"Inspired to Invest" Real Estate Investing Podcast

How to Maximize Profit By Mastering Tax Laws

• Serena Holmes • Episode 65

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How to Maximize Profit By Mastering Tax Laws

Ever wondered how to navigate the complexities of real estate investment while maximizing your profitability?

Welcome back to "Inspired To Invest" episode 65 with Catrina M Craft. To watch rather than listen, click here

Discover valuable insights from Catrina, who is a seasoned entrepreneur, CPA, and tax strategist. Her first property purchase in 2003 was just the beginning of a journey that combines financial acumen with shrewd investment strategies. 

Catrina shares her wisdom on overcoming rising property prices and the critical role of networking to secure the best deals. Learn from her extensive experience to avoid common pitfalls, such as improper investment structures, and capitalize on powerful tax strategies like cost segregation and 1031 exchanges.

Unlock the secrets to efficiently expanding your real estate portfolio across borders while managing legal and tax frameworks in tandem. Catrina highlights the importance of tight partnership agreements, clear exit strategies, and understanding the nuances of landlord-tenant laws. 

Whether you're comparing regulations in the United States and Ontario or tackling fluctuating interest rates, this episode provides practical advice for maintaining profitability and regulatory compliance. Gain a deeper understanding of balancing the intricate aspects of investing and property management to ensure long-term growth and stability.

Join us as we tackle the real-world challenges and risks that real estate investors face. From dealing with undocumented subleasing to navigating the unsettling reality of property fraud, Catrina shares her firsthand experiences and strategic decisions. 

Learn the benefits of selling properties before significant maintenance costs arise and reinvesting in multi-unit properties for sustained growth. This episode is a treasure trove of knowledge for anyone serious about treating real estate as a business, enhancing both personal and financial growth. 

Don't miss out on Catrina's expert advice and inspiring journey in the world of real estate investment.

To connect with Catrina, go to @catrinamcraft on social and https://catrinamcraft/links-catrina online.

Thank you to Wealth Share REIT for bringing us this months episodes. For more, go to @wealthshare on social and to learn about their amazing investment opportunities, https://wealthshare.ca online.

Need support underwriting potential property investments? Check out PropertyCast.io - https://propertycast.io?via=serena

“Inspired to Invest” is proud to support the Beyond Success Program, a not-for-profit financial literacy program for students, launched by More To Give & MAK Investments. Find out more at @more2give.ca.

Join us again on Sept. 11 to hear from an investor who has leveraged real estate to retire his wife and completely change his life!

Thanks again for tuning in & remember, "when you invest in yourself, the sky's the limit!"

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And, for everything related to real estate and real estate investing, please make sure you've subscribed to @serenaholmesrealtor on YouTube & other platforms. We also have a page dedicated to this podcast on Instagram and Facebook @inspiredtoinvestpodcast where we preview guests each week, highlight their episodes, top takeaways, tips, quotes and more. 

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Speaker 1:

Welcome to the Inspire to Invest podcast, where we're sharing stories from real estate investors and how investing has changed their lives. This episode of the Inspire to Invest podcast has been brought to you by Wealthshare. Hey everybody, welcome to Inspire to Invest. I have Katrina M Kraft here with me today. From Dallas, texas, she has more than two decades of experience working as an innovative entrepreneur, cpa, tax strategist and business advisor. Her company offers accounting services and strategic advisory services tailored to real estate, entertainment, marketing, healthcare, publishing and other professional services industries. She is also an educator and she has a big passion for helping people to achieve financial success. She's launched a course called Wealth Intelligence, which provides business owners and individuals with the essential tools and knowledge that they need to build a strong foundation of wealth.

Speaker 1:

So thank you so much for being here today. How are you? I'm well. Thank you, serena. So I guess, just to start at the beginning, obviously we're focused on real estate investors and that's really the purpose of this podcast. Can you talk a little bit about your experience as a real estate investor and how you feel like that aligns with your focus in the finance?

