Robert Leonard (06:31):
Rich Dad, Poor Dad?

Ana Klein (06:33):
Yes. And I was like, “Oh my gosh, this is insane.” So then I’m like, “I actually love this. I flipped a home without knowing that I was in real estate.” So I kind of just fell into my lap. And then I learned everything about it. And then I realized how amazing it was for tax purposes. So that’s how I ended up being just loving real estate and just wanting to be the best real estate CPA.

Robert Leonard (06:56):
So it sounds like you were already a CPA, but not a real estate-focused CPA. Then you found real estate and then became a real estate focus CPA?

Ana Klein (07:04):
Yes. So I started my firm just being a CPA. And then, like, I said, the IRS code is just so geared towards small businesses and then real estate that I realized that I needed to find a niche and this is exactly what I love and I saw the potential. So that’s exactly why I was like, “Let me just focus on real estate.”

Robert Leonard (07:25):
When did you know you were ready to leave the corporate world and make the jump into becoming a full-time entrepreneur?

Ana Klein (07:31):
I hate taking orders from people so I always knew I was going to leave my nine to five. I hated being nine to five and it’s not even nine to five, it’s eight to five with a forced hour break. And I was like, “I hate this.” So I was in public accounting for four months. I didn’t even make it a full tax season. And I remember they had happy hours after work. And I was like, “I don’t like you this much where I’m here 60 hours a week. And then I still have to go see you at happy hour? No, you all. I just want to go home to my family and my friends.” And I was like, “Screw this. I’m going to start my own firm.” And in 2016 I just went full-on and I started my own firm.

Robert Leonard (08:09):
How has being a CPA impacted your own personal real estate investing journey? What do you think that you do differently in your real estate investing because you’re a CPA?

Ana Klein (08:19):
The biggest thing honestly, is analyzing deals extremely to the penny. I think being a CPA, we were already very frugal and cheap would people like to call me. So now I’m always like, “If I don’t get this return, I don’t want it.” But then the number two thing, and I think I’ve learned also from seeing my other clients is keeping track of expenses very detailed. I think knowing what I need to do in the tax world of what the IRS requires of me, I just put that and make sure that all my deductions are to the T, but also because if I’m not, and this is for all real estate investors, if you are not keeping track of your deductions, you’re missing out on so much you just don’t know about.

Robert Leonard (09:01):
From your perspective as a real estate focus CPA, what do you see as the most common mistake that people are making in their real estate investing journey?

Ana Klein (09:11):
The number one is depreciation basis, the basis of their investment. So I think when clients go from not having investment properties to purchasing their first investment property, whether it’s a house hack or a multi-family, they don’t want to invest money in a CPA. So they’re like, “Oh, that’s fine. TurboTax is $150, I should be able to do it.” You have no idea, Robert, how many tax returns I’ve seen where people missed depreciation. Why? Because it’s not easy to just say, “Here’s my closing disclosure. I paid $150,000 for a property. That’s how much my basis should be.” That’s not as easy as it works. So missing depreciation and having the incorrect appreciation is the number one thing that I’ve seen that clients miss by not using a CPA.

Robert Leonard (09:56):
At what point, do we need to move away from TurboTax and get a CPA? Is there a point where it’s not worth having a CPA yet if you just have one house hack, it’s a duplex, one unit, maybe you just own one rental property? Is it worth having a CPA at that point?

Ana Klein (10:10):
I get this question a lot. And then I answer like this, “Do you know how to calculate your depreciation or your basis?” And most of the time, they’re like, “No.” Then you need a CPA because TurboTax does not walk you through what your closing disclosure should be and what you should enter as your depreciation. So I say, as soon as you have one, it is crucial to use a CPA. Is it going to save you thousands of dollars? I will be honest, most likely not, but it’s the peace of mind that you’re doing it correctly. So I would say even with the first one, you should use a CPA.

Robert Leonard (10:43):
What some other things that investors aren’t doing? So not necessarily mistakes they’re making, but things that they’re not doing that they should be doing in real estate investing.

