Short Term Rental Success Stories

One of the best, if not THE best way, to get started in Real Estate Investment is through Short-Term Rentals and Strategies.   Success Stories and Tax Strategies. Jonathan Pacilio. He provided us with some fantastic insight into his journey and experience as a short-term rental investor.

We talked about how he started as a W2 employee and how he realized slowly that entrepreneurship is really the way to go for him and many of our audience members. We talked about mindset. We talked about strategies to acquire capital and use leverage, evaluating properties, assessing risk, finding deals. So many things that we covered that are going to be valuable to you, whether you’re starting off or whether you are a seasoned veteran, whether you can barely afford anything at all, or if you’re making millions of dollars and paying tons of money in taxes.

Listen up, you’re going to get some great information here. If you are interested in being a prospective client, you can email Also, if you know any accountants looking for work at an exciting and entrepreneurial practice, tell them to reach out as well. Enjoy and I hope to hear from you soon.


Welcome, everybody who’s tuned in. We’re going to be talking today about Short-Term Rental Success Stories and Tax Strategies. The cool thing about short-term rentals– I really think for anyone here who has a job and/or is just getting started in real estate investing, I think short term rentals are, if not the best, one of the best ways to get started in real estate investing, building wealth, reducing taxes, and finding a way to get out of your W2 job to achieve financial freedom.

I mean, first off, you want to consider the gateway, the barriers to entry here. I mean, obviously it takes a lot of money to buy a property. To buy an investment property, you need 20% down, but with short term rentals, you can start by just renting out a room or a unit in your primary residence, just to get started. What I consider my first deal, I was actually– Hold on a sec, I’m want to make sure that’s not Karen. Okay, no, it wasn’t.

I was I went on vacation in Mexico and I went to toy around with this Airbnb thing. What I did was I put all my personal belongings in the car, rented out my place on Airbnb for 10 days and it paid for my trip. That was my first bite and just taste of it. I got in trouble, they said you can’t do this anymore, but I just got a feel for how easy it was to make money and how powerful this was. Not only that, but the margins are fantastic. You can do rental arbitrage where you sign the lease as a tenant, and you rent it out on Airbnb or a VRBO at a markup. I’m doing a deal right now like that and the cash flow is about $1,500 to $2,000 a month.

This is what I talk about every day with my clients. One of the most impactful things is the tax advantages for short-term rental investing. With long term rentals, generally speaking, you can’t really use your write offs and losses to offset your W2 income. They’re stuck in this group, this bucket of activity, this passive income bucket, and you can’t use those passive income losses to offset your W2 and other sources of active income W2 or 1099 income.

Think about this, if you have a short-term rental and the average length of stay is seven days or less, and you materially participate, you can reclassify your losses into the non-passive bucket. Now you can use these write offs and losses to offset your W2 and 1099 income. Now, there are some exceptions to the rule with long term rentals, but it’s a lot easier to get there with short term rentals. You still have a W2 job and you could still make this work.

We have a lot of clients where what they do is they invest in the short term rentals, and if we plan properly and we also want to document things properly, we are going to be able to use the losses to offset our W2. Now, for some of you guys who aren’t my clients, you’re thinking to yourself, “That sounds great, but I want a profit. We want to have a cash flow here. We don’t want to be losers. We don’t want to lose money, we’re still going to be bringing in rent revenue.”

The magic word and the strategy that is the bread and butter for real estate investing is cost segregation. There are hundreds of strategies we use, but right now cost segregation is amazing, and allows you to accelerate depreciation and create massive losses. Even if you’re cash flow positive, when we file your taxes, we can create significant losses. With clients, we can, in many circumstances, take a cash flow positive property and use it to offset 100% of the income of their W2 income of the client and his or her spouse.

