Is That Deductible? It Depends: "Properties"

The Property Profile

For the past 6 months, I have been profiling and monitoring affordable real estate options in our community. Due to the high interest rates, the real estate market has experienced a significant slowdown, resulting in a decrease in prices. Therefore, before I retire, I have been actively searching for another asset to diversify our current real estate portfolio.

I had specific metrics in mind for my requirements: I wanted the price to be below $150,000, the property to not require major repairs, it should be located within our community, have a smaller footprint, and potentially be an asset that one of my children could purchase from us through a land-contract agreement.

The last sentence may require some clarification, as it is closely related to the property profile.

Our Children

Let me start by saying that we are the kind of parents who expect our kids to be responsible for their own expenses in life. We have covered the cost of their education, including college, and we are happy to do so. However, when it comes to personal items like cell phones, they are responsible for purchasing their own device and paying for the service. Similarly, if they desired a car, they had to earn the money and fully finance it themselves. This is all part of the financial education and philosophy that we purposefully built into their upbringing. We wanted them to flourish independently, be self-sufficient, and not feel entitled due to our wealth.

Don't get me wrong, as a small business owner, I have provided numerous opportunities for each of my kids to earn money by working with my businesses. Additionally, we have encouraged them to explore other work opportunities that align with their spending habits.

Of course, they have been fortunate enough to benefit from our wealth, which includes enjoyable vacations, frequent family outings to restaurants, and various creature comforts at home that contribute to a good life. Of course, the most important element for a good life is not our wealth—it is the security of a healthy marriage and home filled with love and joy.

However, we have always believed that our wealth can be wisely utilized to benefit our children and family. This does not mean fostering entitlement or co-dependence, but rather providing them with opportunities that arise from having ample resources. This includes tax efficient investment funds that each child has been given through various financial means.

Our third child, who is 22 years old, has ADD, anxiety, and is on the autism spectrum. Life has not been easy for him. We have always pushed him to integrate into the neurotypical world, with minimal accommodation. As a result, he has successfully graduated from college with a trade degree, and we are extremely proud of his achievements. However, what we did not foresee was the level of difficulty he would face in navigating the job search process, including searching for job opportunities, submitting applications, crafting a compelling resume, acing interviews, securing a job offer, and ultimately, successfully maintaining employment. Work and job processes in America are primarily designed for neurotypical individuals, making it much more challenging for neurodiverse individuals. After numerous attempts and failures at various jobs, he is now living at home. However, he has finally found a job that could be considered a "career job." This means that it can support him independently, and potentially even support a family if he ever finds a mate. Our long-standing goal for him has been for him to thrive independently, and fundamentally this involves having a stable job with benefits. We also want him to be close by so that we can continue to coach and support him as he continues to mature.

Our fourth child is 21 years old and has also faced unique neuropsychological challenges. However, she is on track to complete an online creative writing degree from Liberty University in December. She lives at home and has a local boyfriend who plans to become a teacher. He is taking the long path to achieve his goal by working full-time and attending college part-time. Marriage is definitely in their future, but financial challenges likely lay ahead for them in their early marriage. My daughter has been struggling to secure consistent writing work and has reluctantly decided to pursue a full-time "regular job" after graduation while gradually incorporating freelance writing assignments. Despite our great relationship, she is fiercely independent and eagerly looks forward to moving out of our house sooner rather than later. Her graduation this winter could signal a greater likelihood to move in that direction.

Against the backdrop of these two children, we have been considering a housing asset that would be a good investment for us and support one of our kids in their next stage of life.

By the way, our two oldest children are married professionals who have moved away, and our 5th child is in her 3rd year of nursing school with the ultimate goal of working in an urban ER. Thus, none of them would likely have any interest coming back to their home community.

