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Podcast Transcription
Dave Dubeau [00:00:09] Everyone, this is Dave Dubeau here with another episode of the property Profits Real Estate podcast today zooming in, I believe, from New York City, if I’m not mistaken, we’ve got Thomas Castelli from the real estate CPA. We’re going to make. We’re going to make it counting stuff exciting for real estate investors. Thomas, Welcome.
Thomas Castelli [00:00:31] Dave, thanks for having me. It’s a pleasure to be on.
Dave Dubeau [00:00:33] So, Thomas, first of all, tell me a little bit about you and your background when it comes to real estate investing and how this whole real estate CPA business got started.
Thomas Castelli [00:00:45] Yep. So kind of back in 2000, 2014 or so, I picked up the rich dad, poor dad books and kind of went down that rabbit hole. Long story short ended up stumbling upon real estate syndication as an avenue to invest in real estate went to a bunch of events, invested as a limited partner, so I was a passive investor. Then eventually I met up with a mentor who said if I ever found a deal, we do it. So I found a deal down in Jacksonville, Florida, back in 2017. I believe it was, and we went ahead. We did the deal at two units in Jacksonville. I sold it during the peak of COVID or just on, excuse me, on the onset of COVID. And now I’ve pretty much just been kind of re strategizing which approach I want to take. But that’s how I got started in the space. I’ll probably go ahead and invest in more limited partnership interests in the near future. But as for the real estate CPA itself, that was a company. It was founded by Brandon Hall, who is the managing partner of the firm. I’m one of his partners and I kind of kicked off things with him actually right around the same time. I did my first deal as an active partner and I said, Hey, this is a great opportunity for me to kind of marry my passion for real estate with my background as a CPA. So I came on board. It was basically the tax advisory. Now I run our advisory division. And what I do is I help real estate investors pretty much minimize their taxes so that they can build their wealth as fast as possible.
Dave Dubeau [00:02:13] That sounds like a big part of the reason why we get into real estate in the first place, right? So. Absolutely. So with that in mind, tell us that, first of all, that’s a wonderful combination because most of us as real estate entrepreneurs or accountants might be OK, but they typically don’t have the hands on boots on the ground experience in actually doing a real estate deal. So it’s all kind of theoretical to them. It sounds like you and the crew at the real estate CPA are very actively involved yourself as real estate investors as well.
Thomas Castelli [00:02:47] Yeah, absolutely. You know, one of our partners has over 100 units. And then Brad Pitt invests himself and pretty much these other people, other members of our staff are also investors. So we have a lot of people who are who are not only know accountants, but they’re also real estate investors themselves, which is great.
Dave Dubeau [00:03:06] So what are, you know, typically speaking when you’re looking at new prospective clients? What are some of the bigger mistakes you’re seeing real estate investors making when it comes to how they structure things or how they set things up? What are some of the ways that people are overpaying in taxes?
Thomas Castelli [00:03:26] Right, yep, so the first one, I think, you know, one of the first. OK. The first one is they don’t have an accounting system set up from the onset. And believe it or not, it’s kind of a boring thing to talk about record keeping in bookkeeping and all of that.
Dave Dubeau [00:03:39] I believe that I could believe it. Yeah, I’m not. I’m not an accountant kind of guy, that’s for sure.
Thomas Castelli [00:03:46] Yeah. But believe it or not, it’s the key to actually knowing kind of where you stand, both from a financial performance aspect of how your property is actually performing from the financial standpoint, but also for from a tax standpoint as well. Kind of get an idea of you know, make well, really what it comes down to is making sure you’re tracking all of your expenses that you’re capturing all of your deductions. You know, we have some of our clients in, you know, in the past come and just dump kind of everything on the proverbial desk, the shoe box and everything like that and have to sort through everything. And sometimes you’re just missing deductions because people aren’t tracking things properly. So the first and foremost thing you should do when you’re starting out, make sure you have an accounting system in place to make sure you’re tracking your income and expenses and not missing out on any of the more basic deductions you could be taking. And that’s the first step, and that’s the first thing I see a lot of people missing.
