SS224: The Biggest Mistake I Have Made When Passive Investing

SS224 The Biggest Mistake I Have Made When Passive Investing

Successful passive investors typically have an in-depth due diligence process and a strict set of guidelines when deciding whether to invest in a particular opportunity. In this episode, Charles discusses the biggest mistake he has made as a passive investor.

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Talking Points:

  • One of the benefits of investing in real estate is the favorable tax treatment that investors receive. If you are unaware of what they are, you can listen to episode SS209, where I break down the tax strategies that every real estate investor should know. These strategies are great when they are calculated into your investments as an additional benefit. Still, they can be disastrous when your primary reason for investing is to save or delay paying taxes. This is exactly what happened to me with a passive investment I made several years ago. I was rushing at the end of the year to try and reinvest some passive gains from a property sale and ended up investing in a deal that I would not have previously done if there were no tax implications.
  • Before we go on, I just want to mention that I am not an accountant, and it is essential to always speak to your accountant before making any financial decisions.
  • Over the years, I have heard dozens of times from mentors and partners, “Don’t let the tax tail wag the investment dog,” but that can be really difficult to abide by when facing a large tax bill.
  • Over the last couple of years, when a property sells, I immediately put my estimated taxes due for that investment into a separate bank account while putting my after-tax proceeds into another account that is earmarked for investing. Keeping them separate and forgetting about the tax bank account removes the urgency of finding another investment. In addition, being rushed by yourself or someone else into any investment decision is a huge red flag, but it is sometimes harder to notice if you’re the one making the case to invest.
    So I thought more into what other scenarios people get caught up in to chase tax benefits primarily, and a few examples stood out to me:
    • 1. Investments. We have been discussing tax-advantaged investments that don’t truly align with your investment goals, guidelines, or risk tolerance to save on taxes.
    • 2. Business Decisions. Business owners who structure these complicated business structures only to minimize taxes. You usually find these structures expensive to implement and maintain, and most importantly, they are very time-intensive to set up and manage. I sometimes read articles about consultants that will move your company offshore or incorporate you in different countries. You need to hire lawyers and accountants in these different places and pay the consultant. Then you think if the business owner invested their time and money back into the business from the beginning, it probably would be more profitable than trying to save some money on taxes by setting up and managing this complex global company structure.
    • 3. Estate Planning. People who fail to make estate arrangements or people who make complex estate arrangements when they are not necessary may have negative consequences for their heirs.
  • Don’t get me wrong. I will minimize my taxes whenever I am given the chance; however, I will not make them the primary factor driving my investment or business decisions.

Transcript:

Charles:
Have you ever made an investment decision only to regret it later? Most investors don’t realize this mistake until it’s too late. Learn from my experience before you lose your money. Welcome to Strategy Saturday. I’m Charles Carillo, and today we’re gonna be discussing the biggest mistake I have made when passive investing. One of the best parts of real estate investing is the tax benefits, but if you let those benefits control your decisions, it can backfire fast. I made that mistake years ago, rushing into investment at the end of the year just to save on taxes. Spoil alert, it did not go well today I wanna share what I learned so you don’t make the same costing mistake. If you’re investing just lower your tax bill, you could fall into a trap. Let’s break it all down so you can invest smarter and avoid the same mistake I made.

Charles:
Let’s get started. Now, one of the benefits of investing in real estate is the favorable tax treatment that investors receive. Now, if you’re unaware of what they are, you can listen to episode SS 2 0 9 where I break down the tax strategies that every real estate investor should know. Now, these strategies are great when they’re calculated into your investments as an additional benefit. Still, they can be disastrous when your primary reason for investing is to save or delay paying taxes. And this is exactly what happened to me with a passive investment I made years ago. I was rushing at in a year to try and reinvest some passive gains from a property sale and ended up investing in a deal that I would’ve not previously done if there were no tax implications. Now, before I go on, I just wanna mention that I am not an accountant.

Charles:
It’s essential to always speak to your accountant before making any financial decisions. Over the years, I’ve heard dozens of times from mentors and partners don’t let the tax tail lag the investment dog, but that can be really difficult to abide by when facing a large tax bill. Now, over the last couple of years since this event took place, when a property sells, I immediately put my estimated taxes due for that investment into a separate bank account while putting my after tax proceeds into another bank account that’s earmarked for investing. Now, keeping them separate and forgetting about that tax bank account removes the urgency of finding another investment. In addition, being rushed by yourself or someone else into an investment decision is a huge red flag, but it is sometimes harder to notice if you are the one that’s making the case to invest. So I thought more about other scenarios where people get caught up in to chase tax benefits primarily.

Charles:
And a few examples stood out to me. Number one is the investments. Now we’ve been discussing tax advantage investments that don’t truly align with your investment goals, guidelines, or risk tolerance to save on taxes. Number two would be business decisions. Now, business owners who structure these complicated business structures only to minimize taxes, and I’m not talking about just like setting up an S-corp to save on fica. You usually will find these structures to be expensive to implement and maintain, and most importantly, they are very time intensive to set up and manage. And I sometimes read articles about consultants that will move your company offshore or incorporate you in a different countries and you need to hire lawyers and accountants in these different places and pay the consultant of course, because they’re the one telling you you should do this. And then you think if the business owner just invested their time and money back into their business from the beginning, it probably would be more profitable than trying to save some money on taxes by setting up and managing this complex global company structure.

Charles:
Number three is estate planning. So people who fail to make arrangements or people who make complex estate arrangements when they’re not necessary may have negative consequences for their heirs. Don’t get me wrong, I’ll minimize my taxes whenever I’m given the chance. However, I will not make them my primary factor driving my investment decisions or business decisions into the future. So I hope you enjoyed. Please remember, rate, review, subscribe, some common substantial show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

Links Mentioned In The Episode:

  • SS209: Real Estate Investors FEAR MISSING OUT on These Tax Strategies

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