The Opportunity

Out of nowhere, I received an instant message on Facebook from a former patient who had moved away about 5 years ago. The message was something like: "My grandmother has been relocated, and we are selling her home near you. Do you happen to know anyone who might be interested?" After she described the house as a 2-bedroom, 1-bathroom property that was only 1 block away from my home, I knew it could be a perfect fit for me. I informed her that I was interested in viewing the property without involving a realtor from either party. I was informed that they had not yet determined a sales price. One of the family members, who had experience as a realtor, was tasked with determining the price.

My wife and I inspected the property together, and we were pleased to find it in excellent condition. It was precisely what we would expect from a single elderly person who had lived there for 20 years. The added bonus was the presence of a full, dry basement and lovely front and back decks.

I went back and conducted a thorough inspection using my flashlight, examining every nook and cranny. By this time, the family had agreed on a fair price point, demonstrating their genuine desire to sell it. They wanted cash-only offers. There were no red flags with my inspection, and I completed my property evaluation at Beacon GIS where all public data on properties is available. Once again, there are no concerns or red flags regarding the payment of all taxes, which were surprisingly low.

Based on my personal property comparison analysis, it appears that the family priced the property nearly $25,000 below market value to sell it quickly.

Recognizing this as a great opportunity, my wife and I analyzed our available cash flow and agreed to make an attractive offer for a quick sale.

Thankfully, I have acquired a significant amount of experience in buying and selling real estate over the past 20 years. Real estate has become the primary source of passive income that I have established for my family. I am able to evaluate a property efficiently and assess its potential rapidly. In this case, I was considering a cap rate of approximately 14%, which indicates a promising investment opportunity. Additionally, the instant market equity of $25,000 on the property suggests low risk. In addition, I have developed standardized purchase agreements and land contracts that I have utilized over the years. This allows me to save money on realtor and lawyer fees.

Armed with this information, I confidently offered a cash price that was 3% below the asking price. My offer included all furniture and appliances, with no formal inspection or survey required, no realtor fees, I would provide the official purchase agreement, and we would arrange for splitting the closing costs at a local title company that I had used for other property purchases in the past.

The offer was accepted within 24 hours. That's great news!

Business Details

Now it is time to decide how we should organize the purchase within our current assets and nine businesses. All of this needs to be carefully planned given our intention of selling it to one of our kids within the next 12 months through a land contract.

With 9 businesses, our personal assets, and a financially dynamic 12 months ahead due to my pending retirement in June, it was crucial to carefully evaluate cash flow and taxes with this purchase. This necessitated a thorough exploration and understanding of our financial landscape. My wife and I formulated our game plan, and subsequently, we consulted our accountant and attorney, both of whom assist us in managing our enterprise.

I am grateful that we have built a personalized team of professionals around our micro-businesses who continually advise and counsel us on various aspects of our enterprise. They provide valuable insights from business, legal, asset protection, cash flow, and tax perspectives. In my opinion, every doctor should have a personalized team built around them, due to their high net worth. Creating a cohesive professional network is one of the things we do with our SimpliMD clients because it significantly improves your business efficiency and comprehensive financial counsel.

Our lawyer and accountant reached a consensus on the most suitable micro-corporation to facilitate the purchase and ownership of the asset. We reviewed the game plan on how to organize the cash flow effectively for the purchase, as well as how to manage the income generated by the asset.

My wife and I discussed and reviewed things over a couple of dinners this week as everything came together.

Other Properties

The prior evening, we visited with my parents, where my dad is in the nursing home on hospice care. We had a sweet time of scripture reading and prayer, and I savored that he could still talk and comprehend our conversations. I provided some financial counsel to my mother as she was making asset-based decisions that intersected with their changing lives.

After being out of town for a few weekends, I also had multiple other small tasks to manage.

This included depositing the rent check from the builder who is constructing townhouses on my development property. I also drove by the property to visually assess the work being completed and to check if the lot they had rented for staging purposes was still in use (which it was). I am pleased to rent the empty lot, as it essentially covers the cost of mowing the remaining vacant lots that are for sale.

