Reduce Taxes
Tax scholarships, and the three costs of college
There is the price on the invoice, the interest if you borrow, and the growth you give up if you pay cash. Lance works all three, then the ten things that decide what a rental earns.
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The three costs of college
Cash flow, and who pays full price
No matter how much money you make, you could reduce your taxes to offset the cost of college. We call those tax scholarships. In this section of the webinar, I'm going to teach you how to use tax scholarships to actually offset the cost of college, and you can use that money to go towards real estate, which will create cash flow to pay for college, which we'll cover in the next video. Let's talk about the third benefit of using real estate for college funding.
The third benefit of using real estate for college funding is cash flow to pay for college. This is where I want to spend most of the time because this will save you more than all the free money you could possibly imagine. It's how you pay for college that is so much more important than how much you pay for college. Now, we don't want to pay any more than you have to.
Nobody loves sitting on the airplane next to somebody who paid half the price of their plane ticket and you're flying to the same place, right? I get it. We We don't want to spend any more money than we have to on college, but how you pay for college is so much more important. The majority, the majority of our clients are either saving from when their kids were born so that they have all this money in savings and then when their kids go to college, they just spend it.
Now, just to make sure you're still with me in the chat, if I take all my college savings and I spend it on college, how much am I going to have left for retirement? It's a dumb question, but I just want to make sure you're still with me. All right. Yes, Chris is right.
Zero. Bri, zero. Bailey, zero. Lisa B, zero.
Zero. Zero. Okay. All right.
So, if we save for our kids college, that's great. All right. But if we spend it on college, it's gone. Obviously.
The first cost, out of pocket
Now there are three costs of college. The first cost of college is the actual out-ofpocket you know sticker price. You know we were just talking about that. This is let's go over here right.
This is the out- of pocket. This is the first cost of college. Okay. The second cost of college is if we borrow the money.
Hold on, let me go over here and show you. Okay, if we borrow the money and pay back those loans, then there are financing costs. Okay, so the first cost might be $194,000 for these two kids to go to college. The second cost might be $327,000 if we borrowed the money and paid the interest.
Now, if if I just save up each month out of my paycheck to make that loan payment and then I spend my money on that loan payment, how much am I going to have have left in retirement? Nothing. Right? Whenever we pay cash for college or take out loans and pay back college loans, okay, we are interrupting our compounding interest.
Whether it's the money that we've been saving for the last 10 years or whether it's the money that we've been saying for the la saving for the last 30 days. If we save our money and spend our money, that money is no longer earning interest. It's like selling that goose that was laying the golden eggs. Your money actually works the same way.
The cost of spending the money
If we spend our money on college, it's gone. That's my point. Okay, which is the third the third cost of college which is the opportunity cost or the cost of missing out on all that interest. Okay.
The cost of missing out on all that interest because you helped your kids pay for college is one of the biggest expenses when it comes to paying for college that I want to help you to avoid. Okay. So, let's look at an example. We've got Parker who's 18 who's got he's like a freshman in college.
He's got three years left and it's 35,000 a year. We've got Cooper who's 15. He's got two years left. Going to go to school for four years.
It's going to be $25,000 a year. Okay. So, what's the cost? What's the first cost?
What one family faces
The first cost for this family is almost $200,000. That's the first cost. So, if we take our money out of our 529 account and we pay cash, if we take our money out of our savings and we pay cash, if we take our money out of our brokerage account and pay cash, then that $194,000 is gone. Okay?
If we borrow the money and we pay back the college loans, then that $327,000 is gone. Okay? That $327,000 is gone. Right?
So, no matter what, no matter how you pay for it, you still have nothing left for retirement. Okay? Now, this family, they have some money in their savings. They have some money in their brokerage account.
Using the same money differently
They have some money they're putting towards retirement accounts. And they have money in savings. So they can afford they can afford to pay cash for college. But if they take this money and pay cash for college, again, the money is gone.
But what if we took some of that money? What, in fact, what if we just took this money right here? What if we took $194,000 and used it towards some real estate? What if we took that money and used it towards some real estate like this one?
