"A Baltimore Multi-Unit Bust"
Multi-Unit Real Estate Investor
Episode 35: "Bad Beats"
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Many of us dream about the things we’d do if only we had more time. Often, that’s the motivation for entering the real estate game. Today’s guest knew he wanted to leverage real estate to do something big: quit his job and start his own business. Our host, asset protection attorney Scott Smith, also happens to know a thing or two about that.
Welcome back to The Real Estate Nerds Podcast! On today’s Bad Beats episode, Scott Smith welcomes CPA and investor Brandon Hall. Together, they go over the details of one of Brandon’s earliest and worst real estate deals. However, Brandon doesn’t view the property he attempted to manage himself as a total loss. Find out what exactly happened with both the deal and Brandon’s business ambitions by tuning into the full conversation.
Brandon Hall on Becoming The Real Estate CPA
Brandon Hall sits down with our host and fellow investor Scott Smith. The two chat about Brandon’s business, a CPA firm that caters to fellow real estate investors, and Brandon’s entry into the real estate world.
[1:00] Brandon runs a CPA firm called The Real Estate CPA, which only serves real estate investors. They offer a variety of services including tax strategy, preparation, and accounting support. His firm is fully virtual but serves clients nationwide, just like Scott’s law firm Royal Legal Solutions. The two reflect on the advantages of operating this way and how this unconventional approach benefits clients.
[4:00] Scott points out that a CPA like Brandon who can successfully operate remotely demonstrates the high quality of his service. Virtual firms create a liberating work environment that allows firms to pick the most talented personnel without the traditional limits of location.
[6:30] Brandon also invests in syndication deals. He was originally drawn to this by a client and attended the first meeting as a courtesy. Brandon realized the deal was brilliant, and the pair formed Naked Capital–a virtual capital firm.
[8:00] Scott invites Brandon to set the scene for the worst deal he is here to discuss today. Brandon already had a couple of successful deals under his belt and was working at a conventional CPA firm, but plotting his move towards the virtual firm. He knew he would be leveraging his traditional W2 job to get the best financing terms for the investment. “My goal was to buy a property in Baltimore, then live in one unit and rent out the others,” Brandon explains.
[8:48] He selected Baltimore because that is where his wife was working, and he was hoping to use the returns from this investment to start The Real Estate CPA.
[10:00] Scott relates to Brandon’s story, sharing that when he approaches a major change, he always evaluates a worst-case scenario and the exit strategy to get back to his current position. Brandon agrees that his plan was to simply go back to work if his real estate plan went down in flames. Scott observes: “People don’t really hold it against you if you’re doing something big.”
Brandon Hall’s Baltimore Triplex Bad Beat
Brandon and Scott switch gears and dive into the details of Brandon’s Baltimore deal.
[12:40] Brandon followed through with his plan. He selected a property, lived in one unit, and rented out the other two units. Right off the bat, he had a problematic tenant who consistently paid rent late: “Part of this being a bad deal is I had no idea what the tenants were like. Then, I never actually put my foot down and said ‘You need to pay me.’ I never assessed late fees or any of that.”
[13:00] He reasoned he was still getting paid eventually, but in retrospect realizes his failure to establish boundaries was a major mistake.
[14:00] Brandon now realizes the importance of setting expectations in the business world. He touches on what this looks like with his current clients. He admits: “At the time, I didn’t know how to set expectations and that carried over into my business as well. As you can imagine, eventually things break down.”
[15:00] Brandon explains that he had previously, and successfully, used property management companies to handle tenant issues. On this investment, he was managing the property himself and realized he simply wasn’t cut out for it. When he and his wife moved to North Carolina to be closer to family, he hired a property management firm. Yet this presented other difficulties: “Baltimore, Maryland is just an insane city to comply with if you are a landlord…I didn’t even realize some of the stuff we had to do.” He spent several thousand dollars and five months to get his units tested, inspected, and registered with the city.
[16:32] Scott asks if this was an error in due diligence. Brandon explains that the seller did give him the information he needed, but much of it was inaccurate. He points out that his own clients come to him with too-good-to-be-true tax strategies Simple double-checking could have saved Brandon money and compliance headaches: “I just listened to the hearsay, trusted it, and paid for it later.”
[18:00] Scott points out that situations like Brandon’s are why investors hire professionals in the first place. Scott shares a funny anecdote about a client who asked his legal opinion on not paying income taxes. Spoiler alert: “My legal opinion is that you’re going to end up in jail if you do that.”
[19:30] Scott asks how Brandon dug himself out of the hole. Brandon points out that the property fortunately cashflowed well, with 8-10% annual returns. Unfortunately, his profits were sunk into cutting through the city’s red tape, particularly on lead paint issues. To make matters more complicated, Brandon was also growing his CPA firm rapidly. Where other firms may grow at 10% yearly, his was growing by approximately 10% monthly. Balancing his business with the property’s issues became a managerial nightmare.
[21:55] Brandon explains that he is now offloading this property, and if he has his way, will come out of the deal just above breaking even. He explains his motives for offloading: “From a total equity standpoint, we haven’t made much on this at all. The reason I’m offloading is I don’t want to be stuck with this property in a downturn. I don’t want to be in an anti-landlord city or state.” Brandon is nonetheless grateful for the lessons he has learned the hard way from this investment.
