Making Money in Multifamily Real Estate Show

172 | Keeping Your Multifamily Dollars Using Cost Seg with Erik Oliver

March 02, 2022 Dave Morgia Season 1
Making Money in Multifamily Real Estate Show
172 | Keeping Your Multifamily Dollars Using Cost Seg with Erik Oliver
Show Notes Transcript Chapter Markers

Erik's Background:

  • Managing Director of Cost Segregation Authority, providing services since 2006
  • Prior to joining Cost Segregation Authority, Erik was an Operations
    Manager for a multi-million dollar landscaping and design firm in Long
    Island, NY. 
  • Since heading west and joining Cost Segregation Authority, Erik has been speaking at local, regional, and national events. He brings with him a passion for identifying cost savings and educating commercial real estate owners on the benefits of cost segregation.

In this episode we cover:

  •  02:04 - Explanation of Cost Segregation
  •  06:04 - An Example
  •  15:22 - The process to evaluate the assets
  •  21:44 - The importance of a good CPA
  •  29:23 - Can you be aggressive in the valuation?
  •  33:25 - 5KQ1 - If you could only pick one trait that explains your success, what is that trait and why?
  •  34:59 - 5KQ2 - What is the most uncharacteristic thing you've done in your business and why did you do it?
  •  37:43 - 5KQ3 - Can you name any time where you felt like you were not going to end up successful? How did you overcome that fear?
  •  41:27 - 5KQ4 - Can you name a time where something in your business went perfectly and what did you do to make that a reality?
  •  43:15 - 5KQ5 - What have you been focusing on lately to improve yourself or your business?

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Intro:

Welcome to the Making Money in Multifamily Show, where we discuss everything to do with multifamily real estate investing. We believe it's the best way to gain financial freedom and build lasting wealth. This is where you'll find it the best information and practices to help you succeed in your real estate business, whether you're already experienced or just starting out. Here's your host, Dave Morgia.

Dave Morgia:

Hello listener and welcome to the show. I'm your host, Dave Morgia. And with me today is Erik Oliver. And just for your information. Erik is the managing director of the Cost Segregation authority. They have been providing services on cost segregation since 2006. They’ve pretty much done hundreds of 1000s of studies all across the country. And I'm just reading your website. Erik, it looks like one of the more interesting ones was $100,000 single family rental. I'm sure there's, you know, a wide range of segregation analysis, the whole gamut, probably ranging, you know, millions and millions of dollars above that, obviously. So yeah, just appreciate you joining me on the show. And would you just mind tell us a little bit more about your focus?

Erik Oliver:

Sure, absolutely. So yeah, my name is Erik Oliver with cost segregation authority. We do cost segregation and energy studies across the country. And we've been in business about 15 years now. And just just happy to be here. Glad to be on the podcast.

Dave Morgia:

Yeah. And, and I mentioned that single family, but obviously, that's not your guys bread and butter. Right. So the bread and butter would probably be, you know, getting into that the higher dollar projects. Obviously, this is a multifamily podcast. So I'd love to kind of pick at what it means to get into a soft cost segregation study, and just, you know, total benefits package on something that someone might be trying to buy or, you know, exit on. So, yeah, could you just kind of dig into maybe a little bit more of, of what it means to actually bring in a service like yours, and how it could benefit you as a real estate adviser?

Erik Oliver:

Sure, sure. So I'll kind of just start from the beginning, they've just kind of with what Cost Segregation is. A lot of your listeners are probably familiar with, or have at least heard the term, but cost segregation really is just accelerated depreciation expenses. So when you buy a multifamily asset, the IRS allows you to take depreciation on that over the next 27 and a half years. And so just to make the math easy, let's say you have a 2.7 $2.75 million asset, you're going to take $100,000 write off every year of the for the next 27 and a half years, that's just your standard straight line deduction. You purchase it, you give the closing statement to your CPA, they throw it on the depreciation schedule is one big asset. And you take your standard deduction, and cost segregation, we're just segregating that $2.7 million purchase into different buckets, for lack of a better term. But, you know, when you buy that multifamily property, you're not just buying the land and the walls, you're also buying a whole bunch of cabinets, a whole bunch of countertops, appliances, a whole bunch of asphalt in the parking lot, landscaping, there's all these different components. And we are coming in through an engineering based study and basically dissecting that purchase price and allocating costs to those different buckets. And the whole reason you do that is the IRS, for example, says carpet is a five year asset. So if we can put a value to the carpet in that $2.7 million purchase, if we say carpets worth, you know, 150,000 you get to depreciate that carpet over five years, versus 27 and a half. So what you're really doing is you're front loading your depreciation deduction. And there's a whole number of reasons why you would do that Dave, you know, time value of money, a big one that we hear a lot about now is inflation. You know, $1, today is worth more than $1, probably in an hour from now with the way inflation is going. So take your deductions today, we may not own those properties in 27 and a half years. So give me my deductions today, let's front load that so that I can pay down debt, I can invest in new properties, I can generate cash flow. There's a number of reasons why you want to do cost segregation. But that's kind of just the gist of cost segregation. There's been some changes recently, with the tax cuts and Jobs Act and bonus depreciation. You may have heard that term before. But right now we are in a bonus period of 100% bonus depreciation. And as you can imagine what the tax cuts and Jobs Act that was the the Trump tax overhaul in 270, excuse me, 2017 2018. You know, with him being a real estate investor, it's very favorable the new tax laws to real estate investors. And so, for example, with that bonus depreciation, using that same example, when we segregate out the carpet, and we identify $150,000, where the carpet in your asset, instead of depreciating that carpet over five years, you now get to take 100% of that in the first year. So you're not even spreading that deduction out over five years. It's all in the first year and that's fine. any asset with a 20 year depreciable life or less. So when we do our caustics studies, they we come in and we identify three buckets, we've got our five year assets, our seven year assets, and our 15 year assets, and then the rest falls in the in the 27 and a half. Well, that five, seven and 15 year stuff, you get to take 100% of that all in the first year. So it's a huge deduction available to you if you've got the income that can offset that. I mean, we're talking hundreds of 1000s of dollars in tax savings, potentially, by doing Cost Segregation studies right now during this bonus period.

