How to Buy Real Estate with Pre-Tax Dollars

How to Buy Real Estate with Pre-Tax Dollars


How to buy real estate
with pretax dollars. This episode is going
to blow your mind. Hey everyone. Welcome into the Investing
in Real Estate show. I’m Clayton Morris. I’m Natalie Morris. And this is the show
where we teach you how to build
financial freedom, how to use real estate
as the vehicle, buy and hold real
estate to create passive income and cash flow. And really understanding
the tax code is what we’re going to talk
about on today’s episode, because so many people get
scared of the tax code. They think that it’s
something to be, oh my gosh. I don’t want ever pay taxes. I don’t want to be
near this tax code. It’s too scary. But when you embrace
it, you realize you can actually create
enormous wealth from it, right? Right. So this is a strategy that I
have been researching recently. And I thought, well, we should
do a podcast about this. It’s a very specific way
to build your real estate portfolio with pretax money. So we’re going to talk about
specifically how to do that. But we’ve decided to do it. And so most of the
time on this podcast, we like to take
you along with us as we implement new
tricks and tools to build our personal portfolio. So where should we start? Well, OK, so first
of all, let’s just start with this
idea, this premise, of buying real estate
with pretax dollars. What does that even mean? What are pretax dollars? OK, so you are taxed on
what you make in your family as a person, right? Businesses are
taxed differently. So at a high level,
the theory goes that if you, Clayton Morris,
the man, the dude– The man. –makes $100, then the
government taxes you on $100. If you, Clayton
Morris LLC, make $100, but you had $50
dollars in expenses, the government then taxes
you on what’s left over, $50. So Tom Wheelwright and other
tax advisors, their big thing is to make sure that you’re
legitimately funneling as much of your life through a
legitimate business as possible, because
then you’re paying for things with pretax dollars. So what we want to do is make
sure that we can pay expenses with things, with dollars
that are whole dollars, not $0.50 pieces of $1. So for instance, our
cell phone bills, we could pay that out of
our personal bank account. But we’d be paying it
with $0.50 dollars, because what goes into our
personal checking account has already been taxed, though
they’re portions of dollars that we have earned. So what we want
to do, what we do, is pay our cell phone
bill out of our business, because that is a
qualified business expense. In fact, I’d love to
not own a cell phone. But we need it, because
we own a business. So that’s a legitimate expense. So OK. You want to build a
real estate portfolio. That’s why you’re
listening to this show. And you would love it if
you could use whole dollars, whole pretax dollars. So here’s a trick
on how to do that. Do you want to get
started on that trick? Let’s get started on that trick. OK, so one killer way
of doing this is to– If you think about
residential real estate, you might think of this as
what’s known as a house hack. OK, so in residential
real estate terms, this might be a situation
where you would buy, for instance, a duplex. OK, and you would live
in one side of it. So we’ve heard from
a lot of people over the years who did
this right out of college. They purchased a duplex
with daddy’s help. They moved into it. And they then cash flowed the
other side of the property from a tenant who was
living in that property. And it was paying for the
entire mortgage on the property. So that’s the same
idea that we’re about to talk about, right? Right. OK, so here is the strategy. And it has to do with
building your real estate portfolio with corporate
investments, right? Right, so now these are
commercial investments. Let’s say you run a business. Let’s say you run a pet store. OK, you own a pet store,
and/or you’re thinking about starting a pet store. Now, this is a strategy
that you should employ for your pet store, right? OK. So let’s say you
own a pet store. It’s called Doggie Tails. Doggie Tails, OK. OK, so Doggie Tails LLC is a
successful pet store in town. And it rents some
storefront property from a person named Herbert. Herbert, OK. Herbert the landlord, OK? OK. Now, you don’t think Herbert
is an awesome landlord. You don’t particularly love the
storefront location you’ve got. And you talk to
your tax advisor. And the tax advisor,
because you already are a real estate
investor on the side, but you own Doggie Tails
as your main thing– and your tax advisor
says, well, do you own the storefront
for Doggie Tails? And the answer is no, because
you’re paying Herbert. You’re paying,
let’s say you’re– And you say, no, right? Yeah, you’re saying
no, because you’re paying Herbert
maybe $3,000 a month in rent for this storefront. OK, so your tax advisor
knows you’re already down with real estate
as an investment. And he says, well,
here’s a trick for you. You can find a real estate, a
commercial real estate, piece, and purchase it in an
LLC that you own separate from Doggie Tails. And then Doggie Tails
is going to pay rent to the LLC that
holds the business. And then what money now is
going to pay down that mortgage? Right. What money? Is it pretax or
post-tax dollars? Right is not an answer. That wasn’t a– Oh, sorry. It’s a– –right or wrong question. It’s pretax. It’s pretax dollars, because
now Holding Company LLC owns the real estate. Doggie Tails is a renter to your
LLC that’s a holding company. And Doggie Tails is paying
with pretax dollars, rent, which then is paid