Speaker 2:

world? Absolutely. I started real estate investing in 2003. That's when I purchased my first house and it was my personal residence. The next year I bought my first investment property and at the time I was studying under a mentor and they said you'll look at a hundred properties, you'll bid on 25 and then you'll get one. And it held to be true for my first property. And so from then I've gotten 12 individual properties. I focus on single family and I'm a CPA and I work with real estate investors. So I've seen it all. I've seen syndication, a hundred unit, apartment flips, wholesaling, retailing notes, tax liens, everything, and so I've just really fell in love with understanding real estate more because I'm an investor and then it's my client's base as well.

Speaker 1:

Yeah, and I think that's important just to have that perspective. When you are on both sides of the fence, you can understand maybe some of the challenges and successes that they were dealing with. Obviously, you're not a full-time real estate investor. I guess this is obviously just complementary to your wealth building strategies and stuff like that. But when you look at the other real estate investors that you are working with that are more in the full-time basis, what would you say are some of the biggest challenges that you see them experiencing as they're growing their business?

Speaker 2:

Currently it's just the prices are increasing so much so it's really hard to find deals. The best way that I've found deals and some of my clients are through other people, so really networking and finding these deals by communications and going to meetings and really just understanding what's happening. So maybe not in your area. Some real estate investors have gone outside of where they live to find properties.

Speaker 1:

That's exactly my area yeah.

Speaker 2:

Yeah, it's just everywhere. It's just the prices have gone up. But what we found is a lot of my clients can't find good property managers. So if they want to go outside of their area and they need someone to help manage, it's hard to find good property managers you can trust and that are going to really look after your property like you would.

Speaker 1:

Yeah, yeah, and I think that's really smart. I mean, you were talking, obviously, about the single family homes and I know that's why a lot of people end up moving towards multifamily for a number of different reasons. Like it's easier to commercially finance. You can hire a full-time superintendent or property manager at the building and that's easier than having, like you know, maybe a 12 unit building compared to 12 single family homes or something like that. Right, so I think that's a natural progression. You know, even if you were to have a tenant leave, it's kind of a non-event because it's not like your sole source of income. You have 11 other tenants that you can lean on and things like that. When you are getting into the nitty gritty with entrepreneurs and real estate investors and stuff like that, what do you find that you see as like a common thread throughout them, or something that you kind of dive into to try to help make sure that they are on the right path to success?

Speaker 2:

One of the main things I really talk about is structure making sure that your real estate is in the proper structure. I see individuals setting up as a C-Corp and I'm like please don't do that. Yeah, because when you sell, you have those gains and you don't have beneficial gains when you have the C-Corp. Another thing that I really want them to focus on there's different tax strategies you need to look at. So you need to do cost segregation or you need to maybe do a 1031 exchange. Even maximizing your deductions as a real estate investor, whether you're full time or part time, there's tons of real estate deductions that I see people missing when they initially come, and they don't understand that it is a business, whether it's passive or not.

Speaker 2:

You are able to deduct some of these tax deductions to maximize your growth and your profitability.

Speaker 1:

So I guess two questions. So obviously we're in Canada, you're based in the States, so things can be a little different. But I do know a lot of Canadian real estate investors that are going south of the border to take advantage of things like a a little different, but I do know a lot of Canadian real estate investors that are going south of the border to take advantage of things like a 1031 exchange. Can you explain that? Because we don't have that here in Canada? I wish we did, because it's a very powerful way to kind of defer your taxes. But maybe you can talk a little bit more about that.

Speaker 2:

Sure. So a 1031 exchange is a tool that allows you to move your gains. When you sell a property, you find another property that you want to move that gain into and that way you defer the gain on your tax. My strategy would be you're buying a house every year, you have the house. If you want to sell it, if you want to get profit from the house instead, you just move it into another property 1031 exchange then you can pull out some equity if you'd like, as you know, through a loan. But your taxes you don't pay that gain immediately, it just defers. And the goal is you defer, defer, you die and then it passes. I don't know in Canada if it's this way, but if it passes to your heirs, they get the step up in basis. So then at the date of your death, that's the basis, they don't have to go back to your cost that you originally purchased it for. They get that step up in basis. So that's the great wealth generational passing tool.

