The tax benefits of real estate are big but if you’re not tuned into it, you could be making investments where you’re paying more in taxes. In this episode, Community Manager for BiggerPockets, Mindy Jensen, is here to tell you the tax benefits of real estate that you might not know or really understand—from property taxes to tax mitigation strategies. She also takes us across her real estate journey and explains why you need to get educated and think about what kind of investing you want to do. Mindy further encourages us to get information about real estate and take advantage of it.
Listen to the podcast here:
Tax Benefits Of Real Estate — Interview With Bigger Pockets’ Mindy Jensen
I am excited to have with me Mindy Jensen, who is definitely a badass extraordinaire. She is the Community Manager for BiggerPockets.com, the co-host of the BiggerPockets Money Podcast, and she’s a live-in flipper with her husband. They do almost all the work by themselves because finding good contractors can be difficult. She’s here to tell you that real estate investing is not that hard and you can do it too. She has an inspiring story and I’m excited to have her. Welcome Mindy.
Thank you, Monick. I’m excited to be here. I love talking about real estate and yes, anybody who is reading can do it and it’s not that hard.
It’s possible and it’s not that hard. I do recommend that you get some education before you get into it because it’s not that hard, but it’s not necessarily something you’re born knowing what to do.
That is the nail on the head. It’s not hard. It’s not easy. Its work and it’s not that hard of work if you know what you’re doing. If you don’t know what you’re doing, if you’re trying to, “I’ll wing it,” you are going to have the worst experience of your life.
How did you get started in real estate investing?
I got started because I am cheap. I had a lease on an apartment and I was like, “I can’t believe I am throwing my money away on this apartment when I could own. I could be making mortgage payments every month.” I had taken over somebody’s lease, it wasn’t even my lease. When the lease was up, I moved back in with my parents. I saved up $4 and bought a $50,000 condo in the suburbs of Chicago, and I lived there for four years. Even way back then, $50,000 did not buy you palatial estates. It was rough and it needed some work. I painted all the walls, put in tile kitchen floor, a new light fixture and a new dishwasher. That’s all I did to this place.
When I sold it four years later, because I got married and my husband had a house and I didn’t want to live in the condo anymore, I made $25,000 off of it. I made $25,000 off of my $50,000 purchase, I’m like, “I want to do that again.” That started it. We were living in my husband’s grandmother’s house. She had passed away so he was living there and we fixed that up and made $100,000 off of it. It’s like, “We’ll keep doing this for a while because this is awesome.”
You’re about flipping. Do you do some buy and hold too or you just live and flip?
I started off live-in flipping because I didn’t want to deal with tenants and toilets. I don’t know if you’ve ever heard that before. I was on a panel at FinCon and I asked the four seasoned experts, “How many times have you gotten a phone call at 2:00 in the morning from your tenant?” Once in ten years and 90 units from Chad Carson. Never in four years in four units and never in four years in eight units. Gwen never had one, but she had a rap concert on her front lawn at 2:00 in the morning. The neighbor called her for that. That never happens but that’s the thing that everybody thinks is going to happen. I started off because I didn’t want to deal with tenants and toilets. I was just going to flip the houses. Once we discovered that you can live through a construction zone, we did that.
We’ve done it eight times. I want to point out that the reason that we do this is that if we’ve owned it for more than two years, and we always own it for more than two years, when we sell it, we pay no capital gains taxes. I pay no taxes on any of this money that I’m making. That $100,000 off of my husband’s grandmother’s house, all in my pocket and none to Uncle Sam. That is a lot different than people who don’t live in the home and hold it for two years as their primary residence because then they’re paying regular business income tax on whatever flip profit they have. I pay nothing legally. Let me say that legally.
You have $500,000 capital gains credit as a married couple if you’ve lived in it, but otherwise, it is active income less than a year that you own the property.
I mainly do live-in flipping. I discovered you don’t have to deal with tenants and toilets if your property is in Maine and you’re having somebody else handle it for you. I have two partners on a 46-unit mobile home park in Maine and I live in Colorado. This is my win. I bought a co-working space with a couple of partners in my hometown.
I’m curious about this co-working space. I know that is the newest thing and they’re a hit. What made you want to get into that? What do you like about the co-working space?
I like the community that it’s building. It’s not your traditional co-working space. Most of the co-working spaces in our area charge $200 a month and up. We charge significantly less because we’re catering to a certain clientele. I’m the co-host of the BiggerPockets Money Podcast where we talk about people’s journey to financial independence. Real estate plays a huge part in a lot of people’s journey. The financial independence community is the one that we’re trying to build surrounding this co-working space, but also giving people a reasonably priced place to come work.Real estate plays a huge part in a lot of people's financial independence journey community. Click To Tweet
My husband worked from home for years and we were always looking for a place for him to work because we had little kids. We have all wood floors. Sound bounces all over the place and it’s hard to concentrate when your kid is crying for an hour or whatever. Having a space like this would have been awesome for him, but we couldn’t find anything. We could find something that was $100 a month but it didn’t include the internet, which was also $100 a month. You had to get furniture and then you had to do this and that. It didn’t make any sense to our cheap selves.