Dave Morgia:

Yeah, and I think, Oh, I'm sorry, I think there was the light. But my question, Erik, was, I think there was, we could probably speculate into, you know, the bonus depreciation and what might happen, you know, in Congress and at the White House, but at least for what we have today, what do we have left for that period remaining? We mentioned a phase out. So what does that look like?

Erik Oliver:

Yes, so bonus depreciation, anything purchased between September 27, of 2017. And December 31, of 2022. So you have all the way through the end of next year, anything purchased in that timeframe is eligible for 100% Bonus, anything purchased after 2022, it starts to drop 20%. So in 2023, you get 80% Bonus, and then the other remaining 20% gets depreciated over the the rest of the years. So and then in 2024, it's 60%, until it phases out and 2027 to zero. And that's the current tax law. The good news is, you know, there was talks about getting rid of some of this bonus or reducing the bonus amounts. The first draft of the bill that came out from the Ways and Means Committee, there was no mention of bonus depreciation, which is a good thing. So I don't think it's going to be phased out with the new administration, at least not yet. I mean, nothing's been passed. And so that could change, obviously, but currently, there's no mention of it. And so I do anticipate, at least for next year, still having the 100% bonus for anything purchased in 2022. So just to put some numbers to that, Dave, if you buy a million dollar asset, and let's say land is 20%, depending on where you buy your property, let's say lands 20%. So you take out 200,000, that gives you 800,000, of depreciable basis, with this bonus depreciation, you can pretty much count on about a $240,000 write off in the first year. And so that's just calculated your purchase price minus land. And then the cost segregation studies usually come in somewhere around 30%, depending on the asset class, what type of property it is. Multifamily tends to come in a little bit higher, just because there's a lot of personal property, but you're looking at 30 to 35% segregation on that $800,000. And that's going to generate, like I said, a $240,000 deduction in the first year. So that could be your down payment. I mean, if you put 20% down on a million dollar asset, you're basically getting your dump back the terms of right off. And then like I said, you could use your taxable income from there. So huge opportunities right now with the bonus depreciation.

Dave Morgia:

Yeah, it's obviously pretty powerful stuff, right? You talked about inflation, obviously, that's a big one and just time value money, like you mentioned, those two loan, just talking about even if you were to hold a property for the full 27 and a half years, it's always better to get your dollars back first, right? But then you consider most people aren't even holding for that 27 and a half year period, or, you know, even close to that a lot of things are syndicated. A lot of things are you know, held and flipped because the business plan is over. So that's kind of where to me it makes a lot of sense to get something like this done. Where do you really see kind of the highest ROI? I mean, you gave that example? I guess maybe what we'll do the reverse. So where wouldn't it make sense to kind of do these studies? Is it a nominal dollar value? Is it maybe the business plan doesn't align or? Or where it might not make sense? Because it seems like it makes sense quite quite a few places, right?

Erik Oliver:

No, usually does. There's very few times cost degradation doesn't make sense. It's more a timing issue. And that's the great thing about cost segregation is you can kind of keep that card in your pocket. And when you have a high income year, you pull it out, you say okay, now I'm going to do cost segregation on the study. So it's not always a matter of if, as much as it is a matter of when the times you wouldn't do cost segregation. One is if you don't have any income, or you don't show any income. So there's no point in paying to have a study done. That's gonna create this huge deduction if you don't have the income to offset that deduction. So an example would be you're making you know, you're showing $20,000 of income on paper. You don't want to pay us to create a $240,000 deduction because it's going to take you 12 years to use it. Just take your standard straight line deduction, no need to accelerate. The other time would be on smaller property. So cost segregation, just a little bit of history. It used to be very expensive to do cost segregation and the benefit wasn't nearly as big as it is now with the bonus, I mean, it always makes sense to accelerate these deductions, even if we didn't have bonus. But now that we have bonus, it's really put those deductions on steroids. And so but there is a minimum value, we look at everything about 150,000 200,000 or less, we want to look at it. So even, we do a lot of like you mentioned, single family rental homes, we do everything from single family rental homes, to golf courses, and ski resorts and the whole gamut in between. But with the bonus depreciation, it's really made Cost Segregation more accessible and more meaningful for those investors who are investing in smaller properties. And then obviously, the fees have come down over the years. And so we'll do single family rentals for you know, $2,500, and they might save, you know, 25,000 on taxes their first year. And so it's still a great return on your investment. But if your property is smaller, if you are going to sell it, you know, if you're gonna hold it for a year, and then turn around and sell it the following year, we do some extra analysis here to determine if it still makes sense, because sometimes you're going to be paying some of that back in the form of a recapture tax. And so we just want to make sure that our fee versus what you're going to be paying back, you're still going to be saving a significant amount of money. So sometimes on the smaller properties, it doesn't make sense, if you're going to sell it in the in the near future. But on the larger properties and of anything over about a million dollars. If you hold it for one taxable year, you're gonna come out ahead. So if you buy it in November of 2021, and you sell it in March of 2022, you're going to take your deduction in 2021, it's going to offset your ordinary income, which could be as high as you know, 37% plus state rates, when you have to pay that back, you're paying it back at a recapture rate of 25%, or even a capital gains rate of 20%, the highest. So that difference between 37 and 20, that 70% is just that's just the spread that you're saving. So there's some rate arbitrage, you know, you take your deduction at a high rate, pay it back at a lower rate at a future date and save the spread. And so, like I said, depending on, you know, a number of factors, when would that make the most sense? It's just a timing issue. And we work with your CPA to determine if the timing is right. But hopefully that answers your question.