Speaker 1:

Yeah, now does that that's the great wealth generational passing tool. Yeah, now does that work for the entire portfolio or is that just relevant on a primary residence? No, your entire portfolio, okay, wow. Yeah, that's big. I mean for us here, like they even just implemented a much higher capital gains tax, so it used to be 50%, now it's going up to 66%, so it's basically any properties that are outside of your primary residence. So you know, not only growing wealth but passing down that wealth has become more and more challenging for us here in Canada. The other thing that you mentioned was talking about a C Corp, so can you explain what you would suggest that people do register if it's not a C Corp? Again, things are quite different in the States than they are in Canada, so you can shed some light on that as well.

Speaker 2:

Okay, in the United States, because I can't speak on the Canada, I'm not privy to that law. Yeah, in the United States, if you are an active flipper, if you're doing renovations and selling, then that's a business, so that's ordinary income. A business, so that's ordinary income. You could do an LLC. Llc has great asset protection in several states and it's relatively new in the United States compared to S-Corp and C-Corp. Okay, the LLC is a state level and it just has great protection. So you could do an LLC. But you could file as an S-Corp or a partnership if you have more than one member in the business. Yeah, if you are ordinary income and you're doing like the flipping and you're doing active in your business, then you could elect an S-Corp status or you could do the partnership or LOC. Okay, but yeah, I would avoid the C-corp status just because of the capital gains issue.

Speaker 1:

Now, one thing I had met with someone that had kind of a unique background because they're a licensed real estate agent but they're also a lawyer. So they kind of help people, you know, come down to the state so that they can invest but then get the benefit of having visas and things like that. But one thing that I found really interesting is just how important it is to make sure that you're managing your taxes and your legal structure kind of in tandem, just to make sure that you're maximizing tax efficiency but you're also limiting exposure and liabilities and stuff like that. Can you share any advice or input for someone that is coming down and what you would just generally, you know, in addition to the LLC, like, is there anything else from a structure standpoint that they should be mindful with asset protection attorneys, just to make sure the structure is right, but what I always do is I want to work with the attorney and the client.

Speaker 2:

We should all be a team talking about what's the best structure, because if you have partners, you need to make sure that your agreements and partnership agreements are very tight. I've seen it Partners one partner wants to sell the 100 unit, the other one wants to do a 1031. And so some of those legal partnership agreements. And if you're bringing in other investors, I think that's really important that you understand, going in, what the end goal is and have an out. So if someone wants to get out, can their wife buy them out? You know if they get a divorce, what happens. So I think a lot of that needs to really be thought about when you're going into partnership with other people.

Speaker 1:

Yeah, I think that's so important and just considering all those different exit strategies and you know, I think a lot of people make the mistake of not talking about those difficult conversations and it's going to be a lot more challenging down the road if you haven't had them earlier on and kind of set those things up. When you look at some of the clients that you've worked with, what do you think are some of the most common challenges or obstacles that they're facing in the current climate?

Speaker 2:

Yeah, Again, just finding properties, finding great property managers. Also, I work with real estate agents as well, and so some new laws have come down in the United States I'm not sure you're aware of, and so a lot of them are having problems because the investors are feeling like they're getting too much in commissions, and so that could be a drawback as well on what's happening with investors Knowing too, when they're going in, if they're looking for equity in a property. It's hard to find properties now with built-in equity just because the costs are gone. And then, of course, the interest rates. The interest rates here are just, you know, just going up tremendously and it's hard to really have a cashflow and a profitability going in.