And I'm going to explain how this works in a minute, but this is a half million dollar house in Texas in the Smoky Mountains. And it's a $50,000 down payment, and we are taking over a $3.75% interest rate. If you've never heard of creative financing, this is what we call creative financing. Creative financing is where you are taking over somebody's mortgage payments or it is a seller financing situation.
Either seller financing or taking over someone's mortgage payments. Okay, this particular principal and interest taxes and insurance is $2,800 a month with an estimated monthly cash flow of almost $4,000. But there's ways to improve that. But that gives us a net by default of $1,000 a month.
Okay? So, in other words, I could use $50,000 to go towards creating some cash flow that could go towards my loan payments. Now, I would need during the time that I have this overlap, I'm going to need about three I'm going to need about three of those houses that generate about $1,000 a month. So, if I bought three of those houses, that would cost me about $150,000, which would be less than if I just paid cash for college.
Okay. Now, are there better deals? Yeah, you could even find better deals than that. There are right ways and wrong ways to do real estate in general, okay?
Maximising the cost segregation
And we obviously want you to be successful. And being successful in real estate, you know, doesn't just happen on its own. If you want a successful Airbnb, you don't just buy a random house and post it on Airbnb. If you go Google it and look up, people are saying, "Oh, you know, Airbnbs, you can't make money anymore." Well, you have to you there's certain things that you have to do to be successful.
You can't just take any random house and post it on Airbnb and be successful. Just like you can't go randomly buy any stock and and make tons of money. Like you have to kind of know what you're doing. So, just in closing, as some final like tips for you to think about when it comes to how to be successful, here's my top 10 tips in being successful with real estate and college funding.
Number one, maximize the cost segregation for maximum tax savings. Some houses are going to give you less tax savings than others. Okay? a $500,000 house that's going to give you a 25,000 or 25%, you know, cost segregation study is going to be about $125,000 off of your income.
But 35% would be $175,000 off your income. Okay? So big difference in college savings and tax savings. Along those same lines, the minimum down payment equals maximum tax savings.
Rate, cash flow and occupancy
The reason is because if I buy a half a million dollar house with 20% down, that's a $100,000. I could get two houses at five or at 10% down, right? If I only had to put 10% down, that gives me two houses, giving me double the cash flow, double the tax benefits, double the college savings. Okay.
And then number three, the lower the interest rate, the higher the net cash flow. The other reason why a lot of people are not making money right now is because interest rates are so high. If you go out and buy a half a million dollar house right now at 7%, that's $3,300 a month. If you go pick up somebody's mortgage payment at 3%, that's over $1,000 a month difference.
That's how you maximize your net cash flow. Okay. Number four, the higher the nightly rate, the higher the net cash flow. In other words, you need the right location and you need to be in that top 1% in your market.
You need to create an Airbnb experience. We have partnerships with companies that will put in the pickle ball courts. They'll put in the bunk beds and the tube slides. They'll put in the fancy theme rooms.
They will help you to make it an Airbnb experience that will increase your cash flow. For example, $300 a night with a 50% occupancy is $54,000 a year. $400 a night with the same occupancy is $73,000 a year. Big difference.
Number five, the higher the occupancy rate, the higher the annual cash flow. Again, location, location, location. Get into that top 1%. Okay.
$400 a night at 50% occupancy was the 73,000, but at 65% occupancy, it's 94,000. Almost 95. Okay. Also, renovation and improvements for highest and best use.
Marketing, management, diversification
When I bought the house in Florida, I was going to turn the garage into a game room cuz I thought that would help, you know, boost the benefits, right? And the recommendation that I received from the consultant that we work with said that if I turned that garage into a bedroom, I would get a higher and better lift. meaning I would get higher nightly rates and higher occupancy which was way more valuable than the game room based on data. We have data on all of this.
Number seven, marketing and listing for the top 1%. Now, there's nothing I love more than marketing. I love marketing. We can help you market your property so that it stands out and that's based on the pictures and everything.