Ana Klein (10:52):
Well, I think number one is keeping track of their expenses. So I say that, and I will continue to say that because that’s the number one thing that they do. And the second thing is tax planning. So one is, they’re so focused if they have a nine to five that obviously they’re in that rat race, I have to get to work my kids so on and so forth. And they have an investment property and they forget to keep track of the HVAC that they fixed or any little expenses. So then at the end of the year, when we want to talk about, “Hey, well, how’s your property doing?” They’re like, “Oh, I have to go back all of this entire year and add up all the receipts and add up all the expenses.” And honestly, as a human, you don’t want to do that.

Ana Klein (11:30):
And you’re like, “Forget it, I don’t even know what happened. I’m going to guesstimate how much I did.” So that could cost hundreds and thousands of dollars depending on your portfolio. But the number two thing that I think people do if they don’t do proper tax planning, and there’s a difference between tax preparation and tax planning. So tax preparation is when you handle all your receipts to your accountant and you say, “Here, tell me how much I owe.” That’s tax preparation. And at that point, there’s very little that your CPA can do for you because it’s too late. It’s already March. I mean, I have clients right now who are still trying to get their taxes and I’m like, “You all it’s April 20th. Where have you been for the last year and a half?” And they’re upset if they owe taxes. And I am so honest that I’m like, “Well, that’s your fault because you had an entire year to plan and now you have this big tax liability and there’s absolutely nothing I can do for you.”

Ana Klein (12:19):
So if you don’t do proper tax planning, I think that’s the number two thing that people don’t do proper tax planning and the tax planning is making sure that all your records are straight and you have good financials. So that in the fourth quarter, when you go to your accountant, you’re like, “Hey, here are my numbers. What can I do to minimize my tax liability next year?” But if you’re waiting until April to do your taxes and expect us to just pull stuff out of my wand just to make magic for you, I can’t do that. That’s your fault.

Robert Leonard (12:49):
Yeah. This conversation we’re having is actually quite timely for me because I’ve taken quite an interest in learning more about taxes myself recently. I bought the two BiggerPockets tax books. They have one for beginners and they have a more advanced one. And then I also bought the book called Tax-Free Wealth from the Robert Kiyosaki series. I’ve only finished the BiggerPockets beginner book and I’m partially through Tax-Free Wealth, but I’ve already learned a ton from those two books. And I want to talk about a few concepts from these books. And the first is writing off overhead expenses that many real estate investors miss. In the beginner tax book from BiggerPockets it says, “As real estate investors, we are all very good at writing off real estate specific items, such as mortgage interest, insurance premiums, property taxes, management fees, repairs, and maintenance. However, what most investors forget to write off are the overhead expenses that they incur because of their rental property.” So what are some of the overhead expenses that real estate investors commonly miss?

Ana Klein (13:46):
Kind of depends because again, it depends on the size of your portfolio as well, but I will give you some that I have seen that people miss one that is very common. Again, it’s not a lot of money, but at this point, any expense helps. So the first one is always the cell phone bill, a lot of clients miss that, I’m always like, “Hey, how much did you spend on your cell phone?” Obviously not the entire thing is going to be expense because you have a full-time job and real estate isn’t your full-time job. So, that’s one thing. Mileage is a huge one. I have clients who self-manage, self lawn care, self do everything for their properties and maybe they’re not as [inaudible 00:14:22] They’re not down the block, right? So they don’t track their mileage. And that mileage adds up the entire year.

Ana Klein (14:28):
If you really think about it, driving back and forth to your properties, going to Home Depot, going to Menards, going to wherever to get permits, whatever it is, tracking your mileage can really create a big deduction if you self-manage. If you’re very passive, obviously that’s not something that will be for you, but that’s the number one thing. Another one is home office deduction. It’s small, but at the same time, if you’re self-managing, or if you have an office or a designated office area in your room… I said designated room in your house, that will qualify for the home office deduction. Insurance is another one that sometimes clients, when they send over their profit and loss statement for their properties, they don’t include insurance is another huge one. So those are the ones that I’ve seen the most. Again, I will say depreciation is another one that people miss a lot.

Robert Leonard (15:19):
A common misconception that I’ve heard and was mentioned in one of the books, was that taking a home office deduction actually increases your audit risk. Do you think that’s true or not?