Dave Dubeau [00:04:35] Know if you’re if somebody is watching this kind of little mom and pop real estate investor, they’re not doing huge syndication deals. What software would you recommend for somebody who’s not super savvy with accounting and bookkeeping? What’s kind of like a simple one that they can almost anybody can get?
Thomas Castelli [00:04:54] Yeah, I mean, I think QuickBooks Online is where we typically we typically recommend this to when we work with here at the firm with all of our clients, it’s like the Coke or Pepsi, I guess you could say of accounting software. It’s pretty user friendly and there’s a lot of automations that you can set up in there. So you know, what we end up doing for a lot of our clients is setting it up and then giving it back to them. But I mean, you could set it up yourself. There’s um, there’s tutorials out there and how to do it. And basically, it automates a lot of the routine transactions like rent. It’ll be able to recognize, OK, this is a rent and it’ll categorize it appropriately. Same thing with like routine like utilities, expenses like that. It can be super easy once you get it set up to kind of operate when you’re just starting out.
Dave Dubeau [00:05:36] All right. Very good. Now, OK, so not taking into account all of your deductions, that’s a big one. What are some of the other screw ups that we make as real estate entrepreneurs when it comes to bookkeeping, accounting or taxes in general, because you guys kind of cover all of these kind of things, right?
Thomas Castelli [00:05:53] Yeah. So it’s I think another big one in this is entity structure. And I think sometimes people put things in there. Sometimes they have rental properties in S Corporation and you generally want to avoid putting rental properties in as corporation because the only way to get it out is via a sale. So what you end up happening is some will have an s corporation. They unknowingly put rental property in there and say, Oh, I want to transfer it over to this LLC or this partnership, or I want to put it into this trust or whatever the case is, and they have to sell it out. So basically, they’re trying to just get it to themselves. But when you sell it out of the S Corporation, you’re actually making a sale and there’s a capital gain that’s associated with that. So that’s just another big one. I see a lot of beginners out there just making it a mistake or going what their attorney says, putting into an s corporation. If I can take one or C Corp, if there’s one thing, I could give about restructuring is don’t put a rental property in an S Corporation or C corporation unless there’s a very, very good reason to do so.
Dave Dubeau [00:06:54] So for those that aren’t familiar, we don’t want to go down the rabbit hole too much. But what is an s corporation? What is a C Corp? What’s the difference? What are they designed for? Basically?
Thomas Castelli [00:07:05] Yep. So an s corporations generally designed for small businesses, it’s a pass through entity. So say I was a consultant, I might open up an LLC and have a taxes as a as an S Corp in order to mitigate the self and partially mitigate the self-employment tax, which is fifteen point three percent on your first hundred and forty two thousand eight hundred dollars of income. And basically, you pay yourself a salary out of the S Corporation and only your salary is subject to the self-employment tax and not necessarily the entire income you generate. So you might be, for instance, have a business that generates one hundred thousand dollars, but you pay yourself a salary of forty. Now that’s sixty thousand dollars is not subject that, that fifteen point three percent. I think that might save you. I think somewhere around $6000 a year. I forgot the calculation off the top of my head, but that’s the reason why I use an S corporation. C corporations really are used for much larger businesses who are going to be bringing on a lot of shareholders. And that’s typically, you know, long like in a little nutshell, that’s what a C Corp is for a C Corp doesn’t have passed through treatment. So if you put a rental property in the C Corp, you don’t get a lot of the benefits of depreciation in the sense that like when you invest personally, invest in your personal name or through a partnership or even through an S corporation, the losses will get passed down through to you and they can be used offset income from your other rental properties or capital. Gains in the sale of your other rental properties, you just don’t get that with the C Corp, so. Long story short, those are more for businesses than they are for holding real estate.