How a Bad Deal Led Brandon to a Better Life
Although this particular deal wasn’t profitable for Brandon, it did serve a greater purpose. In Brandon’s view, this property allowed him to start the business that he runs successfully today. He and Scott discuss the difficulties of a rapidly scaling business, as well as how real estate can lead to greater fulfilment in life in general.
[23:30] Scott and Brandon discuss how rapidly developing businesses present problems of their own. Like Brandon, Scott’s business grew rapidly over the past year and was accompanied by growing pains. Brandon believes he could have been smarter about his investment, but acknowledges that it played a key role in helping him achieve a larger goal: “This property allowed me to be more comfortable pulling the trigger, quitting my job, and launching my business full-time.”
[26:00] Scott comments that many investors get into real estate to free up time to fulfill a higher purpose, and that Brandon’s story is an example of that. The two talk about the importance of healthy relationships in building a business and preventing burn-out. Brandon, who was dating his current wife Bonnie before he established his business, jokes that listeners should “lock in a significant other before building a business.” Together, the pair have endured extreme highs and lows, a testament to the strength of their relationship.
[31:00] Scott and Brandon acknowledge that dramatic highs and lows are normal in entrepreneurship. Scott points out that many of the wisest investors he knows maintain their internal condition to run on an even keel, even amidst chaos or highly stressful times. Scott tells Brandon: “I love that real estate has helped you get to that next phase of your life. I think that’s going to resonate with a lot of people.”
Connect with Brandon Hall
Connect with Brandon Hall through his website, TheRealEstateCPA.com. Brandon can also be reached personally via LinkedIn for anyone who wishes to reach out about taxes, accounting, or other investing needs that a whip-smart CPA can assist with.
Thank you for joining us on today’s episode of the Real Estate Nerds Podcast.
For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook.
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About Brandon Hall
Brandon is the Founder and CEO of The Real Estate CPA. Brandon works with real estate investors, syndicates, and private equity funds to optimize tax positions and streamline accounting and business functions.
He believes that real estate investing is critical to building sustainable and generational wealth.
Brandon worked at two “Big 4” accounting firms (PricewaterhouseCoopers and Ernst & Young) prior to launching his own CPA firm, Hall CPA PLLC (The Real Estate CPA). In part by using the lessons he learned from working with real estate investors, Brandon now invests in multi-family properties personally and through his capital group, Naked Capital. He also shares his knowledge with fellow investors through The Real Estate CPA Podcast. Brandon is a Certified Public Accountant and national speaker. Brandon holds degrees in both Accounting and Finance from East Carolina University.
When making business decisions that affect your long-term goals, like what types of investments to make with your retirement dollars and which vehicles to use, it really is best to be aware of all of your options. We frequently talk about the Solo 401(k) and Self-Directed IRA as tools for funding your retirement. But what about life insurance? And what about the stock market? What if we told you there is a tool that allows to to reap some benefits of both? It’s called Indexed Universal Life Insurance–and some investors have found it a useful addition to their retirement plans.
What Is Indexed Universal Life Insurance?
Indexed Universal Life Insurance (IUL) plans are a variety of permanent life insurance plan that features a cash-building element. One primary benefit of these plans is that the policy holder gets some of the gains of being associated with the stock market without all of the risk Wall Street is famous for. This is in no small part because of how these policies are designed. IULs earn in part because they are directly linked to a market index, such as the Dow or the S&P 500. Any gains remain within the policy, albeit a cap rate will limit how much you can make. However, you are protected during a particularly bad year for your index with an IUL. The worst case scenario with these plans is that you make nothing, but you never actually lose money no matter how poorly your index performs. The protection of your principal is actually derived in part from the same cap rate that limits your gains.
How much money do policyholders stand to make? Historically, returns run between 5-9%. The S&P Index has actually returned at 9-11%, but the upside limit on UILs stems from the account’s cap rate. For this reason, many advisors argue that the UIL can make a wise addition to a retirement or estate plan once more traditional and self-directed accounts are maxed out.
Tax Benefits of Indexed Universal Life Insurance (IUL) Plans
There are three key tax benefits of IULs. First, you may pay into the policy with pre-tax or after-tax funds. Withdrawals from the policy may be made tax-free if you are under 59 1/2. Such withdrawals are regarded as loans, with your death benefit serving as collateral. Any funds paid out to the beneficiary are also tax-free, including normal benefits upon your passing. This is true regardless of their value.
Ask the Experts at Royal Legal Solutions About Your Retirement Planning Options
Regardless of where you are in the retirement planning process, Royal Legal Solutions an assist you. We have extensive experience educating investors about self-directed investment options. Many of our investor-clients love our Solo 401k information, product, and compliance services. Our Self-Directed IRA services can also be helpful for retirement planning, as the SDIRA is yet another vehicle that allows you to diversify and take total control of your investments. To determine which of the available retirement planning strategies are best for you, consult with one of our experts at Royal Legal Solutions. You may also contact us with any questions you may have about your options.