I reached out to the hospital's accounting department to inquire about the status of my call compensation from the previous month. This was necessary as the legal department had to make updates to my contract. I also checked the status of my prior year CAM reimbursement in connection with the triple net commercial lease of my medical office building to the hospital.

I was able to return some unused goods to Lowe's that were not needed for my guest house. Speaking of the guest house, I replaced the shower head as per the request of our current guests, as the water flow was low. Additionally, I installed new Blink security cameras to replace the 5-year-old security cameras that were not functioning properly.

I took care of several tasks for my mother-in-law. I fixed her stairway railing and outdoor security lights, ensuring her safety. Additionally, I checked in on her well-being and went to the post office to mail a package on her behalf.

I have methodically been working on my garage remodel over the summer, and now into fall, I have painted and hung some items as time allowed.

I reviewed and discussed marketing relationships and associated income with professionals in my SimpliMD network. Ensuring a cost-efficient and reliable network for our SimpliMD community is of utmost importance to me. As an example, I have successfully negotiated a 5% discount with the accounting services provider, TaxElm. Simply use the code "SIMPLIMD5" at checkout to avail of the discount.

I was able to secure our vacation rental in South Haven for our sister-in-law to use in a few weeks. We enjoy sharing it during the off-season with close family members. In exchange for their stay, we kindly asked them to cover the cleaning fee.

In the late afternoon, I completed my remote charting for my clinic and then focused on getting myself organized and prepared for our upcoming annual business strategic planning retreat in South Haven next week. We used to go to fun places for our annual business retreat, but after building our STR in South Haven, it made sense to rent our unit to ourselves and conduct our business meeting in one of our favorite places on earth.

We’ll go through my “Dare To Dream” guide (grab your free copy here) that we have used for over 20 years, and we’ll organize the 2024 personal and corporate budgets and associated strategic initiatives for each of our 9 businesses. With my scheduled retirement and transition into Coast FIRE in June 2024, the budgets will need to be broken down into pre- and post-retirement components. This is because the cash flow will significantly differ between these two phases. It will certainly be a busy retreat.

Is That Deductible?

Now, let's reflect on the business purpose for this busy week. There is a lot to cover, but the majority of it pertains to our real estate business assets.

The New Property Purchase: All costs associated with the property will be processed through one of our LLCs. This will also cover any personal loans required from us to assist the company in purchasing it during the closing process. The LLC will then create a land contract purchase agreement with one of our children for the property, and all expenses and interest income associated with the land contract will flow through that LLC. I was able to eliminate all inspection, survey, realtor, and legal fees in the purchase by managing them myself. The accounting and legal advice are included in the ongoing business retainer fees that I have with these professionals. The dinner discussions I had with my wife about our business structure, cash flow, and tax considerations were included as business expenses.

Diverse Income Management: The computer, internet access, phone, and vehicle necessary for managing my professional and passive income are considered covered business expenses. Tracking and managing income is a skill that I prefer to handle myself, rather than outsourcing it to others.

Helping and Sharing With Others: Not everything can be considered a business expense. By sharing our time, dollars, and resources with others, we can experience a deeper sense of meaning and purpose that extends beyond business. A great example of this is when I helped my mother-in-law, connected with my parents and provided financial counsel to my mom, and by sharing our short-term rental with my sister-in-law. Valuing relationships over material possessions is a critical aspect of thriving holistically in life.

As I wrap up this week, I reminded that in the end, our assets and businesses need to create both hedonia (pleasure) and eudaimonia (purpose) for us.

Taking the time to reflect on your personal and professional life is a critical step in finding the balance between pleasure and purpose in life. That’s why I encourage you to download my free “Dare To Dream” guide and schedule a personal or business retreat to go through it with your significant other.

And if you are looking for a great STR location to do your retreat, check out “Simpli SoHa” along the shores of Lake Michigan for a spectacular and quaint location. You can rent it through our property manager at Lakeview Vacation Rentals (cheapest rate), or VBRO or AirBnB.

Tod