Dave Dubeau [00:08:35] That’s a fascinating idea. Hold that thought for a second. Hi, there this is Dave Dubeau and real estate investors hire me to raise capital the right way. Why? Because most of them are stuck with too small of a portfolio, and they don’t know how to attract investors and raise money for their deals. So I help them to connect, capture and close their ideal money partners. Bottom line when you’ve got a deal, you’re going to have the capital to do it, so go ahead and book a no cost capital clarity session with me at Book a chat with Dave dot com. Again, that’s book. I chat with Dave. Dot com. So, you know, what would you recommend off the top of your head? If somebody is doing single family homes, they want to have it within a legal entity. But they just heard this, and they don’t want to get whacked when they’re trying to get it out of there,
Thomas Castelli [00:09:24] you know, absolutely. You want to have it even in a single member LLC that’s going to be disregarded for tax purposes, which means it’s reported right on your personal tax return, as if the LLC did not exist for tax purposes. So at that point, Alex, for legal liability protection, that’s an appropriate vehicle, also an LLC that would be taxed as a partnership. Say you have more than one person in the deal or is going to be the owner of the property. A partnership is also an appropriate entity, so usually you want to have all the rental properties in either the Single Member LLC or an LLC tax. The partnership is typically what we’ll see.
Dave Dubeau [00:09:59] Yeah, makes sense. All right. And at what point should a real estate entrepreneur start thinking about working with a company like you guys like, you know, real estate CPA? When does it make sense cost and benefit wise to step up to that kind of level?
Thomas Castelli [00:10:18] Yep. So we found that we typically work the best with clients who have we could add the most value to clients. You have already had their engine going. And what I mean by that is that you already have a handful of properties and you’re really ready to scale. So you might have three or four properties and you’re okay. I want to go to 10 this year. I want to go to 20 over the next five years, and that’s really when we’re going to provide the most value because that’s when it’s the most cost effective in terms of like where the course of our services to drag your portfolio down too much as you scale. Because if you only have one rental property or two rental properties, the cost of working with a specialty shop like ours is going to drag down your cash flow. So we actually offer some other type of educational programs for those type. For those people who are just getting started to still get that foundational tax knowledge, you need kind of get off the ground without having it drag down your cash flow.
Dave Dubeau [00:11:11] Yeah, no, that makes sense. All right. Very good. So we’ve talked a little bit about some of the bigger mistakes that people have made, some of the better practices getting set up with even a simple QuickBooks or Quicken type system online to track everything we’ve talked about when it makes sense to start hiring folks like you. What are some of the other services that you provide for your clients? So you guys do bookkeep, you do accounting. What else? How else are you able to help your clients? Great. Great.
Thomas Castelli [00:11:43] Great. So what we have at the real estate CPA and which is the firm we have, like you said, the accounting than we have tax preparation services. So we actually prepare your tax returns. And believe it or not, a lot of people think it’s just tax preparation is the same. You can do it on TurboTax or H&R Block or whatever. But there are a lot of nuances and a lot of more sophisticated reporting items when it comes to real estate, like a partial asset disposition that could save you a lot of money if you if your accountant knows about it. So we do prepare tax returns and we also do advisory. So we do like tax advising, and that’s really where we look at someone’s situation. Say, OK, well, here’s where you are today. Here’s your current circumstances is where you’re looking to go this year, next year, over the next handful of years. And here is going to be the strategies that she’d implement from usually is anywhere between five to 10. Strategies will recommend to really help them minimize their tax liability, kind of as they go along and start building out their portfolio. And then we just have one more thing, which is what we call a tax smart investors. So anybody wants to check it out. It’s tax for investors. XCOM, basically, that’s our service. People were just getting started. We provide a lot of the foundational strategies and a lot of the foundational knowledge through that platform at a relatively low cost compared to what you would get by actually working with the one on one with a CPA.
Dave Dubeau [00:13:01] So it makes sense. A lot of our viewers and listeners are international. They’re not necessarily based in the states. Do you guys work with foreign investors as well? We’re buying properties in the United States.
