Welcome back to the Passive Mobile Home Park Investing Podcast, hosted by Andrew Keel. On this episode of the Passive Mobile Home Park Investing Podcast, Andrew talks with CPA Noah Rosenfarb. Noah has been studying the tax code his entire life in order to find legal loopholes so he can help people legally reduce or eliminate paying taxes. Not only is Noah a third generation CPA, he also has over twenty years of experience investing in real estate. Today Noah answers questions about tax issues within passive real estate investing, cost segregation, REIT’s, questions we should ask our CPA’s, and about his own 501(c): FIGI.
Andrew Keel is the owner of Keel Team, LLC, a Top 100 Owner of Manufactured Housing Communities with over 1,400 lots under management. His team currently manages over 20 manufactured housing communities across ten states – AR, GA, IA, IL, IN, MN, NE, OH, PA and TN. His expertise is in turning around under-managed manufactured housing communities by utilizing proven systems to maximize the occupancy while reducing operating costs. He specializes in bringing in homes to fill vacant lots, implementing utility bill back programs, and improving overall management and operating efficiencies, all of which significantly boost the asset value and net operating income of the communities.
Andrew has been featured on some of the Top Podcasts in the manufactured housing space, click here to listen to his most recent interviews: https://www.keelteam.com/podcast-links. In order to successfully implement his management strategy Andrew’s team usually moves on location during the first several months of ownership. Find out more about Andrew’s story at AndrewKeel.com.
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00:18 – Welcome to the Passive Mobile Home Park Investing Podcast
00:30 – Noah Rosenfarb’s background
01:35 – Walking through a sample mobile home park deal
03:35 – Depreciation in real estate
05:10 – Taxable loss and how to carry it over to cover other income
08:15 – 1031 Exchange or 721 exchange
10:05 – Cost segregation
12:00 – Tax advice for new investors to real estate syndications
14:00 – CPA questions before passive investing in mobile home parks
15:50 – REIT investing
19:15 – Tax incentives for out of country companies
23:10 – Noah’s 501(c): FIGI
28:00 – Getting a hold of Noah
28:55 – Conclusion
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Links & Mentions from This Episode:
Noah Rosenfarb LinkedIn: https://www.linkedin.com/in/noahrosenfarb/
Syndication Platform: https://investwithfreedom.com/
Freedom Family Office Website: https://freedomfamilyoffice.com/
FIGI Royalty Website: https://www.figiroyalty.com/
Keel Team’s Official Website: https://www.keelteam.com/
Andrew Keel’s Official Website: https://www.andrewkeel.com/
Andrew Keel LinkedIn: https://www.linkedin.com/in/andrewkeel
Andrew Keel Facebook Page: https://www.facebook.com/PassiveMHPin…
Andrew Keel Instagram Page: https://www.instagram.com/passivemhpi…
Welcome to The Passive Mobile Home Park Investing Podcast with your host Andrew Keel. This is the podcast where you can get the education you need to invest 100% passively in the highly profitable niche of Mobile Home Parks.
Andrew: Welcome to the Passive Mobile Home Park Investing Podcast. This is your host Andrew Keel. Today we have an amazing guest in CPA Noah Rosenfarb. Noah is a third-generation CPA and has been studying the tax code his entire life to find legal loopholes to reduce or eliminate paying taxes. No, it is not just your typical CPA either because he has over 20 years of real estate investing experience. And through 31 acquisitions, he’s built a massive portfolio of 3500 apartment units and over a half a million square feet of office buildings and retail shopping centers.
Wow. He is the Chief Investment Officer at Freedom Family Office. He serves as the primary financial advisor for entrepreneurs that want to convert their net worth to predictable passive income so they can live the life they want. Noah, it’s awesome to have you. Thank you so much for being with us today.
Noah: With pleasure. I appreciate the invitation.
Andrew: I would love to start by doing just a quick deal review, to walk through a sample mobile home park deal where the purchase price is $1 million (just to make our math easy). I would like to discuss with you the depreciation basis and bonus depreciation in year one to make sure my audience and I understand the tax benefits fully that real estate and mobile home parks specifically provide.