Speaker 2:

I think, looking at all those things and trying to figure out well, what can I do creatively in order to still buy some investment properties and you mentioned commercial, so that could be an area. I have a client that has a hundred unit apartment and well, he sold it last year, he refinanced, he bought it, he fixed it up, then refinanced and then sold it for a great profit. Now it would be very hard to refinance because the interest rate would just be so high for him.

Speaker 1:

Yeah, I think that's the thing and there's this kind of ebb and flow.

Speaker 1:

For a lot of real estate investors is finding something that's affordable for one and something that can actually cash flow, but then on the flip side of that, you're managing like landlord, tenant rules and stuff like that. I mean, for us here in Ontario it's challenging in the sense that they swear very heavily towards the landlords and even just recently they passed a rent eviction bylaw to make it more challenging for landlords and property owners to basically evict people on the grounds to improve the properties. But at the end of the day, you want to improve the value of the property right, like you can turn a crack house into a community and make it like a safe, good place to live. But if these bylaws become ever increasing, I think that there's going to be an exodus of real estate investors and people that want to have that responsibility because they have such a lack of control and then now like the exorbitant costs and stuff like that as well. So I think it's just you know, you're just watching walking this balancing out.

Speaker 2:

I know Evictions in the. United States is by state, so, like in Texas where I am, you can evict within three days.

Speaker 1:

Yeah, Well, here you could be lucky to like, I mean, you could have a non-payment of rent. It could take you a year to get a hearing and if there's one mistake on your application you literally have to start over again. So there are some instances where there's, like, professional tenants, and you know it could take anywhere from two to three years sometimes to get a tenant out. So you can imagine how difficult that would be for someone that has a single family property or like not very many units and stuff like that, right? So I mean I don't, you know, I think it's you've got to be conscientious of the fact that you want to give people affordable places to live and you've got to balance the rights of tenants. But you also have to consider, like, if someone owns a property like, I think, within reason, with an appropriate amount of notice, like anyone should be able to take control over their property and kind of do it.

Speaker 1:

So on that, note we're just going to take a really brief break for a word from our sponsors and we'll be right back. Have you always wanted to invest in real estate to build long-term wealth? Start today with just $10,000. Introducing Honeytree Real Estate Investment Trust. Welcome to the Temple Building, a mixed-use 0.48-acre site with 25 residential tenants and 5 retail spaces In the heart of Brantford, ontario. This property was purchased for $5.8 million and was recently paid for $6.470 million and an instant investor upside of $670,000. Honeytree is taking on a light, value-add strategy, adding AC, laundry and energy-star efficient appliances Coming soon to Honeytree Real Estate Investment Trust. For more information, go to honeytreegrowca.

Speaker 1:

Thanks again for following along with this episode of Inspired to Invest. Thanks again for following along with this episode of Inspired to Invest. In addition to real estate investing and running my own brand experience agency for 18 years, I also published a book called the Accidental Entrepreneur in October of 2021. This is my story and it chronicles how I turned tragedy into triumph to embrace my destiny in entrepreneurship. If you're interested in picking up a copy, you can find the link at serenahomesrealtorcom and you can also find my link tree with all of the retailers in the details below. Thanks again for your support.

Speaker 1:

Inspired to Invest is proud to support the Beyond Success program. In today's complex world, it's absolutely crucial for our youth to learn how to take charge of their financial future. We believe that every young person deserves access to accurate, practical financial information. Designed to bridge the gap, the Beyond Success program leverages a comprehensive educational boot camp to equip young minds with essential financial literacy skills. At Beyond Success, it's not just about teaching financial literacy. It's also about fostering a foundation for a prosperous and empowered future.

Speaker 1:

Join us Together, we can build a brighter financial future for the next generations. Join us Together, we can build a brighter financial future for the next generations. Hi everybody, welcome back to Inspired to Invest. I have Katrina M Craft here with me from Dallas, texas, today, and she is sharing all of her wealth of knowledge working in the financial industry and supporting real estate investors and entrepreneurs. So before the break we were talking about, you know, just that balancing act of finding affordable properties and setting up your structure appropriately and things like that. Based on your experience, what would you say is the most important advice or lesson that you would like to pass along to anyone that is considering investing in real estate?

