I Went Looking for the Next Big Real Estate Strategy. Then I Did the Math.

You Don't Have to Rush

By Eli Qarkaxhia | Principal, Q&U Team at Compass

I went to a local investor meetup a few weeks back. The speaker was a financial advisor, twenty-five years in, and he came to talk about what he called the problems with being good at real estate. Which is a hell of a title when you think about it, because it's aimed squarely at people like me. People who built something, and now the thing they built has its own set of problems.

I didn't agree with everything he said. I'll get to that. But I want to lead with this: the man knew his stuff. He'd been up and down the mountain. He'd seen what happens to people who did it right and people who did it wrong, and he could tell you the difference without notes. That's worth more than most of what passes for financial content.

And here's what I actually want to write about, which is what happened in my head while he was talking.

The wondering

About twenty minutes in, he starts laying out things I'd never heard of. Ways to convert retirement money you thought was stuck. Ways to get a deduction bigger than the check you wrote. Ways to sell a concentrated stock position without a tax bill. Ways to own institutional real estate without owning the headaches.

And I'm sitting there doing the thing. You know the thing.

I'm running my portfolio through every idea as he says it. I'm thinking about the properties I'm holding and what I'm not doing with them. I'm thinking about the guy two seats down who's apparently been doing this for years while I've been grinding on the same three strategies. I'm thinking, how much money have I left on the table just by not knowing this existed.

That feeling is real, and I don't think it's bad. It's the same instinct that got most of us into real estate in the first place. Somebody showed you a possibility and you couldn't unsee it.

But I've learned something about that feeling in the last few years, and it's this. The wondering is useful. The rushing is not. And they show up at almost exactly the same moment, wearing similar clothes.

What I did instead

I went home and spent a few hours with the recording. Not to catch him out. Just to slow the whole thing down to a speed where I could actually think.

Some of it got better on the second pass. Cost segregation with a catch-up filing, which lets you claim depreciation you missed on property you've already been holding, without amending old returns. That's real, it's well established, and most operators I know haven't done it. Getting lines of credit in place while the bank is happy to lend rather than when you're desperate. Boring, unglamorous, probably the most valuable twenty minutes of the day.

And his best point, which I'll be stealing for a long time: prefer strategies that have been through the courts. Oil and gas deductions have been in the code since 1947 and litigated to death, so everybody knows what the words actually mean. Newer strategies haven't been tested. Your CPA doesn't know how they'll hold up. The promoter doesn't know. Nobody knows until a judge says so. Everybody doing something is not the same as it working, right up until it isn't.

Some of it got worse on the second pass. A question came up about how trusts work at death, and I'm fairly confident the answer given was backwards in a way that matters a lot if your whole plan is to defer taxes until your heirs inherit. A couple of the numbers in the headline products didn't reconcile with each other. And on one strategy, the explanation included that it takes a few years to unwind because they want to stay under a certain threshold of scrutiny. Whatever the merits, that's someone telling you the plan depends on not being looked at closely. I'm not interested in a position I have to hope goes unexamined.

None of that means he was being dishonest. I don't think he was. I think he believed every word, and belief isn't the same as being right, and those are two different problems requiring the same solution.

The homework is not that hard

Here's the part that surprised me. You don't have to become an expert to protect yourself. You just have to know which question to hand to the expert you're already paying.

For the two headline products, I ended up with two questions for my accountant. Are these losses passive to me. And do I actually have basis for the borrowed portion. That's it. Boring questions. But that's exactly where those deals live or die, because the entire pitch rests on a deduction that's larger than the money you put in, and that only works if the code lets you count the leverage and lets you use the loss against the income you actually have.

If the sponsor can't answer questions like that in writing with a tax opinion behind it, you have your answer, and you got it for the cost of an email.

Five to seven years

The other thing I'd tell anyone who leaves a meetup like this fired up.

That number kept coming up. Five to seven year hold. It's the part I'd sit with longest, because these things get sold on the tax benefit in year one and they get lived in years two through seven, when your money is gone and you're collecting a distribution that may or may not show up.

Run the math with the tax benefit taken out. If it only works because of the deduction, it isn't an investment, it's a deduction with an investment attached, and you're going to spend half a decade finding out whether the underlying thing was any good. Put a couple hundred thousand minimum on top of that and you've got a real piece of your net worth immobilized in something you can't sell, can't easily borrow against, and can't influence.

I'd rather pay some tax and stay liquid than save some tax and be stuck. That's not a rule for everyone and there are deals where I'd feel differently. But when a return looks unusually clean, the risk didn't disappear. It moved into the illiquidity, where you won't feel it until you need the money.

What I'd tell you

Go to the meetups. Sit in the room. Let yourself wonder whether you could be doing more, because the honest answer is that you probably could, and that's not a criticism. That's just what it means to be earlier in something than you'll be later.

Take the notes. Ask the boring questions. Call your CPA, and if your CPA can't think forward, get a better one instead of deciding you don't need one.

But notice what you already built, and how you built it. Not fast. Not out of a room where somebody was excited at you. You built it by understanding one thing well enough to be dangerous, and then doing it over and over while everybody else chased the next idea.

That's still the job.

I'm not a CPA and I'm not an attorney. I'm an operator who reads the fine print and asks a lot of questions. Talk to your own people before you act on anything you read on the internet, this post included.