down into the mortgage. So just wrap your head
around this for a second, because this is
mind blowing, OK? When we were going through
this, we’re like, wait a second. We have a business
in, and we want to– instead of renting it,
we’ve been renting space. I’m like, no way I’m
closing down that office. I’m not renting
that space anymore. And I’m going to go out and buy
a commercial piece of property. I’m going to buy–
maybe it’s going to have multiple storefronts. So then I could even rent
out the other storefronts. I’m going to purchase for– it might cost a couple
hundred thousand dollars. But I’m going to buy a
commercial piece of property. And I’m going to buy it
in an LLC, a new LLC. Let’s just call it
Commercial Property LLC, OK? Let’s call it– let’s put
the word holding in it, because as we use
this, I want people to understand this is a holding
LLC and Doggie Tails LLC. Now remember, if you
do put other renters in your storefront that
other companies that come in and rent to you, that’s not
any more pretax dollars. You’ll pay tax on their rent. Right, they’re paying you as
a tenant in your property. But for now, let’s just look
at Commercial Holdings LLC is buying a commercial
piece of real estate. And let’s say that there are
three storefronts there, one of which will be Doggie Tails. OK, so now Doggie
Tails is owned by you. It’s your business. Doggie Tails LLC is
now going to rent space from Commercial Holdings LLC. Right. Now remember, Doggie
Tails was already paying this amount
in rent to Herbert. And already that rent
was pretax rent money. Those were whole dollars,
because the government doesn’t tax you on that
business expense, right? Right. So now you’re paying
yourself basically. So you’re paying
rent to yourself, because you’re the owner
of Commercial Holdings LLC. Now, there are some
tax caveats here, which are pretty exciting. So why would you
want to do this? Well, you want to
do this because you are adding to your
investment portfolio, owning a piece of
commercial property that you assume will cash flow
for the rest of your life. Say you want to retire
from Doggie Tails. You want to sell it to someone
else who loves animals. And that person comes along
and buys the business from you and now rents from
you, continues to pay rent to Holdings LLC. So you’ve just bought a passive
asset, a performing asset. So that’s awesome. And the other two storefronts
that I talked about, those are vacant right now. And you can hire– maybe
there’s a shoe store that wants to move into one of them. And maybe a barber shop wants
to move into the third spot and rent from you
and build to suit. They’ll build it
however they want. And they’re going to pay rent
to you, to Commercial Holdings LLC. Right. Now a couple of things
you need to keep in mind is that when you go
to make the deposit on this new commercial
building, you can’t use Doggie Tails’
money, because that would be inappropriate. So Clayton Morris,
the person, would have to pay the deposit
on post-tax dollars. So not 100% of the funding
for this investment is going to be pretax dollars. I’m going to say about between
60% and 80% of it will be. Now, there are
different types of loans you can get from the government
for this specific type of purchase, for instance,
the SBA 504 loan. Small Business Association loan. Right. And so that allows you to
get a very low interest rate small loan. And you can also put
as low as 10% down. And it can go on top of
another mortgage as well. Now remember, whatever
you’re paying in interest is another business expense. Right. So the beauty of– I mean, there’s just multiple
levels of beauty in this. So you’re getting to pay the
interest on this Small Business Association loan as a write-off. You’re adding to your net worth
by buying a commercial piece of real estate like this. You are then renting
it out from yourself. And that rent now
is being paid to you as the owner of the property
instead of to Herbert, to some random landlord. And you’re creating
an incredible tax shelter for yourself
on top of all of this. Right. Now, don’t forget that
under the new tax plan, there is no cap for
tax deductions, state tax and property tax deductions,
if it’s a business expense. We have caps on our
personal real estate but not for investment
real estate. That’s totally fine. So you think of the
deduction for the interest. You think of the
deduction for the taxes. And then you start down all
the benefits of real estate, like depreciation. You can use different
depreciation tools now, because this is a warehouse. And you can depreciate
it piece by piece. So there are all
kinds of advantages to owning something like this. So it’s definitely worth
thinking about for anyone who is a small business owner. So this is a killer strategy. And what I want to
talk about, though, is some of the ways
in which you need to manage the money, though. So when Doggie Tails makes a
payment to Commercial Holdings LLC, you as the owner of
Commercial Holdings LLC better make darn
sure that that money is going into a bank account
that’s set up specifically for Commercial Holdings LLC. You can’t have that money being
paid out by Doggie tails– Into the bank. –and then going just into
your Doggie Tails bank, because that’s like
you paying yourself. And that’s commingling money. You can’t do that. That’s illegal. So you need to make sure
these are separate entities. You’re filing a separate
entity with the state. You’re registering that LLC. You have your
incorporation documents. You have an EIN number, which
is an Employee Identification Number that you’re getting
from the Treasury Department. So you can set up bank accounts. All of that stuff