Let’s start and assume the following for a typical $1 million mobile home park. The land, let’s put that at 30% of the purchase price and that’ll be not depreciated. 35% of the purchase price we’ll say is the infrastructure. Tell me if I’m wrong on any of these, but that’s usually depreciable over 15 years on a straight-line basis. And then we’ll allocate the remaining 35% to goodwill, which is depreciable over 15 years on a straight-line basis. Altogether, with the infrastructure and the goodwill, that puts us at 70% of the asset’s value that could be depreciable over 15 years at an equal annual amount, right?
Andrew: On a $1 million property, this could equal around $46,000 per year. The NOI on something like that would be—at a 9 cap—$90,000 a year. That means you would potentially only be paying taxes on around $44,000, which is the 90 minus the 46.
Noah: That’s if you paid cash. That’s if you don’t have an interest that you’re paying as well.
Andrew: Exactly, and it would go up if you had debt, if you had some financing on it.
Noah: That’s one of the amazing things about investing in real estate is depreciation doesn’t affect the investor when it comes to the returns they’re going to measure, the money that comes into their account either on a monthly or quarterly basis, or the money that comes into their account when they refinance. All of that cash is unaffected by depreciation, and so depreciation is just this tax concept that says, at some point in time, we’re going to need to replace these assets that we’re depreciating, so the government gives us a deduction for that.
The reality is that almost inevitably, if you own real estate for 10, 20, or 30 years, it’s worth more than when you bought it, not worth less. It’s just this great gift that the IRS has given us.
Andrew: That’s a great way to put it. It’s a gift for sure. If we touch on bonus depreciation, which is just another added benefit here, the depreciation on the infrastructure which is typically about 35% of the purchase price, can be accelerated from 15 years to 1 year under the new tax law right now.
Noah: With some limits. Certainly on a $1 million park, you’re going to get that all in year 1, so you’ll pocket that $350,000 in depreciation. If you’ve got some debt on the property, you might get a write off of more than you invested in the property itself. That’s a pretty amazing opportunity if you know what to do with it, and maybe we’ll cover a little bit about who gets that benefit and who doesn’t.
Andrew: Maybe you could elaborate on that just to tell the listeners what a taxable loss is, how they can carry that over to cover other income that they may have.
Noah: Anyone that’s investing in real estate, you’re either going to be one of two types of investors, either you’re a passive limited partner. Maybe you’re not a real estate professional. You’re just investing in these deals because they’re good investments. For you, the rules are slightly different from for people like Andrew and me that are real estate professionals. The government says if you’re a professional, you could take that deduction, and offset it against any other income you have.
You mentioned I have a family office business. I have a real estate business. I have a few other businesses. No matter what income I receive from those companies. If my real estate throws off losses, I can offset them against my other active income. That’s a great benefit of being a real estate professional. Now, if you’re not a real estate professional, the government recognizes that you still should get a benefit as well. You could offset any real estate income that you’ve had.
Let’s say you bought a mobile home park four years ago, now you’re selling it and you’re facing a capital gains tax, which is not a bad problem to have, and you don’t want to do a 1031 exchange, which maybe we could touch on. You’ve got this taxable gain, but now you just invested in this new park that was $1 million, yet you put in $250,000, the rest was finance, and you get a $350,000 write off. That’s going to offset $350,000 of the capital gain from the property that you just came out of.
Now, if you don’t have real estate gains to offset your real estate losses, you can deduct up to $25,000 to those losses against ordinary income, and the remainder is just going to carry over into a future a year, so not too terrible.
But a lot of times, with the people that I counsel, if you’ve got one spouse who’s actively at work engaged in a business, and maybe another spouse, their primary role is being a caretaker at home, what we’re looking at is to figure out is there a way we could make them a real estate professional? Because if we get to make them a real estate professional and you’re investing in two, three, four deals a year, and you’re planning on doing that for the next decade, two decades, or three decades. Well, if your spouse could become a real estate professional, and manage this portfolio that you’re building, now you could start to take all those losses and offset your ordinary income.
