Discover how (and why) two finance professionals switched from stocks to commercial real estate, reallocating their portfolio from traditional investments to 3 multifamily properties.
Stocks vs Commercial Real Estate
There are several fundamental issues with investing in stocks and other traditional investments. The returns are low, unpredictable, uncontrollable, and heavily taxed. Whereas, with commercial real estate, you can generate enormous returns that are predicable, controllable and provide extraordinary tax benefits. And that’s why Eric and Maria, veterans in the financial industry, joined our Protege Program. Eric is a CPA in the financial IT space and Maria worked as a financial marketing professional for twenty years. Being in the financial industry, they had built a sizable portfolio of stocks and mutual funds but became increasingly disappointed with the returns. As you’ll learn in this interview, they advanced from stocks to commercial real estate and purchased 3 multifamily properties. Here’s the complete transcript of that interview where they share their experiences in successfully transitioning their stock portfolio into commercial property:
Eric & Maria Interview: Advancing from Stocks to Commercial Real Estate
Peter: So Maria and Eric, why commercial real estate? Share with us a couple of your driving factors.
Eric: Before we got started in commercial real estate, we were looking at single family homes for almost two years. We would go to open houses and work through our realtor trying to find a single-family home to invest in. When we would find one, we’d make an offer and get outbid. Other ones, we would bid over asking price and get outbid. And it became very frustrating. So that’s where we started. We ended up watching YouTube videos on how to invest in single family homes and I ran across one of your videos. I thought commercial real estate was for wealthy people. I didn’t realize there was an entry level point for normal folks to get into commercial real estate. So I said I think it would be worth giving it a shot.
Maria: And the fact that you have a mentorship program that takes people through, and it helps to establish all the basics and the foundation that you need to understand how to get into the market: all the techniques and the negotiation skills and how to shape a deal, how to talk to a seller, that’s golden information.
Why Switch from Stocks to Commercial Real Estate?
Peter: Thank you, Maria. So both of you are very smart individuals in the finance world and you made the decision to transition from stocks to commercial real estate. What’s some of the background of that?
Eric: I graduated in 2001 from college and ultimately found a job in my area of profession, built up my 401k until about 2008. Heavily invested I would say, as much as I was able to invest into my 401k and IRAs. And then the 2008 market crash hit, and it wiped out about probably 50% plus of my investments. Over time, I gained that back. And due to recent events, we were thinking the market was going to shake again. I pulled all my money out of my 401K and put it into money market accounts. I felt very strongly that the market was shaky, and I just didn’t know where the best place to put my money was.
Peter: Until you discovered commercial real estate.
Eric: Yes!
Offset Taxes and Penalties with Cost Segregation
Peter: So, you have retirement accounts, and you must pay penalties to take it out and invest in commercial real estate. And taxes to account for. So how did you account for that and at the end of the day, was it worth it?
Eric: That was something I was fearful of, using my retirement money. I knew I had it sitting there, and I wanted to do something with it. I just always figured I would have to pay the taxes and penalties, not knowing that I could get real estate professional status with Maria while I maintained a W2 with my job. And then at the same time use the cost segregation method to accelerate the depreciation of our buildings, so that we were able to gain a significant loss on the property, which would offset the federal taxes. We were able to benefit from that approach and through your mentorship we were able to gain that insight.
Maria: It was really eye opening to know that that kind of method existed to help investors take that step. Otherwise we were thinking that maybe it’s just the cost of going into commercial real estate, that we would have to pay 35% tax and a 10% penalty. Maybe that’s just the cost of doing the business. But it was such an “Aha Moment” that we have a way of making this work.
Eric: We had been very diligent savers and having the money squirreled away in the IRAs, we knew we had money there and we always thought we can use it, but we’re going to have to deal with that hit. And this was a way that we could tap into that savings, and not only can we use it today, but we can also benefit from it today. We don’t have to wait until we’re nearly 60 years old to start enjoying the benefits of our savings.
3 Off-Market Multifamily Deals
Peter: All right, let’s jump into your deals. So you found the seller through our marketing methods, and you were able to purchase three deals from the same owner without using banks at a 4% interest rate. And he has more deals that you want to buy from him correct?
Maria: So far, we have purchased three of six buildings from the seller and our goal is to acquire the additional three from him.
Eric: The first deal was a five-unit apartment building in the Chicagoland area. The seller called us and he told us about the deal. We worked up some initial numbers and then we talked to you about the deal and gave him our response. Then after a brief negotiation, we were ready to close that first deal. That was in December of 2022 when we closed at a 4% rate.
Creative Financing Strategy: Seller Financing
Maria: And it was seller financed so there was no need for appraisal or other fees that are you normally have when you involve a bank. So that probably saved us a few thousand dollars.
Eric: That, but also on the purchase price because he realized that if he went through a broker, he would need to sell it at a higher price so the broker can get paid on the commissions. He basically discounted the property accordingly for private seller price and did the financing. So it was a win all around on the price and on the rates.
Maria: I love doing deals where it’s the seller and the buyer working together. Obviously attorneys are needed and title company are needed when you’re transferring the title. But with the absence of banks and real estate agents, you are saving thousands of dollars. Also, in working directly with a seller, you’re establishing that trust and rapport with a seller. And that’s why after buying the first building, I think he was comfortable enough to move on to the next one.
