It’s 2017. I can’t believe I did my first deal back in 2011. It’s been 6 years, and I am still at it. Four of those six years, I have been a full-time investor. I have been getting better at this real estate thing. I have been blessed to survive in business full-time for four years. It wasn’t easy, but all the bumps and bruises were well worth it. It beats having a job.
Today, I am going to talk about a subject a lot of investors have an issue with. I just realized the importance of this matter myself. That is taxes. In this blog, I will talk about my mistakes, and hopefully you will learn from them. If you’re like me, when the tax subject is brought up at your local real estate club, you usually leave out of boredom. I have discovered that not all accountants are boring, and some know how to break it down to where the average Joe can understand.
Related: What Real Estate Investors Can Do Now to Prep for Trump’s New Tax Plan
How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties
This is the dream right? Going from zero to 10+ rental properties, providing stable cash flow and long-term wealth for you and your family, and building a scalable business model to boot! Learn how this investor did just that, in this exclusive story featured on BiggerPockets!
My Experience Hiring Virtual Bookkeepers (Spoiler: Bad Choice)
To do your business taxes, you must have a bookkeeper who will prepare your P&L at the end of the year to provide to your accountant. This bookkeeper could be you. I know some of you probably already know this is important, but a lot of us were not aware of this. I have failed many times with this matter. At one point, I would go on Upwork.com and hire really cheap bookkeepers. I believe I picked one up for $3 an hour. The person was across seas. That was a bad idea on my part. I was confused why he was taking so long. So then I hired another person to check his work. And that person told me the fist person was screwing me over and that my stuff should take no longer than 3 hours a month. So I fired first guy.
And, of course, the new guy eventually disappeared on me. I hired another woman, and I paid her about $11 an hour. She advised me the other guy was just billing me and not doing the work. Oh yeah, I forgot to tell you while I was running through bookkeepers, my CPA was waiting for the documentation needed to get my taxes done. It was a mess. The new lady was working out well. She would do my books in 1.5 hours — at least for a few months. Then she disappeared on me. At this point, I was fed up and realize I couldn’t hire cheap people because they only led to cheap results.
Finding Real Estate-Specific Tax Advice
I found an actual bookkeeping service this time. I hired them, and that had been going really well. Then it was time to do my taxes with this new bookkeeper. My ex-CPA advised me two weeks before my taxes were due that he could not read my bookkeeper’s work. I’m thinking to myself, why would he wait so long to tell me that he could not read my bookkeeper’s work? If that’s important, you would think the CPA would ask for the bookkeeper’s work earlier in the year. He then told me he had some bookkeepers that might take me on for $75 an hour. I knew he didn’t like me as a client — and I didn’t like him either. The problem was, I was never prepared and I didn’t like him because when I actually started getting my stuff together, he wasn’t ready for it. We decided it was best not to work together. I did get another CPA who was able to read my bookkeeper’s work, and we got the taxes done.
Now fast forward to me talking to my CPA for a year-end review. He told me my potential tax bill, which was the price of a 3-bedroom rental in my market in a working class neighborhood. I said to myself, that can’t be right. I called real estate expert Gary Boomshire, and I told him about my issue. He asked me to calm down and told me we could get through this. He told me what documents to ask for from my bookkeeper, called my 401k company and set up a time to talk to his preferred CPA.
Gary went through my P&Ls and balance sheet and asked me about a large number of withdrawals. I advised him that I did not know exactly what that was. We then called my bookkeeper to get a printout of what that was. I had to go through each item — apparently some things were allocated wrong. So it was kind of my fault for not checking my bookkeeper’s work monthly. My new CPA then hopped on the phone to explain where to allocate certain things. This was all because someone cared about me enough to hold my hand and walk me through this process. I was able to get my tax bill down from the a price of a 3-bedroom middle class rental to a cheap little D-class house.
What I Learned From All of This
I learned that in past years, I was actually overpaying the IRS. In order to prevent this, be sure to stay on top of your books. I am now scheduling a meeting once a month with my bookkeeper to make sure that everything is allocated right. I even read BiggerPockets’ The Book on Tax Strategies for the Savvy Real Estate Investor. This is a must-read. I learned I missed a few deductions in past years. Also, be sure to meet with your CPA quarterly and make sure that your bookkeeper and CPA are on the same page. When you know better, you do better. And in disclosure, I am not an expert, CPA, or even anybody good with numbers. I just hope you can learn from my mistakes. The IRS must get their money, and you must be prepared.
What’s your worst tax horror story?
Share with a comment!