Dave Morgia:

No, it does. And maybe we can pick up this recapture a little bit to kind of flesh it out a little bit more for heard listener, getting into maybe a project that's we'll just kind of go syndication model here for something that's a little more standard, say, you know, by year zero and sell your three to five, what would that kind of look like for you guys stepping into that project? I'm sure you know, there's a level of evaluating and then what would the exit look like for something like that?

Erik Oliver:

Sure. So that's a great question. So let's just just to make the numbers easy. Let's say you hold it for five years. So you buy a property, let's say for a million dollars, we come in, we do a caustic study, we break it out into five, seven and 15 year assets. You hold it for five years. Let me ask you a question. What would your five year assets be if you've held it for five years, they're worth zero, right? They have zero value after five years, they're fully depreciated. IRS, for example, says the carpet is a five year asset. So if you own the carpet for five years, you fully depreciated, it's worth zero. So to kind of back into it, if you don't do cost segregation, what ends up happening is you buy it for a million, let's say you sell it five years later, the markets great, you sell for 2 million. What you're telling the IRS says that everything doubled in value, you're saying my land is worth double, my walls are worth double. And guess what so is my dirty old carpet that I've had for five years. And that's just not the case, right carpet, you're not selling your carpet for double what you bought it for carpet goes down in value. So when you do cost segregation, and you segregate out of these components, you're able to allocate the sales price to the right bucket upon sale. And so you're saying my land and walls went up in value, but my carpet didn't. And so you actually end up paying less recapture tax, because you're able to allocate your sales price to the right bucket. So in that example, because you've owned your asset for five years, your five year carpet is worth zero. And so there's no recapture on those five year assets. And if you've owned it for seven years, then guess what, there's no recapture on your seven year stuff. So kind of going back to what I said earlier, you take your deduction at the highest rate, pay back a portion of depending on all along how long you've held it, pay back a portion of it at a lower rate and save the spread. And that's really where the the true value of Cost Segregation kind of comes into play. Now, that's

Dave Morgia:

beautifully explained. I think I think that perfectly sums it up. So you mentioned earlier, you know, there there's fees associated with that. And I think I agree with you technology over the last few years, especially since like you said, this is kind of its cost like on steroids. There's You know, a lot of effort and kind of money getting into making this process a little more efficient. So could you kind of speak on you know what it takes to get this done? How you guys kind of go through the process of actually accomplishing this? And what it just looks like from that end?

Erik Oliver:

Yeah, yeah. So so what we do is, we always look at the property first, before we ever engage a client to do service with us, we want to make sure there's significant tax savings. So we'll get some information from you run a benefit analysis, provide it back to you and say, Okay, on this property, we anticipate increasing your depreciation by X amount. And here's what our fee would be to do that study. Once you engage us and say, Yeah, that makes sense, you know, then we would do a site visit. So the IRS does require that there's a site visit for each of these, the IRS actually prints and I an audit guy that tells us how to do these. And so, in the audit guide said, it does require a site visit. So we'll come out, we'll look at your property, we'll take measurements, we'll take takeoffs, we'll look at what's in there, what type of appliances are in there, all those different components that we're looking for. And then we come back to the office, and we start to put costs on that. And we start to say, Okay, there's, you know, 6000 square feet of carpet, we'll put a value to that carpet. And then we, what we do at our, at our firm, which is a little bit different, is we actually provide a new depreciation schedule for your CPA. So a lot of costly companies just kind of break out the cost and hand it over to the CPA and say, Here, here's all the costs, now deal with it. And CPAs don't really appreciate that, or they do appreciate it, because guess what ends up happening, they end up looking at it and billing you an hourly rate. So they do appreciate that because it's like 10 hours worth of work. So we try to do a lot of that for you, we take the cost, we then put it into a depreciation schedule, so that they can easily upload that into their tax software. And so it ends up saving them time saving you time. And then what that does, is they've now on your books, you know, you've seen a depreciation schedule usually just says building a million dollars land 200,000 Now your depreciation schedule is gonna say, five your assets 150,007, your assets 30,015, your asset, you're gonna have those things broken out. And, and so once we've done the site visit, we prepare the report, we give it back to you guys. And then you input those numbers before you do your tax return. And then from there, you're able to take those deductions. So in saying that I just I, one of the things crossed my mind that we haven't touched on. But you can also go back and do these on studies, or excuse me on buildings that you've owned in the past. And so let's say you bought a building in 2017, and you hadn't heard about cost segregation, or maybe you didn't have a lot of income in 2017, you can actually do a study in 2021, on a building you purchased in 2017, and take your deductions in 2021, without ever having to amend any prior your tax returns. And so that's a very powerful thing for any investors who own real estate. Right now, if you own real estate, and you're paying taxes, you've got an issue to talk to somebody favorable. So definitely worth looking at. I mean, we all got to pay a little bit of tax, and it's, and you don't want to wipe out your income down to zero. That's not the most strategic way to do it. But sure, you definitely shouldn't be having big tax bills. Right now, if you're holding real estate, you should be utilizing that real estate to create these depreciation expenses. And like I said, you can go back, there's a form that we fill out as part of our studies. It's a it's called a 3115 change in accounting method. But basically, you're, you're telling the IRS, Hey, I've been taking my straight line deduction for the last four years, I'm now going to change the way I calculate my depreciation, I'm going to accelerate it. Here's the difference in those two numbers. And you get to drop it on, like I said, your current tax return without amending any prior years. So can be very powerful even for properties you've owned in previous years.