That’s one of the planning strategies that we look to implement if we can.
Andrew: I love that. That’s super cool. Since you mentioned it, I would love to mention the 1031 exchange or 721 exchange. Maybe you could just elaborate a little bit on those. I would assume most of our listeners understand what those are and have heard those terms before, but maybe you could just tell us.
Noah: Sure. I’m a bit of (I guess) unique in that I don’t love 1031 exchanges. 1031 exchange is designed to take your profits from one property that you’re selling and you roll it all into a new property, but what I’ve found over time, especially because I have LP investors in my deals as well, and I’ll give you a great example. We bought a building in Texas a couple of years ago. Everything’s performed well. We’re ready to sell it at the end of the summer. We’ll get about 4 ½ times our money.
Somebody that invested $250,000 with me back a few years ago, when we acquired the building, they’re looking at getting back a little bit more than a $1 million right now. If we did a 1031 exchange, that means they’re going to have $1 million tied up into one property. My clients are wealthy, and they certainly could afford to have that, but my preference is for them to diversify their risk, take that money, and maybe split it up into three $350,000 investments that we’ll make over the next 12 months, rather than lump it all together into one single property.
I think 1031s are great for active investors. People that are putting their skin in the game, they’re building their portfolio, and they’re trading up in value. They work well for those people that have direct control, and they’re putting all their eggs in one basket because that’s the way you build significant wealth in a short amount of time.
For LP investors who are looking at real estate as a way to diversify their risk, create a passive income, and have steady stable returns, what I’ve found over time is if you could diversify out of one property that’s done well, plant four more seeds maybe in a couple of different markets and a couple of different asset classes. Then we use bonus depreciation cost segregation, and we get those losses in the first year that you’re investing in those other properties, and it could offset most to the gains that you had on the last one.
Andrew: I love that. That’s high-level advice right there. Thank you for sharing that. You mentioned cost segregation and a cost segregation study. Would you mind elaborating on that? We typically do those on the acquisitions that we purchase. Can you explain what that is to those that don’t know what it is?
Noah: Yeah. Again, we’re talking a lot about depreciation, which is this fake idea that we’re buying something, and we’re going to reduce the amount that it’s worth every year. Some things like Andrew mentioned, you’re going to deduct that 1/15 per year, and after 15 years it’s worthless, but the government has different rules for what you’re allowed to deduct and when.
Some properties or some pieces of a property, like maybe carpet, so if you have carpet or you have paneling inside of a room, maybe that’s only 5-year property. You’re going to […] out that over 5 years. Maybe your kitchen cabinets you could deduct over 10 years.
When we buy a building, we send in an engineering expert. They go in and they assess from the purchase price how to allocate it to 5-year property, 7-year property, and 10-year property so that we’re not lumping everything into this 15-year bucket or 27 ½-year buckets, and we start to accelerate our depreciation through this cost segregation study.
It’s an engineering study to divide up the purchase price into smaller parts. Instead of just land and building, we’ve got land, we’ve got the exterior of the building, and then we are breaking out the interior of the buildings into smaller parts so we could depreciate it faster.
Andrew: Awesome. Like the carpet, the water heaters, the doors, and paneling, everything is separated. That’s fantastic. To jump into a couple of questions, let’s assume that a listener of this podcast has never passively invested in a real estate syndication before. What should they expect to come tax time on their first syndication?
Noah: The first thing you should expect is not to file on time. If you are one of those people that you’ve got to get your return in by April 15, you should think carefully about who you’re investing in syndications with and make sure that they can produce that tax return timely. Unfortunately, the way this business goes for a lot of syndicators, they don’t get their K-1s out by the initial filing deadline and they go on extension.
For some investors, that’s frustrating. My perspective as a CPA and someone that’s advising clients and making these investments, it doesn’t matter. You could go on extension. There’s no real big deal about going on the extension. But if that’s going to get the hair on the back of your neck up, if you’re going to be upset about it, make sure to confirm that you’re going to get your tax return K-1 information on time to give it to your preparer, so you could file your return timely.