Speaker 2:

Real estate investing is a great source of wealth. It's one of the top ways individuals in the United States, and I'm sure other countries, have gained wealth. I say, please, research, try to find a mentor, go to some of the organizational meetings to find different properties. And I always say if you just have one property, that's great. Don't stop there, because if that becomes vacant, you need to make sure you have enough cashflow to keep that property going. So anybody who wants to get into real estate I said your plan should never just be one, because it's going to be very hard to make a profit.

Speaker 2:

I would say three at the minimum, because if one is empty, you still have funds coming in from the other two. If something breaks down, you need funds to fix it. You don't want to always have to dig into your own funding. Also, if you are going into other states we talked a little bit about evictions you need to know the eviction processes per state. In some states where it's cold, they won't let you evict in the winter. Yeah, yeah, I would say eviction friendly. I hate to say that, but eviction friendly because you need to protect your property. Recently I had an incident where someone subleased a property.

Speaker 2:

Someone wasn't documented and there's a person that she went through one of the websites online did all the background and everything came through, but she was basically getting it for someone else and luckily I caught it on the very first day. Yeah, and it took me maybe 20 days to evict them, but you know they were, I was able to get them out.

Speaker 1:

Yeah, no, that's so important. I think that, yeah, it is kind of a scary time for some landlords, depending on where you are. I had interviewed someone that was in California recently. They're even saying if someone's like squatting in your property for a couple of days, like that, they basically have all these like rights to it. And I was like what I know they're not even on the lease or anything like that, and they still have these rights.

Speaker 1:

So it is really mind boggling and you know, I think just politically it shows how different guess things can be either state to state or province to province. Now what would you say is probably the craziest thing that you've ever experienced as a real estate investor or even one of your clients might have experienced.

Speaker 2:

I think that was one of the craziest because when she came and I was, I managed some of my properties the ones out of state I don't manage, but the one in Dallas I managed and she even said, yes, I had a real estate person that I was renting from and it wasn't even their house. I gave them the deposit and everything and then I found out it wasn't their house and she made a long story about, you know, taking care of her sister's kid who had died. I mean, it was just like elaborate.

Speaker 1:

And.

Speaker 2:

I found out that she was basically just frauding me the whole time.

Speaker 1:

Well, it's definitely happening. I mean, we have a neighbor that actually owns kind of like an equestrian farm in Florida and she got a call from one of her neighbors down there saying like oh hey, I didn't know you're selling your property, and she's like what? And so basically someone had frauded their identity and had hired a real estate agent and literally listed the property for sale. And luckily she found out. And the only way she found out was because the first sale sign had gone up. So she had to obviously contact the agent. She got to see what they had provided in terms of, like, their identification, but she obviously had to prove that she was the owner and that no, I'm not selling it. You can imagine, like imagine that that had flown under the radar and like you know what chaos she'd be dealing with after the fact, right? So it is scary that people put those kinds of efforts. Yeah, that is happening, you know especially on Zillow.

Speaker 2:

I've seen where people have listed the house and they're not even the person that owns the house. They'll get the deposit and everything, yeah, yeah. Also, they're transferring deeds here. I don't know how it's just so easy to transfer your deed to someone else. Yeah, in Dallas County they now have a deed alert because it's happening so often. Wow, you can register your home and you get a deed alert if someone's trying to change it.

Speaker 1:

Yeah, well, I think, electronically. That's something that's gonna obviously maybe put some protections in place for property owners, because they have to change me. What worked once upon a time is obviously not working right now, so they gotta do something to protect people. In terms of growing your own portfolio, what would you say is next for you when it comes to, like, financial freedom? Is there a particular goal that you're working towards, whether it's cashflow, number of doors or size of your portfolio?