So many amazing opportunities there. We going to learn more about cost segregation. I’m going to be sending out an invite soon. Next Thursday, the April 24th, so two Thursdays from now, we’re going to bring in Jono Weiss. I don’t know anybody more synonymous with the tax strategy than Jono Weiss. He’s everywhere. Fantastic guy. We’re going to be talking about cost seg and diving in deeper, and talking about more advanced strategies. Because a lot of you guys probably know the basics. We’ll talk a little about the basics and then dive into some really cool stuff to do if we’re a little bit more resourceful and thinking outside the box to maximize the benefits of cost seg.

To sum up all the awesome things with taxes, we take the rental losses that are normally passive, we can reclassify them as non-passive without having to quit our jobs. We don’t need the real estate professional tax status. Then we can accelerate those write-offs and really use all write-offs, and be resourceful and create write-offs from other sources, not just cost seg and depreciation, maybe put our vehicles in the business, hire the family, tons of other ways if we’re resourceful and understand the tax code.

Now we’re creating huge savings. Get a nice refund on your return and you re-invest it back into your portfolios, business endeavors, financial vehicles, and whatever you need to get you to where you want to go and reach your goals financially, and with your career and lifestyle. Lots of awesome stuff here. We’re intending to have two guests. Right now, we have Jon Pacilio who we’re going to introduce it a little bit, and Karen who is hopefully going to join us. She is in the middle of giving testimony in court still, but we hope she can tune in.

I gave her a one touch button to tune in with on her phone. Hopefully, she call in, but right now we’re joined by Jon Pacilio. He is a longtime friend and client in short-term rental investor. If you guys have W2 jobs and you’re looking to get out of the rat race with real estate investing, and to reduce your taxes, I think Jon’s story is going to be a fantastic model for you guys to learn from and to follow, and also to think about where you’re going. Karen just texted me, “Definitely not making it, still giving testimony.” Anyways. Jon–

Jonathan Pacilio: Hopefully, she’s not getting sued– [crosstalk]

Mark: [laughs] On Liability insurances and asset protection. Jon, we’re going to go into some things and talk about strategies and tax strategies, and the short-term rental market. First, Jon, can you introduce yourself to the audience?

Jonathan: Yes, sure. Thanks, Mark. It’s not funny, but it’s happening. We’re talking about to– I’ll introduce myself in a second, but I think it’s so timely that you have someone who’s literally in the middle of like a legal situation, and then we’re also talking about taxes. Nobody wants to be an entrepreneur or open up their own business, or try to invest anything to deal with taxes or lawsuits. It’s interesting. You have to spend a tremendous amount of time preparing for both.

We were joking earlier, right, Mark, about it’s just a matter of when you’ll get sued by somebody who’ll be upset. It’s so interesting because I think when you start down this road– We’ll talk about some cool things that I was able to do, my wife and I. We have spent some time on the side preparing clearly for tax strategy. The next thing I’m going to be focusing on is legal strategy and just preparing for anything that could go wrong. Again, it’s timely that one of our panelists who is doing some great things, a good friend of mine has these things come up. Anyway, my name’s Jonathan Pacilio. My background has essentially been about 20 years in managing large risk portfolios for large financial institutions on Wall Street. I spent that time really chasing the early part of my first career, I’ll call it, as wanting to be a suit, if you will, and try to get a C-suite job and push the corporate ladder in banking. I don’t know what necessarily drew me to banking. I grew up in New Jersey and that was a thing, Wall Street, on either investment, you’re a broker, or you’re part of a large firm of some sort, or you can get into banking in different ways, whether it’s being a risk executive or whatnot.

My path, and I’ll spend not much time on this, just because I’m glad that I went through it, but I essentially, about 12, 13 years into that career, started to realize how much of an entrepreneur I really was deep down. I had various roles at companies like Bank of America, Merrill Lynch, Wells Fargo. I essentially actually worked with Mark just in the last couple of years. It’s my desire to essentially recreate a new path started probably about five years ago, just the politics and the different things that I just didn’t want to do in corporate America were weighing on me.