The second thing to consider is the K-1 that you receive as a passive investor might also have a K-1 for the individual state in which the property or properties are located. If you’re in Florida, where I live, there is no state income tax. But if I own property in an estate where there is an income tax, I may be required to file a state income tax return in that state for the income I received on that property.
Again, that’s not a big deal. There are some compliance costs around it. But if your accountant charges you an extra $300 to prepare your Georgia return, and the investment that you made is only producing $1100 or $1300 a year of income, it’s a pretty significant portion of the income to give up to the accountant to pay your filing fees. Just make sure that you’re appropriately sizing your investment to take on this additional cost burden of the accounting compliance.
Andrew: I love that. That’s a great tip. What should passive investors ask their CPA before investing in real estate syndication passively?
Noah: Most people don’t always go to their CPA for advice before they do something. They’re typically going to their CPA after it’s already done. Unfortunately, the professions encourage that in a way by the style of CPAs charging fees. You’re either paying a fixed fee for your tax return to be prepared after the year-end and if you want anything else, you’re going to have to pay hourly to your accountant.
Most people aren’t that anxious to pay their accountant any more money, and most accountants aren’t looking to charge that hourly rate to clients because it tends to be inefficient. When you go to the person who’s your tax preparer, usually, they’re the ones at the highest level. The partners in a firm or a sole practitioner prepare and their time is the most valuable asset they have.
The way that accountants make money is during tax season. They have people that are underneath them at lower hourly rates doing some of your work so that they’re able to generate more than their hourly rate on the time that they’re spending on your return. When you go to them asking for advice, it’s not as profitable because they’re the only ones that can give you that advice.
I would say certainly to ask your accountant. See if they could help structure your investment. You may find that if you’re investing in multiple deals in multiple states, if you don’t necessarily have an asset protection strategy, you’re going to want to look at that. Maybe it’s not the best idea to invest in your name. You want to decide with that accountant if you should be setting up any entities between you and that individual real estate investment.
Andrew: Perfect. That’s wonderful. Just to go back, I just remember this. If our investors are investing in a REIT or another option like an investment fund, does that depreciation that we talked about previously still carry over and provide the same benefits to the limited partners?
Noah: In funds, they’re typically passing through all the depreciation. On the REITs, if you’re getting a K-1, you’ll receive a portion of the depreciation. If you’re not getting a K-1 through that REIT because it’s structured as a C corporation, then the C corporation itself is getting the benefit, and you’re only receiving a dividend which is taxed at dividend tax rates, which is already net of the depreciation.
Andrew: Got you. Thank you for touching on that. If some of our passive investors are investing through their IRAs or other retirement accounts, what do they need to know about UBIT taxes on assets they invest in that are taking on financing leverage? Could you touch on that a little bit?
Noah: Yeah. This is an area where there’s lots of confusion both by the investors and by the syndicators because most people are under the impression that if I have my money in an IRA and I invest in a real estate project and let’s say I invest $100,000 and 5 years later I get back $200,000 on a sale. It’s in an IRA. I don’t have to pay any tax. Unfortunately, you might be wrong.
If you own real estate in an IRA, there’s this portion of the tax code, which Andrew mentioned, called UBIT. UDFI is another acronym that is attributed to this, but basically, inside your IRA, not everything is tax-free. There are a couple of exemptions. One of the things that are not tax-free is real estate in which there’s debt on the real estate.
If there’s a mortgage when you acquire the property, or if you add a mortgage or a line of credit after you acquire the property, now all of a sudden, there’s a formula that has to apply to determine how much of your gains or your income becomes taxable even though it’s held by an IRA.
Now the thing most people don’t know is if you own your real estate in a 401(k), then that doesn’t apply. Why? Who knows, but if you own your real estate in a 401(k) plan, doesn’t apply. The challenge is that most people who have control over their retirement accounts tend to have control through an IRA, not a 401(k). The 401(k) is held with their employer. But if you’re self-employed or you’re over the age of your employer’s requirement for what’s called an in-service distribution, you are stuck with your employer plan.