needs to be separate. Right. It needs to be set up properly. You’re right. And you can’t just have
Doggie Tails pay taxes on that building. Clearly that’s inappropriate. But you set Doggie Tails’
rent appropriately so that it is paying for you
to pay those expenses. And that’s another point,
market rent as well. You can’t give Doggie Tails a
break and say, hey, guess what? You could rent this
place for $100. But the shoe store next door
has to pay $4,000 a month. It has to be market rent
based on the market conditions in that neighborhood. And that’s something that
the IRS will look at. Make sure that you’re
paying a reasonable rate. Now, you don’t have
to go crazy with it. But it has to be a
reasonable rate of rent in that neighborhood, right? Right. And then you could
open a second location. Do the same thing if you wanted. Because Doggie Tails
is doing so well, you want to have Kitty
Tails and Bunny Tails. Iguana Tails. And Alligator Tails. You can do that all over the
city for as much as you want, as long as you set
this up properly. Now, I wrestled with
myself on whether we should do a podcast like
this, because we think, well, most people want
to invest with us. They have a day job. And then they want to
own single family homes or residential real estate. But then I ran into a guy
actually at the Phillies game we went to recently
who was a dentist. And I was like, well, I
assume a lot of our listeners have their own
businesses as well. A dentist is a small
business owner. There are plenty of people who– maybe you have a guitar
shop or whatever. Yeah, it’s perfectly reasonable. And by the way, hi, dentist. We were at the Phillies game and
came up to Natalie and said– I think his name was Dan. Dan said, big fan of the show,
big fan of Morris Invest. So thank you, Dan. and
we have a lot of dentists that watch actually and listen. Because as dentists
are first to admit, they’re not very good
with their money. They’re not very good
with their savings. Well, they’re not
trained with their money. That’s what our dentist
actually told us. He said there was one course in
business, running a business. And running a dentist office
is running a business. He’s like, I’m running
this full-time job, running a dental office. But we’re not very
good with our savings. We don’t know where to put
our money for investments. And so that’s an
important piece of this. But right, so many of our
listeners, many of our viewers have small businesses. We know them, because they’ve
bought properties from us. Maybe they own their own
flooring company back home in North Carolina or whatever. Wouldn’t it be great if you
could finance your own business by having– be able to set up and purchase
real estate, a commercial piece of property, and then
pay rent to yourself using this strategy? Yeah, exactly right. So I do think– I thought about it
and was thinking about moving our offices
into a place that we own. And I thought, that
sounds like a pain. But if we don’t, we’re going to
pay rent 12 times to somebody else this year. That could be going towards
something that we own. So I really want
to give it a try. Well, and especially
when the fact that we can get a Small
Business Association loan and then on top of another loan. And it’s a commercial
piece of property that we can depreciate. Creating this tax shelter,
it’s a no-brainer. So, anyway. And I’ve told the story
of my grandparents where owning warehouses and
how they retired on that well into their– I think they were in
their 70s and 80s. No, they both were in
their 80s, actually. They lived on
warehouse real estate. It was an oil change shop. And so my dad still
collects that rent. We know that in certain places,
commercial real estate is a boom, was a great investment. Yeah. So there you go. So if you are interested
in learning more about this strategy,
we will have more episodes on this very
topic here on the show as we– As we try and do it. Yeah, as we try to do it. And we go down the rabbit
hole of opening and moving that office. We’re excited about it. I can’t wait to share
that story with you. In the meantime, if
you’re ready to pick up your first rental property,
or your fifth rental property, or your sixth rental
property, that’s what we do. All you need to do is go to our
website at morrisinvest.com. Click on the Book a Call tab. Schedule a consultation. Our team will jump on the
phone for 30 minutes with you. And our properties, roughly in
the $50,000, $60,000 $70,000 range, depending on if it’s
a C or a B class property. And it may be a little higher. Some of our B class can go up
in the $80,000s, which is– it depends. There’s a range. Don’t hold me to it. Sometimes people get on
the phone and be like, I thought it was
going to be $60,000. And it’s $62,000, or it’s
$55,000, and it’s $70,000. Yeah, they’re all in that range. But they’re great properties. And we completely rehab
them, place tenants in there, and make it a turnkey
process for you. So go to morrisinvest.com
if you’re looking forward to doing that with us. Or if you want to go out
and do it on your own, that’s what this whole
channel’s all about. You can go out. You can hang drywall. You can swing hammers. You can find properties. You can hire. Whatever you want. You can open a Doggie Tails. You can open Doggie
Tails or Iguana Tails. So that’s what our
show is all about. We’ll be back with another
episode on the Investing in Real Estate show. Now go out there. Take action. I don’t care how you do it. But become a real
estate investor. It’s the number one way to
build wealth in this country. We’ll see you.

