically for DSCR, you know, if you’re not a short-term rental investor, they’re going to be actually based off long-term rental comps.

For example, like if you’re in, let’s say, you’re in Florida. You want to buy a $750,000 house. Getting a DSCR loan on that is going to be virtually impossible because they’re going to look at that property and they’re going to say, “Well, what does it rent as a long-term rental? Oh, it can only rent for $3,000 a month, $4,000 a month. Okay, we’re gonna appraise it—let’s just call it the 1% rule—okay, we’re gonna appraise it for $450,000.”

So that’s why DSCR gets tough. But for a DSCR, typically you need to—yeah, the property has to have a debt service coverage ratio.

Now, when I was in school, like, we always were taught a healthy DSCR is typically like 1.25 to 1. Meaning every $1.25 you have, you’re basically able to pay off that mortgage and then have that $0.25 left over—or have that $1.25 of net operating income to the mortgage payment. Really healthy margin there.

But nowadays, like some of these DSCR loan products, because these banks are trying to get loans made, they’re dropping that.

Jeremy: I’ve seen 1.1.

Ryan: No, I’ve seen one. Dude, I’ve seen 0.75.

Jeremy: Yeah, I’ve seen—I’ve heard of 0.75.

Ryan: Yeah, it’s crazy. It’s absolutely—it’s like—it’s very, it’s honestly like ill and like stupid, in my opinion.

Jeremy: But we’ll see.

Ryan: The idea of that property—they’ll qualify a property that’s literally losing money. Think about that.

Jeremy: Yeah, and then actually, I think there was someone at the conference who does those products, and I was like, “Well, what happens if they can’t pay it off and like home values go down?”

He said, “It hasn’t happened yet. We haven’t had one default yet.” I’m like, “All right.”

Not that these DSCR loans are such a small segment of, like, the loan world that, yeah, I don’t think it would really affect things on a macro scale. But I don’t know. We’ll be monitoring. Ryan and I will be monitoring the situation. We’ll let you all know what’s going on.

But Ryan, we’re running out of time here. What I like to do is—I think you’ve had so many tangible takeaways, which is awesome. I didn’t even have to ask you to, like, say tangible things; you just naturally did it. But what is a tangible pro tip for our listeners?

Ryan: Understand numbers—pro formas, percentages—to have an idea of whether a property is going to make money is one thing. But actually put it on paper and understand how to learn numbers.

Because once you learn how to value a business or value a property based on the cash flow, you can really go into any sort of business or industry. If I can make—if I have an asset that’s going to produce me $10,000 in net income per year, what am I willing to pay for that?

Well, if I have discounted cash flows of $10,000 a year for seven years, what is that worth in today’s money? That’s what I need to pay for the property.

A lot of people, when they look at properties, they look at the purchase price on Zillow or Redfin, and then they work their pro forma. When I see a property, I’m like disregarding the purchase price at first. I want to work the numbers because I can back into what I should pay for the property.

You want to get to the point where you’re working backwards. A lot of people go, purchase price, how much gross revenue, what are my expenses, what’s my debt service. I start with, okay, how am I going to finance this thing? What are the expenses going to be? How much does it need to make? And then, what am I willing to pay for it?

Jeremy: Yeah, so—so guys, know your numbers. Know your revenues and expenses. Know your financing. A great tool I know to do that is, if you want to check out BNBCalc, it does lay out all the variables.

It doesn’t lay out the tax benefits.

Ryan: Shameless plug.

Jeremy: Yeah, something Ryan and I are talking about is how do we, you know, display the tax benefits—or if we just say, “Talk to Ryan.” That’s going to be the best way to display the tax benefits.

Yeah. Ryan, where can folks find you?

Ryan: Yeah, so I’m all over social media. It’s going to be Instagram, Twitter, TikTok, @learnlikeacpa. On Facebook, I have a Facebook group called Tax Strategies for Real Estate Investors.

We have over 5,500 real estate investors in the Facebook group posting comments daily. Check out the Facebook group—it’s free to join, obviously. And then, yeah, just stay connected on social media. I post every single day.

Jeremy: Beautiful. Ryan, well, I’m excited. We’ll definitely have you back and see what type of deals you’re doing and how the tax situation progresses. Thank you so much for coming today.

Ryan: Yeah, thanks for having me, guys.

Jeremy: All right, guys, until next time—stay tuned. Short-Term Rental Pros podcast. See y’all next time.