If you’re self-employed, you could set up your own self-directed 401(k). I have my own self-directed 401(k). It acts much like my self-directed IRAs, which I also have, but inside my self-directed 401(k) I can make those real estate investments and not be subject to UDFI on my real estate deals.
Andrew: Wow, I love that. That’s another golden nugget right there. I love it. I know you own companies in Puerto Rico, and we have talked briefly about this. I know they have some tax incentives. Can you share a little bit about that with the audience?
Noah: Yeah, sure. I’ll give you the short story. If anyone’s curious, they could just contact me directly and I could share some more specifics. I own a C corporation that I formed in Puerto Rico. The reason I formed a corporation in Puerto Rico is Puerto Rico invited me. They said, Noah, please come here. Do business on our island. They made this offer to everyone in the United States. Please come bring your business here. The way we’re going to attract you is we’ll offer you a 4% corporate tax rate guaranteed for 20 years.
If you’re producing value on the island, and that value is getting exported off of the island, so in my case, we provide consulting services in Puerto Rico to US-based companies and individuals. All of the income we generate would be taxed at 4%. One of the unique things I did is when I set up that C corporation, I set up a 401(k) plan inside the C corporation. I rolled over some money from one of my existing 401(k)s into my new company 401(k). And then I bought the stock of that company in my 401(k) plan.
I started the company, C corporation as shares. My 401(k) plan had some money in it. The 401(k) plan bought those shares from the company, and now my company is owned by my 401(k) plan. And then I took one extra step and I said, you know what, the government on our 401(k) plan allows us to put money in and not pay taxes now, but when we take it out, we have to pay taxes. They also have another plan—which is called a Roth plan after Senator Roth—where we could pay the tax now and then never pay tax again.
I decided, let me convert this 401(k) which owns my Puerto Rico C corp into a Roth 401(k) plan. Now by paying tax on the shares that I bought, which were on a low basis, because I did it when the company was formed, I own all of my stock in that company inside of a Roth 401(k) plan.
Let’s say, for example, this year we’ve got $1 million in profit. I pay $40,000 of income tax to Puerto Rico. They’re very excited because they weren’t going to have that $40,000 had I not chosen to set up shop down there in Puerto Rico. I’ve got $960,000 in profit. I issue a dividend to my 401(k) plan, which is the owner. Dividends aren’t taxable inside of a 401(k) plan.
Just like if Microsoft, GE, Coca Cola, or Procter & Gamble issues a dividend inside your 401(k) plan, there are no taxes. That $960,000 goes into my 401(k) plan, tax-free. I can invest it in Real Estate, I can invest it in stocks, I can invest it in private businesses. Any income that I make inside that 401(k) is tax-free for my lifetime. If I end up taking that money out after I turn 59 ½, I’ll pay no income tax on it no matter what state I live in, and I’ll be able to pull that money out tax-free for the rest of my life.
Andrew: Wow. That was a lot of CPA jargon right there. If I was going to do anything like that, I think I would contact you and talk more, but that’s why you work with not 1%, you work with ½%.
Noah: Yeah. We tend to work with entrepreneurs that have built a significant network, and now they’re looking at how do they convert that into their passive income so that every month, whether it’s $50,000, $100,000, or $200,000 a month, they’re just like clockwork receiving it in their bank account, and we’re taking care of everything else on the back end. They get to live the life that they dream of. We help them make sure they build family bonds, protect their legacy, and protect their assets. That’s our core business.
Andrew: I love that. Could you share a little bit about the 506(c) that you just started?
Noah: Yeah. This is exciting. If you look over my shoulder, you see two logos. One is Freedom. Freedom Family Office is our primary business. We also started Freedom Internet Group Inc., which is called FIGI. If you go to figiroyalty.com, you’ll learn about a very unique business that I set up with a partner. We’ve got 20 years of experience buying internet businesses.