Ana Klein (15:30):
So when clients say, “Well, what if I get audited?” Number one is if you have nothing to hide, why are you scared? So unless you’re hiding millions and you work for the cartel you get audited, bring your receipts, then you’ll be fine. So don’t worry about that. There isn’t really a book or a specific place on the IRS that says, “If you do X, Y, and Z, you will be audited.” So no, the home office is not something I’ve seen. But again, if you do get audited and you’re hiding nothing, it’s just going to cost you a couple thousand with your CPA, but don’t be afraid unless you’re hiding something.

Robert Leonard (16:03):
Yeah. From what I read in the book was that basically maybe a decade or two ago, taking a home office deduction could have potentially raised a little bit of a yellow flag for the IRS because back then not as many people were working from home, technology wasn’t as what it is today. But with so many people working from home these days, it’s just not really a red flag for the IRS anymore. So it’s not really an audit risk.

Ana Klein (16:26):
Yeah. Again, the home office deduction can be really small. It depends on the size of your home, right? If you live in a $5 million home, it’s going to be a lot bigger. I will tell you what I have seen and what I have had my client’s been audited and have represented them. Number one, meals and entertainment. 100%, we all know people have used that to the max. So meals and entertainment is one. The second one is mileage. People just say, “Oh, I drove 12,000 miles.” No way did you drive literally 12,000 miles in one year? And number three is the real estate professional status. Those are the three things that I have seen my clients get audited for, which make more sense than the home office deduction.

Robert Leonard (17:07):
Yeah. I would agree with that. One of my other key takeaways from these books so far and you mentioned it is to be proactive with taxes… The beginner book wrote, “Learning to think creatively and proactively about ways to minimize your taxes and how this applies to day-to-day things will help you keep more of your profit in your pocket rather than handing it over to the IRS.” How do real estate investors act proactively about their taxes? What are some of the things that we should be doing before we buy certain things? Or just generally we should be doing throughout the year.

Ana Klein (17:39):
This is such a great question, because I say six months ago, there was that big article about our prior president paying or getting money back. And allegedly, I really don’t care about the political views, but I always tell people, it’s like, “If you are paying into the IRS, be mad at yourself because you’re not playing the game.” It’s all your fault, right? You don’t have a good CPA. You’re not being out proactive and doing this. The IRS internal revenue code is there for you to play with. It’s very hard, but there are so many ways to play the game. You just don’t have someone in your corner that’s going to help you play the game. So being proactive as a real estate investor means having an accountant who does tax planning, not just tax preparation. Again, it depends on your income again, because if you’re 100% passive and you’re over that of 150,000 AGI, there’s very little that can be done, but there’s still things that can be done.

Ana Klein (18:34):
So for example, let’s say you are single. You just purchased a triplex. And at the end of the year, you have a big tax liability for whatever reason. So the tax planning would come in handy at the end of the year, because maybe I say, “Hey, Robert, we should look into some expenses so that we decrease your liability. Is there anything that needs to be fixed in your triplex?” “Well, I’ve been thinking about there’s something wrong with the HVAC system. I don’t want to replace the entire thing.” So this is when I tell you, “Okay, let’s take the position of being able to expense that repair, not capitalize it.” There’s so much information because if you go and replace the entire HVAC system of those three units, that’s going to be a capital expenditure. But if it’s just one, I would take the position of perhaps saying that’s a repair because you’re not altering the entire HVAC system. That could potentially lower your rental income, therefore lowering your taxable income. These are things that clients don’t think it’s necessary until April when I tell them they owe $5,000 or 10,000.

Robert Leonard (19:36):
One more interesting quote from the book and you touched on it too. So it’s interesting to hear that it was one of my takeaways from the book and also you mentioned it and the quote is, “We know that some of you may think what we have described is the job of your CPA or tax preparer but that would be as incorrect as saying that your doctors take care of your body.” I like this quote a lot because I’ve heard a lot of people say, “Well, that’s my CPA’s job.” Where does that fine line end between what is expected of the CPA versus what we should be doing ourselves?

Ana Klein (20:10):
I’m going to steal this quote and put it on my Instagram every single day that my followers see it. I’ve never heard this, but it’s amazing because it’s so true. When I have new clients come to me and say, “Hey, I’m leaving my CPA.” I always ask, “Why? Because if they made a mistake, I’m going to make a mistake. And any other CPA you go to is going to make a mistake. We’re humans, that’s going to happen. There are always three sides to the story, right? My client’s, the CPA, and the truth. So when they say, “Well, my CPA didn’t tell me that I needed to do this or X, Y, and Z.” And I’m like, “Okay, well, did you schedule a strategy call with them at the end of the year?” They’re like, “No, I just handed them my information in March and they told me I owe $10,000.