I started thinking about it pretty aggressively about five years ago. Then in the last, let’s just call it three years, I spent some time coming up with a strategy that would really help me bring in, I’ll call it, semi-passive income. The reality is, I have this pyramid that I think about when it comes to financial freedom, which I’ll talk about a little bit later. Essentially, you need to start gaining traction on how you’re making your money. Where the hell’s your money coming from? That 20-year career was excellent.

We’ll talk about how I left over the last– Just almost one year ago today is when I finally pulled the plug completely, but I had spent several years putting together a stream of income or really multiple streams of income with the large lion share coming from short-term rentals. I’ll get into why in a second. Essentially, that 20-year career was great. I have a risk background. It’s actually very good to have in terms of thinking about real estate investing, being an entrepreneur, because nobody wants to do that and think about all the things that can go wrong. They want to get excited about all the things that can go right.

I don’t mind thinking about the things that can go wrong because when you plan for that and you have stress tests, and you have things in place to think about contingency plans, it helps your success along the way. When those things inevitably happen, they prepare you to move forward. Again, from New Jersey, married to my wife, Kimberly. We have two girls, McKenna and Violet, five and two. When my firstborn, Violet, was born, this was about five years ago, it really kick-started the focus on all the thoughts you have, all the things that you want to accomplish, all the changes that you want to make, the path deviation you.

You have to get going because time shrinks immediately when— For any of those that have kids, you know this. Essentially, that’s it. That day happened then I realized I can go a whole day without even brushing my teeth. I have this little infant to take care of. If I don’t make changes now, I’ll be 65 and nothing will change. That’s my mindset that I headed into about three years ago, where I actually met Mark, some other folks.

We’ll talk a little bit, about what I think is helpful in terms of coming up with your tribe or getting mastermind groups together, or really situating yourself around people that they don’t have to think exactly like you, but you have to pull yourself away from any of the mindset tendencies of people that you enjoy being around, but they’re just keeping you from your goal. It was Mark, actually, who we met through– Actually, one of my goals that year, let’s just call it 2018/2019, was to specifically strengthen a relationship with what I call a tax strategist. Not a CPA.

I don’t know how many of you guys are familiar with Mark. Obviously, you’re following him and you understand it. I think the big differentiation from a non-Mark follower is I just knew that CPAs, they’re just employees. They’re just someone else with a job that they just want to get through the end of the day. They just want to get their paycheck and just do their job the bare minimum as possible. That’s fine. There’s nothing wrong with that. If I need to strategist to essentially construct the right way to invest and make financial decisions, and I just called Mark about three hours ago, because we’re going through something, and if we get to that, I’ll elaborate as much as I can.

Where I literally now have to go to Mark and I say, “What do you think I should do to avoid essentially losing money? What type of fund can we use for this transaction and how can we do it, and in what way?” Then again, I need more legal partners and I need a strong partner there, where they can legally construct some things. There’s a lot for me to learn there. That’s essentially what I did. I met with Mark and I said, “That was one of my goals.” The way he approached his business seemed very unorthodox. It was about truly relationship building and establishing his skill sets to investors.

We hit it off. I also found out he was working lows at the time. Right, Mark? You had that career where you were about to leave as well. It was weird because I wanted a tax strategist, but I also initially found what I’ll call a tribesman. You’ll hear that a lot from people, where it’s like, “I don’t know this person very well, but instantly, they have this major North Star goal, if you will, of leaving their corporate job.” I remember when I told my boss a couple years ago, I’m like, “I’m going to be leaving soon. I’m going to be going down the real estate road.”

Anyway, I have a good relationship with him, but he was like, “Real estate’s not going to make you rich,” because he’s thinking like it’s all this work and you got to do this. It can’t really pay off. You can’t get hundreds of homes and all that stuff. I just realized instantly you can share a thought with somebody and they just have a negative reaction because they would never quit their corporate job, let’s say, to do what it takes, and that’s fine. That’s his path. My point is, Mark instantly shared something that had a true connection, which is I’m going to put a path together to leave corporate America. I enjoyed the career, but again, 15 years in or so, needed to do something else.