Dave Morgia:

So what about a scenario where you have maybe you're buying distressed or something with a heavy value add and you don't expect a lot of income? You're one? What would you recommend in a scenario like that, say the tax bill is going to be you know, pretty good as is and near to is going to be more normalized and you would really like to capture more there would that be something you sit and wait on and then do it or start with a Cossack day one?

Erik Oliver:

You know, that's a great question. And the answer is it depends. There's benefits to doing it both ways. One of the benefits will start with doing the cost STG before you improve the property. If there's a way you can justify or put the property into service before you do rehab, so let's say I buy an existing multifamily and it's full of tenants. The moment I close on that property, it's perverse, right? Because I've got lease agreements. I've got tenants in there. I'm using it for its intended use or purpose. So that building is in service. We would recommend doing a cost sake study at the moment you buy it. You're going to capture all the existence countertops, cabinets, appliances, carpet, carpeting, etc. As people's Lisa start to fall off, and you start to go in and renovate these units, you now get to take the deductions on the new carpet countertops, appliances, etc. So you're kind of getting to, for one right? Appreciate the old ones versus the new and the new ones as well. The key is on those type of scenarios, it has to be in service. So let's say you buy a vacant, vacant rundown multifamily building and nobody's nobody's living there, it's not in service, you're going to pop a bunch of money into it. In that case, you can't use that method because it was never put it in service. But if it's put in service, oftentimes you get a little bigger bang for your buck to do the cost study prior to the renovations. Because you're now getting, like I said, two sets of cabinets, two sets of appliances, etc. So you're getting depreciation on both. Again, there's a lot of other factors on whether or not that would make sense in each scenario. But that's one way to look at it. If you can do the caustics study before the renovations, definitely look at doing that, because you get bigger bang for your buck. On the other side, if you don't have a tax bill, and you don't need the deductions, there's nothing wrong with waiting until the improvements are complete. And so we do that quite often people will buy a property leases will slowly lead up though, they'll remove the tenants go in, revise all the units, and then they'll call us a year or two later to do the cost takes that because that's when their expenses have run out. That's when the income started to come in. And so they need these deductions. And so, again, that's just a matter of keeping that card in your back pocket and playing it when you need it. And when you're in the highest tax brackets, I mean, there's definitely some tax strategy of balls are involved here with you know, getting with your not just your CPA, and I'll just touch on this day. I know this is totally off topic, but CPAs are extremely important. And I'll tell you, from my short time in this real estate, industry and taxes and that type of thing, it's so important to have a good CPA who understands real estate. You know, if you're just paying if you're looking for the lowest cost, if you're getting your taxes done at h&r block in the lobby and Walmart, you're probably leaving money on the table. So go find yourself somebody who not only is a tax prepare, because anybody can prepare taxes and just move the move the paper alone, need to find somebody who's going to strategize with you, who understands real estate, because there's so many, the tax code is 1000s and 1000s of pages. And it's very complex. And it's written to incentivize people to do business. And so the government wants you to buy real estate. And if you understand the tax code, there's so many advantages to buying real estate, as long as you've got somebody who understands it. So just a side plug for the CPAs out there to understand real estate, please pay them the money. They're asking, it's worth every dollar I know it's gonna cost you more to have a CPA to your taxes than the folks at h&r block. But whatever money you're going to pay your CPA, you're going to get 10 times that in deductions and tax savings on the back end. So I just thought I'd throw that in there.