Tax Strategy: Cost Segregation
Peter: So you cashed out of your retirement account, you put down the down payment and were able to purchase the property with seller financing and a fantastic interest rate. The deal had lots of upside potential because the seller hadn’t raised the rents in five years or longer. So day one you’re able to raise the rents. The question is, you used your retirement funds and there’s a penalty to pay for that and tax consequences. How did you use cost segregation across the board to help you mitigate some of those costs and penalties?
Eric: We interviewed three different cost segregation companies. When you reach out to them, they’ll give you an estimate on what they think your tax savings will be and they’ll also tell you what the charge will be for the analysis. So we looked at all three and weighed the cost versus the tax benefits. Ultimately the one that you suggested did have the best anticipated tax savings and extremely reasonable rates to provide the service. It’s not a cheap thing to do, but if you’re in a situation where you need to ensure that you have enough tax loss to cover an early withdrawal from your IRA, this is an extremely viable option to get you that loss that you need to cover those gains.
The total amount we will be saving is about $65,000 from accelerated depreciation tax affected. So after taxes, it’ll be a $65,000 tax benefit, which more than covered the withdrawal from the IRA. In fact, we got a refund that first year. So I withdrew money from the IRA. Then we did the cost segregation study and then we included that against our income on the apartment and we came out ahead with a refund.
Tips for Switching from Stocks to Commercial Real Estate
Peter: Again, the importance of having Maria as a real estate professional to be able to take advantage of all those tax benefits. Now, we have audience members out there, they also have retirement savings and are playing the stock market. Some of them have just stopped because of volatility. They’re scared of getting into commercial estate because they’ve worked all these years for a retirement account. What advice would you give to someone wanting to do exactly what you did?
Eric: I would say find a mentor because I wouldn’t know how to get into this alone. I think it’s important, what we have absorbed through this program. It was able to change our lives and I think that’s the number one most important thing you need to do to get into commercial real estate. If you’re not familiar with it, find a mentor that can guide you into finding these deals and then guiding you through the deals once you do find them.
But also if you have money saved, don’t wait until you’re 60 years old to start using it. I’d like to retire before I’m 60, and if I could leverage my IRA today, by the time I’m maybe in my mid fifties, I could retire from the corporate job and just run my own business.
Maria: I think 401Ks are there to benefit the Wall Street, not the main street folks. And if you can tap into your retirement funds and make use of it and put it into something that you have control over, that’s something that people should seriously consider because it gives you a path to financial freedom. You can put that money to work in a way that helps you create an income stream, cash flow, and appreciation of capital. No other asset class can help you achieve that.
Key Takeaways
- Mentorship: Seasoned finance industry professionals, Maria and Eric, knew they needed a mentor if they were going to withdraw money from their IRA and 401k and buy commercial real estate.
- Off-Market Multifamily: Using the 3 pillars we teach in our program, they purchased 3 multifamily properties (17 units in total) off market. And since they worked directly with the seller, they negotiated seller financing.
- Creative Financing: Since no banks were involved, they were able to negotiate an amazing 4% interest rate.
- Forced Appreciation Upside: The deal had huge rent upside potential which allowed them to force appreciation and use the equity to pay off the seller.
- Real Estate Professional Status: Maria achieved real estate professional status as per the IRS tax code 469 and this gave them unlimited tax benefits even though Eric is still working. Without this status, they couldn’t take advantage of all of the tax savings from cost segregation.
- Cost Segregation: A cost segregation study allowed them to accelerate the depreciating of their property over 5 years instead of 27.5 years. It’s a powerful tax saving tool and it gave them $65,000 in tax write-offs in year one.
- They plan to acquire the remaining 3 multifamily properties (18 units), bringing them closer to their goal of 80 units.
How to Advance from Stocks to Commercial Real Estate Step by Step
Step 1 – Mentorship: Transitioning from traditional investments to commercial real estate is far more challenging than it may seem and you don’t want to make a mistake when you are working with your real money. Do what Eric & Maria did. Get certainty. Get a mentor. Join our Protege Program.
Step 2 – Strategy: Develop a detailed commercial real estate investing strategy so that when you make the portfolio reallocation, you won’t waste any time with your funds not being wisely deployed.
Step 3 – Buy Right: Purchase commercial properties one at a time using the 3 pillars that we teach in our Protégé Program:
- Buy a property that’s priced under market, so you are walking in with equity from day one.
- Buy a value-add property with rent upside potential so you can increase your cash flow and force the appreciation.
- Location, location, location: Purchase a property in the right area.
Step 4 – Get Tax Benefits: Offset the penalties and capital gains taxes using the tax benefits of commercial real estate.
Step 5 – Repeat: Rinse and repeat; build your commercial real estate portfolio one property at a time to create generational wealth.
If you have any questions, post a comment below or text PETER to 833-942-4516.
Every Successful Commercial Real Estate Investor Has a Mentor
Every successful multifamily investor has a mentor. Get your mentor here: Commercial Property Advisors Protege Program
Congrats to Maria and Eric for their courage to move from stocks to investing in commercial real estate!