That’s my background, a little bit about my family, what I’ll call first career of a tremendous amount of time with really good skill sets, don’t get me wrong, with risk management. Now, I’m on this path of being a true entrepreneur. Short-term rentals just happen to be a vehicle. I don’t want that to be our primary source of revenue forever, but it’s such an interesting all-in asset class at the moment that’s very misunderstood. It’s brand-new. Quite frankly, it’s exploding in a lot of good ways, but then in a lot of bad ways, which we’re navigating like everybody else with regulatory issues and lots of things. Which I won’t talk about quite yet. That’s me in a nutshell.

Mark: Fantastic. I’ll ask you some of the questions later on, just some common challenges that a lot of my clients who are investing in short-term rentals are getting. Now, for those of you in the audience, I want to encourage you guys to put your questions in the Q&A section of the chat. I see some questions coming in. We’re going to address all of the questions, so just keep on putting them in as we go through these things.

Now, one of the things I just want to point out, so Oren mentioned the 10% second home mortgage, which is amazing. Normally, when we think about getting a mortgage for a property, we think, “Oh, we got to save up 20%.” With the second home mortgage, and you can have multiple second home mortgages, you can get a property with only 10% down. Not only can you acquire more real estate and have more leverage. Think about this. You put 10% down on a $500,000-property. You’re putting $50,000 down. We run the cost seg, let’s say we write off 30% from the cost seg.

When I say cost seg, we may write off 25% and then we’ll estimate the fair market value of the furniture that comes with the property. You got a lot of these mountain cabins and beach cabins that already have furniture. That’s property that has a shorter life in the real estate and also qualifies for bonus depreciation. Let’s say, in a typical circumstance, we’ll write off 30% of the purchase price. You’re writing off more than your cash that goes into the down payment. If you’re in a high enough tax bracket, you’re going to get a refund that is greater than your down payment.

You get that money back and you could just put it right back into your rental portfolio. Talk about a compounding effect of building wealth and reducing your taxes. The second home mortgage combined with the tax strategy is just one of the ways that short-term rental investing is so amazing and so awesome. Also, think about these short-term rentals, if you’re going to buy something with furniture, again, you’re going to have access to more depreciation than buying some bare-boned, ordinary long-term rental, or multi-family where you’re not going to have those shorter life depreciable assets in the real estate, such as the furniture, and the linens ,and the kitchen supplies, kitchen utensils.

Jon, I know that you’ve taken advantage of the second home mortgage once or twice, right?

Jonathan: It’s interesting. We did. The short answer is, yes, we bought our first cabin with that, and it was right at the– I forget what they call it, but I guess the Fannie or Freddie limit of, I don’t know, maybe it was like $800,000. It was crazy because it was in the middle of COVID and we used the 10% down. Just to highlight some things, a couple things on a 10% down, don’t think of second homes necessarily. A lot of times they do have to be perceived and the banks will really tell you this, so don’t take it for gospel from me, but if you’re going to do like your next storehouse, you just want to own that.

They’re not going to really think it’s going to be a vacation home, but don’t necessarily think you just have to have something on a lake, a beach or a mountain. I’m going to be honest, like right now you can absolutely find good acquisitions, but they’re much harder than they were even just two years ago. It might make sense to do that, it might not. My point is it doesn’t just have to be those locations. There could be another city that does allow short term rentals. That’s the key thing in any of these searches, but is to find something where you might just, look, Hey, I just want a apartment in the city, another city, let’s just say Atlanta or something.