Dave Morgia:

No, I could not agree more. And I've seen the difference between a good and bad one. Luckily, I didn't pay the price too much on the former there. But yeah, I even would go one step further and recommend your CPA actually actively invest in real estate, either actively or passively. And it really involved in the game, not even just understand it, but as their skin in the game, if you will. Yeah. 10. Next, the money, whatever. And, you know, another mention is, you're paying them a higher bill. Yeah, but that's also deductible anyway, so it's, it's really, it's really not too much of a thing once you really add it all up. So yeah, Erik, you can enter kind of the, you know, the government, you mentioned the IRS earlier and their audit guide, I would love to pick it that because I just think that's super interesting. From what I understand, we hire a company like you a lot of the liability for this cost SEC study would kind of be lifted and pushed to you guys. But how do you guys make sure you guys are staying, you know, in good conversations and relationships with the IRS, say if they were to want to come see what you guys did? How do you make sure everything's kind of checking out?

Erik Oliver:

Yeah, and so we really just follow that audit guide. It's a 13 step audit guide, it really gets basically that guide is provided to the IRS agents who are auditing caustic studies, and it says here, IRS agent, here's what a good study needs. And so if you follow that guide, there really are there's not a lot that they can challenge you on. It's interesting, because oftentimes in our industry, people say, Well, why is there pricing or why is there such a difference in these reports, you know, had the report done with these guys. They got 20% segregation, I had to report that with these guys, they got 30% shouldn't be about the same. And the answer is no. It's just like, it's like getting your taxes done if you go to five different CPAs it's how they interpret the tax law and how they can justify their interpretations. So I've we've done, we've redone studies before, on the same building that got 18% segregation, and we did the study about 32%, segregation, exact same building the exact same things inside the building. And so the good news is we have been involved in eight audits, and we've never had to change any of our numbers. And it really comes down to a couple things experience. I mean, just like anything, if you have a CPA who has had experience, they know where and when to find these deductions and what's available to them. But then also, I'll give you an example, we had a, an audit once where the agent didn't like the so the way we justify this stuff is there's case law and all this stuff, somebody went to court one day and said, Hey, cabinets don't last 27 and a half years. And the IRS said, Yeah, you're right cabinets only last five years. So we're gonna make cabinets a five year asset. So there's all these court cases that allow us to do what we're doing. And an example of that experience I was talking about is we were involved in an audit and used a court case that to allocate the electrical work in the building. So we get to take portions of the electrical work and apply it to the five, seven and 15 your assets. So they didn't like the court case we use. And they thought the IRS agent said, you know, we feel like this court case, and the way they did it, the way they modeled that in this court case is a better representation. So we want you to change it and use this court case, when when you change it, we actually got better numbers than we were doing it the other way, by modeling that the way they asked us to. So now we have a letter in our files from an IRS agent that says this is how I want you to allocate electricity, I want you to use this court case. So now we use that court case. And that's how we model it now. And I'll tell you, our numbers on the electrical are a little bit higher than our competitors. Just because we're using that court case, because we have that letter from that IRS agent, we're able to just we feel like we can easily substantiate that if any agent ever asked us why did you use this court case, we're gonna say, Well, look, we got a letter from your colleague here that wanted us to use it. So that's why we're doing it this way. So just like your tax return, if you go to five different tax preparers, you're gonna get five different results. That's the same thing and cost segue. And so what you're really paying for is you're really paying for experience, knowledge, and expertise. And that's why your standard CPA look at CPAs is kind of a general practitioner, they have to know a little bit about, like I said, there's 1000s and 1000s of pages of tax code. And unfortunately for CPAs, it changes every year. So they have to relearn it after they've learned it. But they so they know a little bit about a wider range of subjects. But we just dive deep into this one subject. And that's why CPA firms will partner with groups like ours, to do these studies, because they don't have the expertise, they have the tax knowledge, but they don't have the construction or building knowledge to be able to put values to all these different building components. And so as long as you're following that IRS audit guide, you're fine in terms of audit, you know, there's really no audit risk. We've never had one of our caustic studies trigger an audit, it's usually something else in the tax return. And then they say, Okay, we see you've done a caustic study, can we see it? You handed my report, it stands alone by itself, we defend it 100%. And they say, okay, you've had a reputable company, do it. I see the methodology here. I see they follow the 13 steps, you know, you're good to go. So really, just as long as you've got a reputable company, you should be fine.

Dave Morgia:

Yeah, and I think the big thing there, right is you had it in writing, and you have all these court cases and decisions to back you up. It's not like you're trying to set a new precedent when it comes to law. Right. So use what's already out there, and it'll be a lot safer. So yeah, absolutely. And getting into the difference of, say, different companies or even your own company. It sounds like evaluating a property with different cost segregation percentages. Do you have any pushback from owners at times? And what does that conversation look like? If it's kind of been a difference in opinion on whether, you know, there could be a push for a more aggressive evaluation or something like that?