Speaker 2:

My first goal was 20 doors. We just sold four. We don't know what we're going to do with that, the money. We didn't do a 1031 exchange. We were thinking just because most of the houses that we bought they were five years old, like within that range, and now the maintenance is starting to occur. So we thought just get out before we have to replace you know the large things that HVC and the roof, most of those. We have a lot of hailstorms and tornadoes here, so most of that could be done by insurance. Yeah, three roofs replaced in the last two years by insurance, and so we're just looking at okay, get the money now that to now invest in other things. I'm actually in one thing I love because I do work with clients in real estate. Sometimes I do deals with some of my clients and they have different deals that are coming up. One is an apartment unit that's getting built and so I'm interested in maybe investing in that. I'd like to get some multi-units.

Speaker 1:

Yeah, yeah, I think that's definitely wise, and I mean, from a lot of the investors that I talked to, that's one of their biggest regrets is just not going bigger sooner for all those things that we kind of talked about earlier. So I think that's definitely very smart. When you look at real estate investing, what kind of impact would you say it's had on your life personally? What?

Speaker 2:

kind of impact would you say it's had on your life personally? Personally, it's been a great wealth builder for us, my husband and I. The first property I bought for $80,000 is now worth $260,000. And most of that growth actually happened in the last six years. You know, it's just been crazy.

Speaker 1:

That's so amazing. I mean, you literally can't even find a condo where I live for probably less than 500,000, let alone a house. Oh, wow, yes, it's so expensive.

Speaker 2:

Three bedroom, two bath, two car garage, home about 2000 square feet Wow.

Speaker 1:

And I got it for like 80,000.

Speaker 2:

But that was, you know, 2004. Yeah, but, but that was 2004. But in the last five years I've seen it go down and I had negative equity and now it's up. So I thought about selling that but I ended up keeping that one after I put some renovation. But it's been huge just because of the knowledge. We've been able to share this knowledge with other people.

Speaker 2:

As a real estate investor, I feel like I have a better understanding to help clients as well. So it's impacted me because I'm looking at tax laws all the time to help me and my clients and I have an interest in that. So I just realized that real estate could be huge for me. I have three aunts or two aunts and a grandmother now that are needing long-term care or some type of care assisted living and I just thought, you know it's making me think, okay, what will I do if I have this income that's just coming in? How many doors do I need for me to live comfortably when I retire? So I'm looking, starting to look at things like that, like, how many doors will I need to have $20,000 a month? Yeah, so those types of things I know they're so important where you can just have the passive income as well as just the equity growth.

Speaker 1:

Yeah, and I think that's really important just to think strategically and literally, you know, almost reverse engineer what you think your plans are going to be. And you know, I don't think anyone probably thought inflation would be as bad as it is right now. So also factoring maybe a little bit of that like we don't really know exactly how far that's going to go in the next 10 to 20 years, but I think that's extremely smart. Now, for anyone that wants to know more about you know, us real estate or investing in Texas, what's the best way for them to get in touch with you?

Speaker 2:

So on all the channels. My email is Katrina M Craft, just like it is now KatrinaMCraftcom On Instagram Katrina M Craft, facebook, katrina M Craft and YouTube Katrina M Craft and I do do a podcast every week dropping different videos and tips Great, so we'll include that in the show notes below, Of course.

Speaker 1:

Thank you for your time, for being here today and for anyone that has enjoyed this episode. Make sure that you like, comment and subscribe on YouTube, and you can also follow along with us on social at Inspired to Invest podcast. And remember, when you invest in yourself, the sky's the limit. Thanks again. Thank you to WellShare for bringing you this episode of Inspired to Invest. The views represented on this podcast are for general information only and does not constitute investment or other professional advice or an offering of securities. The host and guests featured on Inspired to Invest make no representations as to the performance of any particular investment. Should you decide to make an investment, you are responsible for conducting your own review and analysis. It is recommended that you obtain independent legal accounting and tax advice from licensed professionals.