As someone that’s always looked for yield, I like cash flow. I love buying cash flow. I don’t like investing in the future. I like buying the present. Over time, I started investing in internet businesses. What was so unique to me as someone that owns real estate is when I buy real estate, I’m usually buying something—let’s just use a five cap as an example—I’m paying 20 times earnings.
In these small internet businesses that we acquire, we’re paying three times earnings. It’s like a 33 cap that we’re buying these businesses at. I started buying websites with a partner Ace Chapman back in 2014. We started a private equity fund. We went out and acquired a pool of assets, and what we came to realize is there was this unique opportunity in this small market of lifestyle, entrepreneur-led internet businesses where people are making anywhere from $150,000 to about $1.5 million a year running their own online business.
When they go and transact and they buy and sell companies between each other, the SBA is not interested. There’s no Fannie or Freddie. Most of those transactions are financed with a component of seller financing, and the balance being cash at closing from the acquirer. What we’ve decided on and what we’ve created is an opportunity to put in—instead of equity—a slug of cash where we’re helping finance a transaction, but in exchange, we’re receiving a percentage of revenue for that business.
Take that example of somebody buying a $1 million business. That business might produce $400,000 of cash flow for the owner. When somebody goes to buy it, usually the seller is putting about half a million dollars in seller financing, and the buyers have to come up with half a million dollars. Now we can come in, maybe put in $150,000, $200,000, and $250,000, and in exchange, receive a percentage of revenue. Typically, at closing, we’re generating anywhere from 25%-35% returns on our capital if the business stays the same.
As that business grows we would get higher returns. If the business detracted, we’d get lower returns. This business—FIGI Royalty—where we’re acquiring internet royalties and internet-based businesses, we’re on a path to take that company public. We’re an SEC reporting company already, and we’re raising a pre-IPO round right now, which we’re doing as my first 560(c). I’ve never done that before. I’m excited. I’m able to share that with people like you and your listeners if they have any interest or want to learn more about it.
It’s a unique niche. People think mobile home park investing, maybe a step off the beaten path. This is like going down two or three more paths from there. You could visit figiroyalty.com. You’ll see an investor page where I’ve got a video you could watch that describes our business model and our origin story.
Andrew: I love it. Thank you for sharing that super niche. Just like mobile home parks. It’s different. It has that stigma, but it’s “alternative investment options.”
Noah: In 2012, I started an alternative lending fund. We’ve been investing in private debt for about nine years now, and the same thing was true then. We were investing in private debt, typically to generate anywhere from a 6%-8% return net of fees and expenses. Nothing big, no home runs. Just short term, high-quality credit. The deals that we’ve done have been really interesting. I’m always looking for the next place that I can generate a yield, where I think my risk-adjusted return is better than everything else I’m seeing in the market.
FIGI is one of those opportunities that has come to me through my wild search through all the asset classes to figure out where is the best place to invest my capital.
Andrew: I love that. You’re such an entrepreneur. You see most CPAs, and not every CPA thinks real estate related, let alone entrepreneurial like. That’s one thing I love about you. I really appreciate all the value you’ve added today. Thank you so much for coming on the show.
Noah: Yes, with pleasure, man.
Andrew: Awesome. So if our listeners want to get a hold of you, what’s the best way for them to do so, Noah?
Noah: LinkedIn is always a good place to reach out. My name again, Noah Rosenfarb. If you’re interested in real estate syndication, you could go to our syndication platform, which is investwithourfamily.com. If you’re a successful entrepreneur and you’re trying to think through how to reduce your taxes, build your passive income stream, and build that lifestyle that you deserve, you could check out freedomfamilyoffice.com. Of course, if you want to learn about the power of royalties, you can visit figiroyalty.com.
Andrew: Awesome, Noah. Thanks again for coming on the show. I really appreciate it.
Noah: Thanks so much for having me.
Andrew: Enjoy the rest of your day. That’s it for today’s show, folks. Thank you so much for tuning in.
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