Ana Klein (20:51):
And I was just upset that they wouldn’t have told me what to do to decrease my tax liability.” I’m like, “I’m not your babysitter. I’m not here to call you and say, Hey Robert, so how’s your year going? Is there anything I should do for you?” I say, “If you don’t care, why should I care?” I have other clients who are calling me saying, “Hey, I’m on my 15th property.” And I’m like, “What do I need to do?” So this quarter is perfect because unless we’re working and you have a CPA on retainer every single month do not expect your CPA if you’re a one-time client to call you and see how you’re doing and how your business is doing, that’s not my job.

Robert Leonard (21:31):
One of the most hotly debated and common topics in real estate, LLCs to invest or no LLCs. From a tax perspective, give us a rundown of the different scenarios of when we may want an LLC versus, when we might not, when it’s needed, when it’s not.

Ana Klein (21:48):
Your questions are so great because I think there’s so much bad advice out there that you need an LLC for every single property like that old [bro 00:21:56] it’s like, “Everybody gets an LLC.” No, that’s not true. So first of all, I will say a disclaimer, I’m not an attorney. Don’t take those as legal advice. For LLC purposes, it’s all for liability purposes. Yes, there are ways to decrease your tax. There are ways to play the game with an LLC but that’s if you have a business. As a rental property, no. So what I recommend to clients is always number one, speak to an attorney. But if this is your first property, it’s under your name. You barely have any equity in it. You don’t need an LLC. It’s really not going to protect you from anything. And I had an attorney telling me the other day, attorneys can get through LLCs all the time.

Ana Klein (22:38):
However, I do think that once your portfolio increases and your equity is higher, you should create a barrier between you and your tenants, depending on the insurance that you have. Obviously, people have umbrella insurance. So you don’t need an LLC. I guess this is a takeaway. You do not need an LLC to start investing and your property does not need to be in an LLC in order for you to take that step, to start investing. Definitely speak to an attorney because there are reasons why you need an LLC, but not everybody needs an LLC off the bat.

Robert Leonard (23:10):
How important is it for real estate investors to keep their business and personal expenses separate? We just talked about an LLC and I’ve heard that not keeping them separate can actually invalidate an LLC’s protection. So even if you go through getting an LLC, because you feel like it’s right, you pay the attorney fees, all of that. And then you make the mistake of not keeping your transaction separate. It could be invalidated. So how important is it to actually keep things really separate?

Ana Klein (23:35):
So that’s exactly the right thing to say because I’ve seen clients who get 20,000 LLCs and then their books are a mess. They mix personal and business expenses. And essentially what you’re doing, it’s in the legal world, is called piercing the corporate veil. If you get an LLC through legal zoom, I don’t think it gives you an operating agreement, which now if you have an LLC, you should have an operating agreement. If you have an S Corp, you should also have who’s on your board of directors. There’s so much more than just filing a fee on legal zoom and saying, “Hey, I’m official and a client LLC.”

Ana Klein (24:12):
Again, commingling your funds. Now you are breaking that corporate piercing that corporate veil. And therefore it does invalidate the LLC. Not all the time, but there’s more to just filing and legal zoom LLC that people just don’t know about. And especially, I have a lot of clients in California. California is out of control with their fees. Having an LLC in California is a minimum of $800. So why are you going to pay California $800 if you’re not even doing your LLC and running your business as a company? I mean, that’s literally giving your money away for free.

Robert Leonard (24:49):
Do we need to keep our transactions separate even if we don’t have an LLC? What if we just have rental properties, no LLC, they’re just in our personal name. How do we handle that?

Ana Klein (24:58):
I always say, even if you don’t have an LLC get a separate bank account with a different bank that you keep your real estate portfolio in. One, it’s just going to be easier for tracking purposes because you’re not co-mingling the rental income, the mortgage interest with Uber eats or Grubhub. It’s totally separate and it’s easier for tracking purposes. Also for an audit, it’s just really making it easier for the taxpayer to keep things separate.

Robert Leonard (25:25):
What do you do with your real estate portfolio? How do you handle the LLC versus personal ownership, I guess you could say?