Erik Oliver:

Yeah, no, that's, that's a great question. So it's very hard when you're looking at cost segregation companies, it's very hard to compare apples to apples. I mean, I've seen I've seen proposals just about from everybody in our industry, and they're all different. The numbers are all there. But it's mad if unless you're very trained, you don't know where to find the numbers. And so I'll ask a client, I'll say, hey, and they'll ask us what you know, you guys, I'll tell you right now are these aren't the lowest in the industry? And so we get asked quite often, you know, you guys are $2,000 more for the study. Why? And I'll say Well, let's look at the benefit, you know, okay, well, we're gonna we're estimating conservatively to generate a $300,000 depreciation deduction. And on your competitors analysis, yeah, they are too. $1,000 cheaper, but they're only estimating a $200,000 deduction. So if we get an extra $100,000 of depreciation based on experience and expertise, what does that mean in a tax savings? You know, $100,000 at a 37% tax bracket, that's a $37,000. Tax difference. So yeah, you might pay a bit more to have a quality study done. But you're you're stepping out, what is the saying you're stepping over dollars to grab pennies? Right? Yeah. So a couple $1,000. To get an actual study, I'll tell you, I'm always very honest with my clients, there's companies out there, you can actually go online, I think there's a website called Do It Yourself, cost sag or something along those lines, but you can really go out there, you plug in your address, you put in a few questions, you answer some questions, and 10 minutes later, it spits out a report. But again, it's very inexpensive to do that. But you're not having somebody go in with the expertise. They're just taking averages. And so yeah, it's quick, it's easy, it's in, it's, it's inexpensive, but if you're only getting 15% segregation, versus having an actual engineering based study done, where you're getting 30% segregation, that's double tax savings. And when you're talking again, about a million dollar asset, that's an extra, you know, if you're doubling your say it's an extra $150,000 of deduction, it's an extra $50,000 of tax savings, so just pay the extra money to have it done correctly. Because you know, it's gonna make, it's gonna save you tenfold in the long run.

Dave Morgia:

Yeah, and plus, you have an expert team behind you that can back up evaluation of study much, you know, more strongly than someone who's, who's doing something kind of more carte blanche on their own DIY. So yeah, no, really, really interesting. Kind of take on that. So yeah, thanks for the explanation. I just was curious if there's, you know, like you say, there's just differences in kind of studies. So I'm sure there's people shopping around, kind of, like you mentioned, you know, 3000 versus 2000, that kind of have some opinions on things, and maybe they don't necessarily agree with the how you guys want to evaluate. So just wanted to hear a little bit on that.

Erik Oliver:

Yeah, no, that's, that's great. And I'll just go back to saying, you know, we get pushback, we've I've actually had people not do business with me, because they say that my numbers are too aggressive. They say, Erik, I had three, I had three proposals, these ones were all saying, we're gonna get 200,000 of production, you're saying you're gonna get 300,000? I don't want to take the chance to be audited, etc. I'm like, listen, let our Audit History speak for itself. We've never had to change any of our numbers. There's a reason, again, just to bond experience and expertise. And all those things I said, but the onus is on us, we're gonna go, you know, we provide 100% audit support, we're gonna go to bat if anything's ever question, and we're not doing anything different than the competitors, or it's just a different interpretation of the law. And it's or maybe using, like, I gave the example, electrical allocation, it's a different court case that we're using to model these, these studies. And so anyways, just thought I'd touch on that.

Dave Morgia:

Now, that's, that's perfectly explained. And like we mentioned, you know, when you have cases to back yourself, you definitely put yourself in a good position. Before we do run out of time, Erik, I would love to hit these five key questions. So as long as you're ready. Yeah, yeah, let's go ahead. So first one here is if you can only pick one trait that explains your success, what is that trait and why?

Erik Oliver:

I think I would go with effort. I am a firm believer in you get out of whatever you're doing however much effort you put into it. So I coach, I have a son and a daughter and I coach their basketball teams and I, I tell the kids after almost every game, because I don't care if we win or lose. I just want us to go out there. And I want us to run down the court as hard as we can. If there's a loose ball on the ground, it's our ball, not the competitors ball, we're going to get the loose by want the effort. And it's the same thing in business are the same thing. And anything you do in life, you're going to get out of whatever you're doing, however much you put into it. And so put the effort in, and you're going to get the results that you want to see. Like I said, we all we win some we lose some but I feel good at the end of the day knowing I gave it everything I had, I put all the effort and I could I did everything I could in order to do whatever it is. And if I win, I win if I lose, I lose but knowing that I could sleep every night knowing that I put in the effort, the worst games to lose it as you know, I played basketball growing up and the worst games to lose are the ones where you play an inferior team, but you didn't put in the effort. Excuse me. And so as long as you put in the effort you feel good about yourself at the end of the day.

Dave Morgia:

Absolutely. It's it's more just like you put in the reps and over time, the results will come right and the keyword over time. They're not necessarily the single instance of results, but you know, it'll prove itself worthwhile if you put in the reps correctly.

Erik Oliver:

That's correct. Yeah, I agree with you. 100% Yeah, and then

Dave Morgia:

the next one here, Erik, what is the most uncharacteristic thing you have done in your business and why did you do it? Um,

Erik Oliver:

I'll go back to when I first started doing this cost segregation. Number of my mentors, were like, Erik, you gotta go out and you got to talk to CPA firms. And you've got to, you know, they have all the clients, they have all the real estate clients, you got to go talk to the CPA firms. And I tried it, and I tried and CPA firms are hard to get into, you know, CPAs have all heard of cost sake. So they think they know how it applies. So I took a little different approach, and I kind of shifted, I said, you know, what, I'm gonna start targeting the building owners themselves. And, excuse me, the reason for that is, and I found this out after a little bit later, but I work with a CPA, and he's got 1000s of clients and said, John, why is it I said, you've sent a couple referrals my way, I know, you've got hundreds of other clients what's going on, he's like, Erik, I gotta be honest with you. He goes, I've got nine IRS responses on my desk, and I got 1400 tax returns that are due in April, I am not concerned because I'm saying this, and I don't repeat this, as I repeated on the podcast, he says, I don't have time to service my clients the way they deserve to be service, they're not there, a lot of CPAs are getting paid to process tax returns, that's where their money's at. And so they're not looking necessarily for ways to save tax dollars, they're looking to get your tax return down so they can get the next tax return done. Now, I want to make sure I state this, that's not all CPAs. There are tax. And that's what we talked a little bit about earlier. But so I found out that the CPA is not always looking out in the best interest, not because they don't care about you as a client, it's because they don't have the bandwidth. It's we all run into that problem, right. And so going and talking to building owners and being on podcast and going into networking groups and talking directly to the building owners. Trust me, they care about the tax savings. And so they're going to make sure their CPA looks into a cost segregation study. So that's one of the shifts I've had just just here in my career is kind of just changing our marketing efforts. And going directly to the bill building owners, it's a little longer transition, because usually I show them the numbers and then they do have to take it to their CPA, because they want to get their approval. But I found that it's been a little more successful for me anyways, being able to target just the building owners directly and get them to understand the value of

Dave Morgia:

it. Now that's super smart. I mean, going right to the person that's going to be affected the most by the tax savings is probably a solid approach. Yeah, maybe you know, another step, they got to consult their regular CPA, the guy they've been used to working with, but Yeah, seems like they'd be the most interested to hear about what you have to say. Right? So

Erik Oliver:

yes, it's been pretty successful so far. So yeah,

Dave Morgia:

that's awesome. And then can you name a time where you felt like you were not going to end up successful? And how do you overcome that fear?

Erik Oliver:

Um, yeah, so I'll go back to just out of college, or prior to getting out of college. You know, one thing I try to teach my kids now is, I don't care what it is. When I was in college, I'm like, I'm gonna go be a doctor. Because doctors make lots of money. I hate science, right? So I did like pre med classes, my first couple of years in school, I'm like, I'm going to go get your doctor, I'm going to make all this money. Halfway through college, I'm like, this is horrible. I hate science. I'm not going to be a doctor, I don't want to be a doctor. And so at that point, I really didn't know what I wanted to be. And, and so I try to instill in my kids, I don't care what it is you want to be or what it is you want to do, if you want to, to be a plumber, be the best damn plumber out there. Right? And you don't have to have your mind made up at 18. No, I don't think anybody knows what they want to do at 18. But find your passion. We all have to work, unfortunately. But find your passion, and then make that your career so that every day you have to get up you don't feel like you're working. So in saying that my kids joke to me, they're like, Dad, was that really like your goal in life was to sell caustics studies? And I'm like, No, that wasn't my passion growing up. But I do enjoy talking to people solving problems interacting with investors. And that's really why I like my job is because I'm able to help people save significant, you know, tax dollars. So find your passion. And then pursue that passion. And I do think going back to your question. When I was just getting out of college, I had no idea what I wanted to do on something like this. You know, I was working. I think I was working at footlocker to be honest with you at the mall, selling shoes, in those goofy striped shirts. And I'm like, What am I gonna do with myself? I'm like, you know, 22 years old. I'm selling shoes. Like, you probably don't remember the what was it? Al Bundy. What was the name of the show? You're probably too young.

Dave Morgia:

was at the honeymooners. Is that a different show?

Erik Oliver:

No, it was a different show. Oh, I can't remember anyways, Al Bundy was he was the older generation I say older I'm 42 your listeners hopefully will understand who Al Bundy is, but he was selling shoes at like 45 at the mall anyways, so I had no idea I thought that was gonna be me. I'm like, I'm gonna turn into Al Bundy. Right and so it was a lower point but like I said, I found my passion. I ended up being Getting into business development marketing because I did like to talk to people. And so that was a long winded answer to your question, but

Dave Morgia:

Well, no, no, that's that's absolutely perfect. I think yeah, especially when you're young. There's stigmas around not having that shiny career. I think that's kind of ingrained in a lot of people. Right. And yeah, it can kind of conflict with your kind of self esteem if you're not pursuing like the doctor whatever type of career when so you mentioned the plumbing thing, right? You know, be the best plumber. The funny thing is plumbers and a lot of crews like that make a ton of money. You know, they do very well themselves. Usually, it's just not really well touted. So there's tons of ways to align yourself with, you know, your passion and still making money and and it might not be the conventional route you've been used to thinking about so

Erik Oliver:

I totally agree. I worked with a country club when I was in college, and I tell you, these guys that were golfing every day, they were all tradesmen. Yeah, they started off as roofers, you know, they did no college degree, they started off roofing at 19, learned how to do it. And then they opened a company at 25. And they were golfing five days a week, by the time they were 35. And they had a crew of guys out there doing roofs and St. Plumbers, roofers, truckers, I can go down the list. So find your passion, whatever it may be. And you know, if you're passionate about it, you'll be successful. Trust me, I

Dave Morgia:

absolutely love that. And then pretty much the flip to that one. Erik, can you name a time where something in your business went perfectly? And what did you do to make that a reality?