When you’re talking about a budget-conscious clientele, then it’s on point.
We also bought a property. It was a store and they sold ladies clothes. I don’t know if they weren’t profitable. They moved out and the store came up on the market and we bought it. It was a great purchase because we bought well. We can afford to not charge a lot of money.
Do you want to share the name of it so people who want to work there can go?
One of my partners is somebody called Mr. Money Mustache. It’s called StacheMont. The StacheMont or Mr. Money Mustache headquarters is in Longmont, Colorado.
If any of you are out there in Longmont, Colorado or the surrounding areas, they’re a wonderfully affordable place where you can go work. You’ve been investing a lot using your self-directed 401(k), tell me about that. First of all, explain what that is because a lot of people don’t understand what that is. Why do you like it and why do you think it’s been a good option for you?
The self-directed solo 401(k) has a lot of amazing options. I’m going to try and remember them all because it’s almost unbelievable. The first and foremost is, you have to have self-employment income. It has to be a true source of income. It has to be real self-employment income. Once you have that, you can put up to $55,000 if you’re self-employed. If you are a regular old person with a 401(k), you can contribute up to $19,000 for 2019, but my company can contribute up to 25% of my income. The more I pay myself, the more I can put into my 401(k). It has kept it $52,000 or $55,000.
I can take that money and I can invest it in the stock market like a traditional 401(k) or I can invest it in other things that I choose such as real estate, which is the only thing I choose. I can also make private loans through that. I have made some private loans to other real estate investors who are able to find better deals than I can find in my current hot market. I have used it to invest in syndications. I’ve used it to lend to somebody who makes mortgages himself or his company does. There are a lot of different ways you can use it. If you don’t have self-employment income, you can still take advantage of most of these things. In a self-directed IRA, which has similar limits, I don’t think you can contribute as much like your company doesn’t.
With the self-directed IRA there’s something called a UBIT tax. When you’re selling properties within it, sometimes you can get hit by this 30% tax within your self-directed IRA, which is no bueno. 401(k) does not have that.
All the growth in the solo 401(k) is growth, as though I bought Facebook for $1 and it went to $1 million. That’s with the real estate there. If you have self-directed income, the 401(k), in my opinion is the better option, but clearly you should talk to your financial advisor to get the right information for you and your choices. That has been amazing. I have grown my portfolio significantly by opening up a self-directed solo 401(k), putting all of my other 401(k)s into it from past jobs and then using that to invest. That’s how I bought the mobile home park. I did not buy the co-working space through there, but I’ve made a lot of loans and a lot of syndication investments too.
If you guys want to know more about this on my blog, on my website, REIGodesses.com, I wrote a post about that and then you can also get a free book all about self-directed 401(k)s. You can check that out. Also, I want to make a point because I know you do these live-in flips. You do not use your self-directed 401(k) for your live-in flips because that would be disallowed.
It must be an arm’s length deal. I can’t buy a house for my dad or do any of the work on it, which makes buying the mobile home park in Maine such a sweet proposition through the self-directed solo 401(k). I’m not going to go there. I’m not going to be tempted to do anything on it because it’s so far away. If I had a property closer to me, I might be a little more tempted to be like, “I’ll go paint the walls.” You can’t do that.
You can’t put equity into your properties that are owned with your self-directed IRA. You can pick up Brent and that’s about it. You can’t even mow the lawn, paint the wall or any of that.
You can get yourself into quite a bit of trouble if you decide to be like, “Nobody will know.” They always find out. Don’t do it.
They’re awesome instruments, but make sure you know the rules so that you don’t want to foul on them by accident. Speaking of running afoul on things and not doing things the right way, I always like to ask, what was your biggest mistake in real estate and what did you learn from it?
I don’t know if you know this but around about 2008, there was a teeny dip in this real estate market. Of course, I bought the house at the height of the market in 2006. We even started to dip a little bit. I was consumed with making the house better that I didn’t pay attention to what was going on in the market, then I decided, “Taxes are high here.” My monthly tax bill for my property in Wisconsin is the same as my yearly tax bill for my property in Colorado.