41 thoughts on “How to Buy Real Estate with Pre-Tax Dollars

  1. Sorry but don't understand. (1) Even if Clayton Morris, the dude, a sole proprietor owner (assuming he is an idiot for not running his business under an LLC) of the business called Doggy Tails, pays $3,000- per month rent to Herbert the landlord, isn't the rent automatically tax deductible as business expense under IRS rules? (2) Of course, it would be wonderful to own a property with multiple store fronts, but aren't we assuming that we have the required down payment which may not be true?

  2. Its a coincidence that I was just thinking about this topic in light of the new "tax cuts" and the elimination of SALT deductions. I kept looking for a wink, wink, nudge, nudge from you guys… So how about this, I buy rental real estate, how about if I buy a home with my properly structured LLC and rent it to myself? Now I can not only depreciate it but also continue to write off the interest and property taxes. Of course the rent I pay would be post tax dollars but hey, I get the writeoffs back and I would still take the personal deduction!

  3. Great topic you guys but I would I think you’re at the point where you need to start doing visuals and actually show the numbers do some examples so that it really becomes tangible

  4. I have an LLC in which I have my rental property in. Can I take my primary residents and put it in the LLC I have my rental in and then turn around and rent my home I live in from the LLC?

  5. Thank you guys for sharing this , I have a question on this one though
    When doggy tails pays the holdings company the rent with pre-tax dollars , as I know , the holding company will be taxed on that rent , because for the holdings company only the interest on a loan is an expense !!
    Therefor it's just the same as taking the loan with doggy tails LLC .
    Please correct me if I'm wrong
    Thanks.

  6. Hey guys great show. So your not real buying it with pretax dollars, but your paying it off with pretax dollars? Which is basically the same at the end.

  7. Love this idea, even though I don't have a business store front. However, could you use this same strategy against your own home? Sell your home to your LLC, then rent it to yourself?

  8. This is what I want to do. Thank you so much for just giving the knowledge away and explaining it in such detail. I am changing the path my family is on to secure the future of it when the kids and nephew's are of age to learn to buy and hold for themselves and pass the knowledge down. Thank you again for your time and knowledge.