Thomas Castelli [00:13:14] Yeah. So we do have a few clients who do who are located outside of the United States and Dubai, US based properties. And I’d say those, the more the minority of our clients. But we have a few we have. We do have a handful of expats, too, so we will have some U.S. citizens living abroad, but if we do help people who are who are not U.S. citizens, but who are by U.S. rules.
Dave Dubeau [00:13:36] Yeah, so the commonality is it’s someone who’s investing in property in the United States. That’s yesterday.
Thomas Castelli [00:13:44] That’s where we can help. The challenge we’ve had in full transparency is helping people with the foreign aspects of it because we’re not experts in, say, necessarily experts in the Canadian tax law or European tax law or anything like that. So really, where we’re able to help people on is how this is going to impact you on the U.S. side of things.
Dave Dubeau [00:14:04] Very cool. So, Thomas, if people want to find out more about you guys and the real estate CPA, what should they do? And I know you guys have got a bunch of free resources for people. Maybe you can talk about one or two there that might make sense for people to check up.
Thomas Castelli [00:14:17] Yeah, absolutely. So we have a podcast and we’re going to have you on the podcast. So they get it. Got that episode the way to the podcast. We give a lot of free information strategies and stuff like that away on the podcast. I think we have over one hundred sixty something episodes now, so you could check that out on all major podcast platforms. It’s called the Real Estate CPA podcast. And then we also have a bunch of free guides on our website at the real estate CPA. You can go to resources and you can find that. And then I guess the last thing I could say that we do a big event every year is called the Tax and Legal Summit. We’ll be doing that this upcoming February, so February 2020 to basically get a lot of our staff together and then some attorneys together. And we do basically presentations on various tax and legal strategies that real estate investors can employ to minimize taxes and protect their assets from liability.
Dave Dubeau [00:15:09] So just out of curiosity, Tom, is the majority of your clientele are they are they multifamily investors, single family, home investors, self-storage or is it kind of all across the board?
Thomas Castelli [00:15:23] It’s all across the board. We have a lot of single family investors, of course, a lot of multifamily investors, too. So we do work with a lot of syndicates and funds. We’re kind of all over the spectrum and we have clients with just a handful of single families all the way up to large portfolios in multiple states or their own large apartment. So we’re kind of we’re kind of a diverse we have a diverse set of clients.
Dave Dubeau [00:15:45] Very cool. Now the event that you’re going to be putting on in February, how many people are usually coming out of these events? I understand we’re kind of wrapping up the pandemic, so who knows what’s going to be this year? But what’s your typical turnout for those guys?
Thomas Castelli [00:15:59] Absolutely. So we’ve done this event two years in a row is going to be the third year coming up and it’s always virtual. So even before the pandemic, we did have virtual. So I think the first time we I think we had like 250 people and then the next time I think we had like a year thousand. Wow. And the second time around, so it is it is free. So we did it free last year. I think we’ll be doing it for free again. So it’s a great opportunity for people to kind of just get out, get a good primer on what’s available to them from the tax and legal side without having to spend an arm and a leg trying to
Dave Dubeau [00:16:34] figure it out. Oh, that’s wonderful. So people can find out about that if they check out the real estate CPA.
Thomas Castelli [00:16:39] Yeah, absolutely. It’s under the resource section.
Dave Dubeau [00:16:42] Awesome. Thomas Well, you know, there’s been a lot of fun. I appreciate you bringing your insights into how us non CPA heads can do things better. What when it comes to our portfolios. So thank you very much for sharing.
Thomas Castelli [00:16:59] Anytime. Thanks for having me on. It was it was an honor.
Dave Dubeau [00:17:01] All right. Take care, everybody. We’ll see you on the next episode. Well, hey there, thanks for tuning into the property Profits podcast, if you like this episode. That’s great. Please go ahead and subscribe on iTunes. Give us a good review. That’d be awesome. I appreciate that. And if you’re looking to attract investors and raise capital through your deals, then we invite you to get a complimentary copy of my newest book right back there. There it is the money partner formula. You can get a PDF version, an investor attraction book dot com again. Investor Attraction, book dot com. Take care.