Part of that is my house was much more expensive in Wisconsin. Also, a large part of that is the tax rate in Wisconsin is unbelievably high and the tax rate in Colorado was unbelievably low. My taxes were $14,000 a year and now they’re $1,100 a year. I like $1,100 a year much better. A big chunk of my monthly expenses was in taxes. Yes, you get services for them but that’s not a rewarding purchase. That’s not something that you’re like, “They paid my taxes. Look at all these roads I get to drive on.” Nobody takes that into consideration.
The thing you learned is paying attention to the market. You bought in 2006 and you bought it when it was high. Was it hard to sell? What happened with that property?
It was a weird property. That is something that I wish I would have paid attention to before I had bought that property. It was weird in relation to the rest of the city. It was on the lake. It’s obviously more expensive because it’s on a lake, but it was also a big house on the lake. It’s even more expensive. That house was $800,000 on the lake. Across the street, it’s $200,000. It’s a smaller house, but it’s not on the lake. It’s not that much different, but there’s a huge difference.
I’m severely limiting my buyers’ pool to people who want to be on the lake and have enough money in an area where $200,000 houses are the norm. I’ve got an $800,000 house. I wanted it to be a $1 million house. I thought for sure it was going to be a million-dollar house, then the market dropped. We were lucky to sell it for $800,000. In hindsight, maybe I would have stayed a little bit longer, but who knows when the market’s going to change. I don’t know when the market’s going to drop. I don’t know when the market’s going to go up. There are things that you can pay attention to that gives you some clues. You’re in this business too.
It took a long time to recover.
It did, and some places still haven’t recovered.
Credit was hard to get. You should be happy you sold it for that much.
I should be happy I sold it?
I guess, but probably you shouldn’t be happy.
I am happy I sold it. I don’t want to continue. Once I sold it, the property taxes went up to $17,000. That was years ago, who knows how much they are now.
They’re good points you’re making. One is paying attention to the property taxes because that does make a difference to the bottom line for the numbers. Also, so much of what you’ve been saying, your strategies are geared around tax mitigation and a lot of people don’t think about that. They think about the income. The tax mitigation benefits of real estate, not only do you want your money tax free. Sometimes you can get it so that your taxes look like you have a loss, so you’re paying less in taxes than you otherwise would have because you do own the real estate. Even though you’re making more money, you’re paying less tax. The tax benefits of real estate are big but if you’re not tuned into it, keyed in, you could be making investments where you’re paying more in taxes, property tax wise.
Yes, you can and I sure did. I would say that’s a good point. This is where your good real estate focused tax advisor can help give you some guidelines. There’s depreciation. Are you taking depreciation on your rental properties? Even if you’re not, Uncle Sam thinks you are. When you go to sell, he is going to make you recapture all the depreciation that you took or did not take. You don’t know what you don’t know. It goes back to the beginning, get your education. Get a good tax advisor, they will save you a whole lot more than you pay them in advice.Build a community and be a part of that community where people all have similar goals and mindsets. Click To Tweet
A good tax advisor will make you money, not waste your money. You’ll end up with the net positive from that. It’s worth it. The flip side of the biggest mistake, what are you most proud of?
I am proud of the work that I do in the property. I don’t know if you’ve ever been to a property where you’re like, “I don’t know who did the work here, but they really don’t know what they’re doing.” A neighbor’s property was on the market and I went in to see it because I’m nosy. I’m looking around and I’m like, “On this short piece of wall, he took two pieces of trim and scissored them together, but not mitered them together.” It comes in lengths longer than that. You always use a big long piece on every single wall. Otherwise, it looks terrible.
Instead of having a three-inch piece of wood planks, he ran out because there was only an inch left. He just left it. There was an inch of open space and I’m like, “You can’t do that.” I guess you can. I am proud of the work that we do in every one of our flips. We’ve learned how to do plumbing the right way. We’ve learned how to do electricity. I won’t do drywall ever again, but I know how to do it should I want to. I’m proud of the product that I’m giving out.
It’s nice to have places where it looks good and you’re proud of what you’ve done, and people are like, “This is the Jensen property.” To what do you attribute your success?
Having a strong partner where we are on the same page. Live-in flipping could be draining when you’re living in the property. If you’ve ever done a flip, you know if something goes wrong. There’s always something unexpected. There’s always something and you’re like, “That’s going to be another $1,000,” or however much it is. In the grand scheme of things, if you’re putting in $100,000 and then the only thing you find is an extra $1,000 somewhere, you should be excited.
As long as that’s what you budgeted for. If you budgeted for $20,000 and you’re like, “It’s $100, and now there’s another $1,000.” That kills me. We’re such a good team. When I’m having a day like, “I can’t believe we found another thing,” he’s like, “It’s no big deal. We can fix it.” When the role’s reversed, I’m right there. We’re never both down at the same time. I’m making it sound like it’s all peaches and roses, it’s not. Sometimes you’re like, “I can’t believe there’s more dust. I stepped on a nail. I can’t wait to get that tetanus shot.” That hurts for a week. Breaking a tile right after you put it on, you pull it back up. If I didn’t have my husband by my side the whole time, I would have stopped.