Just a little side note, I used to love I I like horses. I have way too many horses, but I like I used to love buying horses that had a terrible pitcher. They were on, you know, they were for sale with this little picture of this horse on the other side of the field. And I would buy the horse.
I would take pictures with my kids on the horse and I would sell it as a kids horse for three times the price that I paid for it just by taking better pictures. So when you're marketing your house on Airbnb, there is a right and wrong way to do that. Okay. And then eight, private and direct bookings.
I think there was a comment on the webinar about that. All right. If you get a database of return clients that go to you directly, you could cut out all the Airbnb fees. So you could, you know, create a database for repeat customers and have a web page for your property.
Number nine, have a world-class guest book to maximize the experience, physical and online. The better the experience, the better the reviews. The better the reviews, the higher up the list it's going to show up on Airbnb. And finally, number 10, professional management is not just because you don't want to do it.
Professional management is going to give you maximum customer satisfaction and and your own happiness as well. But if you're trying to get good reviews, you need somebody who knows what they're doing. So hire a professional management company to get those five-star reviews, right? Hands off also means less time and low stress.
What the tax saving offsets
You know, own properties um across the country for diversification and best locations. And then discounted pricing means you keep more profit. We can help you with discounted management. Okay, I want to elaborate on this just a little bit because I want to emphasize just how each family could literally offset the cost of college by reducing their taxes.
For example, let's say that you are a married filing jointly family making around $200,000 a year. Well, for you, you're going to be paying about $27,000 in federal taxes. That is the cost of a state school education. If you could reduce those taxes, you could actually reduce your cost of college by getting these tax scholarships.
I mean, it's just a play on words, but at the same time, free money is free money. If you get free money by not having to pay taxes, then that is the same as getting a full ride scholarship to a state school. Now, let's say that you make over $300,000 a year. Well, $300,000 a year is about $50,000 in federal taxes.
That's right. That's the cost of an outofstate school or maybe even a private school with a little discount. So, if you could offset your taxes by $50,000 a year, that's like getting $50,000 in free money or in free scholarship money. Tax scholarships, right?
And finally, over $450,000 would literally offset the cost of a top tier private school. So any family, no matter how much money you make, if you can offset your income and reduce your taxes, those are tax scholarships. Now, if you want to learn how you can actually put all of this together and use real estate to pay for college and create the cash flow to pay for college and now how you can use these tax savings to put towards that real estate, click the next video and let's dive into how to use real estate to generate cash flow to pay for college. By far my favorite and hopefully this will tie everything together.
Click the video.
Educational information only
This is a transcript of a recorded presentation, edited only for paragraphing. It is general educational information, not tax, legal or investment advice, and it does not take account of your circumstances. Tax law changes and outcomes depend on your own facts. Figures mentioned are illustrations of how a strategy works, not projections of what you will receive. Confirm your position with your own CPA or tax attorney before acting.
Questions this raises
What are the three costs of college?
The out-of-pocket price after any aid; the interest, if the money is borrowed; and the opportunity cost, which is the growth the money would have produced had it stayed invested. Lance's argument is that the third is usually the largest and is the one nobody puts on a statement.
Does opportunity cost apply even if I pay cash?
That is precisely when it applies. Borrowing costs you interest you can see. Paying cash costs you the return that money would have earned, which you never see because no one sends you a bill for it. Both are real; only one is visible.
What decides what a short-term rental earns?
In this talk Lance lists ten factors, and the ones he spends longest on are the average nightly rate, the occupancy rate, the interest rate on the financing, and the quality of the listing and the management. Several are things you choose rather than things the market hands you.
Why does the interest rate affect the tax side as well?
It does not change the deduction, which follows the property. It changes the net cash flow, because a lower payment leaves more of the rent in your hands. Lance treats the rate as a cash flow lever rather than a tax one.
Is a higher nightly rate always better than higher occupancy?
No, and the talk works through why. The two trade against each other: pushing the rate up tends to pull occupancy down. What matters is the product of the two across the year, which is why pricing is managed continuously rather than set once.
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