  9. This was absolutely perfect, my wife owns a dog grooming business that is renting currently and I just proposed that we do this very strategy to start investing in real estate. It’s pretty ironic that you guys used Doggy Tails as the business. I’m looking forward to your next videos. Thank you!

  10. I like the girl – aside from being pretty she also has very precise, exact, direct, understandable way of explaining what she wants to say. I like Clayton as well.

  11. I'd like to know how exactly is LLC taxed. What is difference between taxing person vs. LLC. In my country LLC is taxed 2 times (1. company taxation 19% + 2. person taxation (dividend) 15%).

  12. Could doggy tails buy and hold rental Realistate such as single family homes? Basically allowing the business to provide the down payments pre tax instead of paying yourself out of the business and then going and buying the Realistate in your own name or another LLC. I’m trying to skip the self employment tax on the money if possible.

  13. Great video. I talked to my husband about this. We currently lease our store front for $7000/mon. I hate that we pay all of this money to the landlord.

  14. Can you do the same thing with space in your home? I have a friend who is a personal trainer and one whole floor of her home (lower level with separate entrance, bathroom, parking, etc), is her studio. Free weights, machines, treadmills, you name it. Total of about 1,000 sq ft all on one level and she lives upstairs. I am sure the home is in her name but the business is a separate entity. Can she charge the business rent and then take the deductions and so on? Will this qualify for the 20% passive income deduction in the new tax laws? Thanks and keep up the great work.

  15. I own a bicycle shop. Bought our building about 15 years ago. 2 commercial units in addition to ours plus 3 apartments upstairs.

  16. Great Vid. Question. I am in Toronto Canada. I have a personal owned pre-con assignment ending this year and I have capital in my small business account. Do you suggest me to sell the assignment to my small business? In terms of the benefit of the taxation. Also, I will need to get the business loan for half of what I owe the builder. Will you have any insight or tips? Thanks appreciated.

  17. So Doggie Tails is still writing off the rent expense, but now the holding company pays tax on those dollars (income). It (the rent) is not pretax money, it is non taxed money, regardless of who it is paid to, simply by reason that it is a business expense. In the end you are shuffling money around but do you come out ahead, other than using the rent to build equity in your own building? You are now paying income tax on money you previously used (and still do) to avoid tax.

  18. Awesome advice, and a really great idea. Love how you're always watching out for us viewers to make sure we stay compliant, too. Thank you so much!

  19. You can buy and rent houses or flip houses as well using pre-tax dollars through a Roth IRA. You can also earn a fee to manage that business.

  20. I guess I’m just confused why doggy tails couldn’t purchase the property on its own and just write off the depreciation, taxes, and interest it’s paying. Also, wouldn’t the holding company still pay taxes on the rent income received in excess of all property tax, depreciation, and interest?

  21. I really like that your wife is helping you in the business. Same goes for us. We’re a small family owned jewelry store and my wife is my back bone and supporter. It’s got its ups and downs of course, and I’m sure you’re aware of it, but having someone you trust to work with you is priceless 😊

  22. NOTES:

    The idea here is that you would buy using money that isn’t already reduced by taxes. The key here is understanding what you can do because of the tax code. Remember that corporate entities are taxed at a different rate than individuals. When you are corporate, you put as much of your expenses into the business, making the income not taxable. For example, if you pay your cell phone bill with your personal account; you are using taxed money. Each of the dollars in your personal account cost you more money. If you use your business, you are using pre-tax money. In residential real estate terms, this means for example buying a duplex and living in one side. The renter pays the entire mortgage, meaning you have no tax dollars working for it. For real estate investment, this means, for example, buying a commercial property and having your business rent that location.

    My thoughts:

    Think of this sort of like a 401k. You put money in before it is taxed and when you take the money out, you’re taxed. This allows you to maximize the use of your money now for a greater effect and a more effective way to spend and use the money. The best practical consideration for you would be to buy a commercial property under an LLC (Let’s call it Bert’s Property Holdings, LLC, for the sake of argument) and then you move Levi Family Jewelers there, and Levi Family Jewelers pays Bert’s Property Holdings the rent. Pre-tax dollars pay the mortgage.

  23. Please make an episode using the duplex house hacking idea ? I would’ve been able to actually follow for new investors

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