I also work with my husband. He’s my business partner and I love it, and we have a great time. We’re joining an event called Real Estate Investor Soulmate. It’s for people who want to be partnering together with their significant others. What do you think makes for your successful partnership with your husband?
We talk all the time. I respect him, he respects me. We have conversations that are not always lovey-dovey. Sometimes I’m frustrated with a behavior that he has, but he’s still a great person. He left the dishwasher open and I ran into it or something stupid like that, or he dropped a tile on the floor. He didn’t do it on purpose. It stinks that something broke or this didn’t work or whatever but remember that this is somebody that you respect. Have conversations. Your husband does not read minds. No matter what he says, he does not read minds. If you want him to know something, you have to say it to him. You can’t think it in your head, then he’s going to know. You have to say the words, “I wish you wouldn’t do this. Okay, I’ll stop. I wish we could do this. I don’t like that this is happening.” Communication is absolutely the key.
Communication and mutual respect, that’s true. There are many women who are furious with the men in their lives because they shouldn’t have known or they should know something, but they’ve never communicated with that person. They’re mad because they should have known. I always say, “If you haven’t told them explicitly, then you can’t be mad because they’re not mind readers.”
Throw it on the reverse, can you read his mind? No. You don’t know what he thinks you should know. Ask him. If you want to know the answer to a question, ask the question. If you want something they need to know, then tell them.
What advice do you have for a woman who’s starting out in this field?
Get educated. First of all, what kind of investing you want to do? Do you want to be a landlord? Do you want to flip houses? Because it’s not that hard and it’s not that easy. It’s work. Finding a contractor stinks, but you could do almost anything by yourself. Plumbing isn’t that hard. Although I will say, I don’t have the strength necessary to tighten some of the things so they don’t leak. That part is hard, but they have this new system called PEX that you don’t have to do any welding. You don’t have to do any tightening. You take these big pliers and clamp them shut, and you can test the joint right then and there.
Learn on YouTube, on BiggerPockets.com, on Monick’s website. Learn anywhere you can find information. Google is your best friend. I started this before YouTube, before the internet, and it’s much easier now. There are books, websites, podcasts and videos. Any way you learn, if you’re visual or audio or whatever, you can learn and keep researching until you start to see the same answers over and over again. This information is out there. For you not to take advantage of it is doing yourself a disservice and your finances.
Also, ladies, there are ways to do it. You don’t have to do the work yourself. You can find good contractors. It’s possible. You can do it yourself. There are no limits and you just have to get educated. Before we get to our famed trinity which is a brag, a gratitude and a desire, what’s the best way for people to reach you and find out more about what you do?
I am the Community Manager at BiggerPockets.com and I am all over the website. If you are not a member, when you join, I will be your first contact. If you are a member, I’m probably your first contact. You can find me on Twitter, @MindyatBP, Instagram and Facebook. You can email me at [email protected].
BiggerPockets is phenomenal with all things real estate investing. Definitely check it out and check out Mindy there. It’s time for our trinity. What is one brag? What are you celebrating?
I am celebrating the co-working space. It is a lot of fun to build something with people that I like, and in the case of my husband, love. It’s exciting to build and be a part of this community where people all have similar goals and mindsets.
What’s one thing you’re grateful for?
I am grateful for healthy kids. I have a friend whose daughter broke her arm and I’m like, “That’s horrible.” Another friend, her kids are in the hospital sick. I have healthy children and I am grateful for that.
Last but certainly not least, what’s one desire?
I would like another awesome real estate investment.
So shall your desire be, or so much better than you can imagine.
Thank you. May the goddesses shine their real estate love upon me and help me find that property. There’s a property around the corner that went under contract with somebody else, and I’m hoping that it falls out.
Whatever property is yours by divine rights, that will show up.
You’re welcome and thank you. That was awesome. You can find me at REIGoddesses.com. You can connect with me there and subscribe to the podcast and comment and be in touch. Thank you.
Thanks for having me.
Thanks for being here.
- BiggerPockets Money Podcast
- Mr. Money Mustache
- @MindyatBP – Twitter
- Instagram – Mindy Jensen
- Facebook – Mindy Jensen
- [email protected].com
About Mindy Jensen
I have been investing in real estate since 1996, and recently earned my Colorado real estate license.
I love helping first-time homebuyers find that perfect house – I love looking at houses, and we will keep looking until we find THE ONE.
I love walking first-time home sellers through the process, happily answering any question that comes up. I have been in your shoes many times, so I know what you are going through.
As an investor, I have the experience to help analyze deals.