Ana Klein (25:31):
Great question. I actually don’t have an LLC for my portfolio. So I’m going against what I started because I spoke to an attorney and they’re like, “At this point in your career with your portfolio, you really don’t need one.” So I do have a separate bank account that all the money goes in and I pay my mortgage, but I have clients, for example, who have 30 properties, they’re all paid off. There are no mortgages and they do have an LLC for every single property. They went to their attorney and that’s what the attorney advised them because if they were to get sued in property A, essentially they stop at property A, they don’t come after property B, property C, but this is why it’s so important to speak to an attorney because you don’t always need one and for me, it works that way.

Ana Klein (26:18):
The other thing that people always think about is they’re going to know who the owner is, right? So my tenants know that unfortunately, I’m the owner as much as I say that, I’m the manager. If they wanted to look, they can see it’s me. So it can create some identity issues where people don’t want to know who the owner is, but it’s really up to you what you want to do but that’s how I handle mine.

Robert Leonard (26:39):
Another common situation I’ve heard from the decision of the show is that they’re partnering with a person they know, or people that they know to buy a property together. There’s no real issue with that part, but the issue arises when it actually comes to tax time. The property isn’t super big or expensive so it doesn’t generate a ton of cash flow. Let’s say it makes 3,000, $4,000 a year in actual cash flow after all expenses and reserves are set aside. But because it’s a partnership, K1s are needed for each partner which can eat up to a thousand dollars per person, sometimes more. How do investors best approach this situation? Is there any workaround for this?

Ana Klein (27:19):
I have seen this. I have clients who partner [outlets 00:27:23] say, me and you, Robert are like, “Hey, let’s buy this property and we don’t create an LLC. We just split everything half and half on our scheduling.” I don’t recommend that because we like each other right now. But what happens if you get married and your spouse doesn’t like me and wants to kick me out of the partnership, what’s happening? There’s so much unknown and risk if we don’t have anything in paper. So I understand where you’re coming from. Let’s say you only cash flow a thousand. And what I’ve seen from good CPAs, a partnership return on the cheap side is 1,500 minimum.

Ana Klein (27:58):
So now you’re literally left with nothing, right? So I guess at this point when you do your accounting and your analysis for properties, people forget to add CPA and attorney fees. All they add is the water, the utilities, the interest. Okay, but you need to have our tax return. So I guess in your example, it kind of sucks that they’ll have no money left over, but from what I’ve seen clients getting to arguments with their brothers, with their parents, I would just recommend having a partnership and knowing that this isn’t going to make you rich right away, but at least you’re creating wealth for the future.

Robert Leonard (28:35):
When you think back on your life, whether it be personally or investing related taxes, business, investing, what piece of advice have you received that has really had an impact on you and you continue to use it and think of it to this day?

Ana Klein (28:49):
Two things. Number one is work harder than anybody else because nobody cares how hard you work. I think I was born in Mexico, born and raised in Mexico. So coming here and living the American dream is something that I don’t ever forget that as long as you work and don’t make excuses, you can make an amazing life for you. So, that’s the number one thing. And the number two is don’t care what other people think. We’re not here to impress anybody in this world. So work as hard as you can and stop caring what other people think especially nowadays with social media, it’s so easy to get in like how many likes that I get? And it’s like, “Don’t worry about it. Continue to work hard for what you want and you’ll be fine.”

Robert Leonard (29:33):
Ana. Thanks for joining me on the show today. For those listening that are interested in learning more and might want to connect with you, where’s the best place for them to go?

Ana Klein (29:41):
Thank you so much for having me. I appreciate it. So you can head on over to our Instagram. It’s @anakcpa, just one N. I try to post as much value and educate our clients and followers as much as we can. That’s the best way to get in touch with us.

Robert Leonard (29:57):
I will be sure to put a link to Ana’s social media and our website in the show notes below. So if you guys are interested, you can check it out there. Ana, thanks so much for joining me.

Ana Klein (30:06):
Thanks so much, Robert.

Robert Leonard (30:08):
All right guys, that’s all I had for this week’s episode of real estate investing. I’ll see you again next week.

Outro (30:14):
Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to the investors podcast.com. This show is for entertainment purposes only before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network, written permission must be granted before syndication or rebroadcasting.