Erik Oliver:

Yeah, so I think I'll just touch on a deal. We had here cost segregation authority, it was a large deal. multiple properties. And I think it was a success simply because I'm a big proponent of communication, both positive and negative. So when things are going well, I'm communicating to the clients and hey, everything's on track. You know, the numbers are looking like what we projected, everything's looking good. But then there was times where I had to communicate, hey, we were supposed to have the site business done, but we're not able to get ahold of so and so and so, you know, sharing the good news, and I think it's true for multifamily investors, syndicators, communication is key, you've got to communicate the good and the bad, otherwise, you start to lose credibility. And so I have no problem calling a client and saying, hey, you know, things aren't going like we thought they would. And here's the reasons why, here's what I'm going to do to fix it. And it's the same thing in life, whether it's communicating with a spouse, or your children or a co worker, communication is key, and it builds credibility and credibility goes a long ways. I feel like whether it's in business, or in your personal life is just being accountable for what, you know, what you've communicated. And so I would say, communication, in that sense, has been a key component of having something go successful.

Dave Morgia:

No, it's funny how rare it is, for people to admit fault, but it earns you so much respect when you do so oftentimes, right? When you just own it completely. The person might be mad at you for five minutes, but then for the rest of their life to be like, You know what, that Erik is a straight shooter, so I can trust him to tell me what's going on good or bad? So no, definitely, definitely, you know, high ROI to just tell the truth. And then last one here, what have you been focusing on lately to improve yourself or your business?

Erik Oliver:

Yeah, that's another great question. I think for me, as I've started to grow in this business, I think it's, I've got to work smarter, not harder. And so really fine tuning those processes. And, you know, automating things that can be automated getting the right people in the right seats, who can, I'm the first one, there's, I know, I know what my skill set is, and I'm the first one to hire out what I don't do well, and so, you know, so getting the right people in the right seats, being able to fine tune those processes so that we can become more efficient as a team, I think is is really where my focus has been lately, because, you know, there was a point where we were just spinning our wheels trying to keep our heads above water, which was a great problem to have, but how do we streamline this, standardize it and make it more efficient so that we're not you know, for my colleagues for my team, how do we standardize the process streamline the process, make it more efficient, put the right people in the right seats. So that's really where my focus has been lately is just looking at the processes and where we can improve those processes.

Dave Morgia:

Yeah, that that eliminate automate delegate kind of TRIO there is super clutch if you can start to work on your business and constantly think about that when you're looking at tasks. That's a that's a big one. So

Erik Oliver:

yeah, no like that. Was it eliminate automate and delegate?

Dave Morgia:

Yeah, in that order, if you kind of consider from that perspective, if it's a task, you can just get rid of get rid of it first. If you can automate it, that's the cheapest way to do it, obviously. And then if you can delegate it to someone else, then they'll do that. So I like that. I like that a lot. Yeah, no, Erik, I mean, glad I can give you a little tidbit at the end, but I learned a ton today really appreciate the time. Considering tax can be kind of a bear for some people. You know, it's not the Most fun topic for a lot. I think we had a pretty good show I had a ton of fun honestly, it's, uh, it was a good conversation really interesting to hear your approaches to things and how you can kind of take advantage of this and make sure you're still staying in, you know, in good regards to the IRS. I'm sure there's gonna be tons more questions anyone can ask you, or hopefully they have a property to reach out for your for but you just want to let the listener know how they can reach you today. Yeah, absolutely.

Erik Oliver:

The The best way is just through our corporate websites, so it's just www dot cost clst segue s eg authority.com. And we've got a number of places on that website where you can drop us a question, we've got someone who can answer it other than myself or one of the folks on our team here. So please use us as a resource. You know, we don't build by the hour. So if you have a tax question, we work with real estate investors across the country CPAs. Across the country, we're kind of seeing the latest and greatest what's working, what's not working. So if you have a question, especially for your folks who are investing in multifamily. I mentioned we do a free benefit analysis. But if you're looking at a property, you say, Hey, I've got this property in mind. I want to know what type of deductions are available to me, please reach out, we'll run it. Like I said, we don't charge anything, whether you close on it or not. No big deal. But please use us as a resource, anything real estate tax or depreciation. We've, if I can't answer it, we've got people here that can and so we'll get you the answer. So thanks for having me. I appreciate it. They

Dave Morgia:

know thanks again, Erik. Really appreciate the information today.

Erik Oliver:

Alright, sounds good. Take care.

Thank you for listening to the show. I don't take your time and attention for granted and appreciate that you would spend it with me. If you enjoyed this show or any of my previous shows, it would be a huge help if you would rate and review the show on Apple Podcasts or your favorite podcasting service, or even just share the episode with a friend. And if you'd like help from me or would like to talk about real estate investing further, feel free to visit the show notes for more information, or you can visit davidtravis.com.

Explanation of Cost Segregation
An Example
The process to evaluate the assets
The importance of a good CPA
Can you be aggressive in the valuation?
5KQ1 - If you could only pick one trait that explains your success, what is that trait and why?
5KQ2 - What is the most uncharacteristic thing you've done in your business and why did you do it?
5KQ3 - Can you name any time where you felt like you were not going to end up successful? How did you overcome that fear?
5KQ4 - Can you name a time where something in your business went perfectly and what did you do to make that a reality?
5KQ5 - What have you been focusing on lately to improve yourself or your business?