That could be where you just enjoy going to Atlanta and hanging out for the weekend, so think of that too. It just has to make realistic sense to where you’re like, “No, I go there and I travel there, and that’s a second home.” You have to justify it. It can’t just be a house in a neighborhood just randomly. Just think that through, and again, they’re going to have their own requirements. Yes, so we were able to leverage the 10% down in the smokeys, right in the middle of COVID.

I was able to actually take advantage of all these forbearance programs that were in place and I just hit the cutoff, and they gave us the maximum amount we could get with 10%. Through my wife, I’ve refinanced that cabin, I think twice now actually to get out of it and get money back, and then reinvested somewhere else. By and large, as a singular product, the multiple second home approach is really good to get started. You just got to be careful where you’re looking, if it’s a true vacation market, because they’ve exploded in prices and you’ll see a lot of crap that’s not worth it.

The benefit is, and obviously, Mark, you hit on it a little bit and you’ll continue to talk about it, is I don’t want you to go crazy, but you do have wiggle room because you have the cash flow that these things are not traded on right yet, so there’s more cash flow in terms of a long term rental. Then you have the tax benefits then you potentially have your W2 income to return to you. You can pay a little bit more if it’s the right property and get a tremendous amount of benefits, and you’ll still win. You have a huge win, if that makes sense.

Mark: Yes. Let’s talk about this. Now I’m going to talk about this from the perspective of a CPA. Think about this and I remember this return. I remember looking at the numbers when I was finalizing your return and I was pretty happy. I was looking at this. I was like, “I am looking forward to showing this to Jon.” He purchased the place for $80,000 down and I think you pulled, like you said, the way you acquired the capital with some forbearance, I think that you may have refinanced some places, right? Did you borrow from 401k from that?

Jonathan: No, but I refinanced everything to get nothing in my wife’s name and just mine. It was pretty impressive and it literally came down to the last minute.

Mark: Yes. He puts $80,000 down with some strategic to sourcing from his different sources of capital, and he gets an $800,000 property. That’s going to cash flow and you can imagine the cash flow. You can tell us about the cash flow in a little bit, but this is what I see as a CPA. We roll it off $280,000 for depreciation in year one for bonus depreciation. We had some straight-line depreciation for a couple thousand dollars too, so we’re putting 10% down into the property. We’re writing off 35%.

Think about this, so if you are going to get a $280,000 write off and you’re only putting $80,000 down, the refund that you’re going to get is probably going to give you as much or more than the amount of money that you put into that down payment. It’ll probably be equal to your down payment if you’re at a 28% tax bracket. If you’re at a higher than 28% federal tax bracket, you’re going to get more of a refund than your down payment into the property. That’s setting aside the fact that you may have some cash flow, you may have some all other expenses from revenues, but just looking at the depreciation from this.

Why I say that is because in year one, a lot of times you’re just getting started. You have a lot of startup costs. Usually, we see the net income being around wash or around zero, or not that significance. Obviously, there are some variations there, but just imagine that, that you get your down payment comes back to you in the form of a tax refund when you leverage a good tax strategy and some financial strategies as well. How about the numbers here? We pulled some money from some sources here and how about when it’s normally operating or– can you give us a feel for how much profit and what’s the cashflow looking like for this?

Jonathan: Yes, only on market. Yes, hold on. Well, you’re breaking up a little bit. I don’t know if it’s my internet or yours. No, that’s fine. It might be mine. Can you hear me now though?

Mark: Yes.

Jonathan: I got the gist. Some numbers, good stuff. Look, here’s the thing and this is why there’s two things happening in this industry right now. Obviously, people are chasing the money, so margins are starting to squeeze, but then you also have people that are buying almost anything and that’s not good either, because it’ll work, but it won’t necessarily work long term. I’m not even talking about regulatory shutdowns if cities don’t allow it. That particular cabin, let’s just say at that time, because again, we’ve refinanced differently, so costs have gone up and we’ve redeployed capital.

I think we did like close to 206 months, 200K, and that was brand new online. We spent a fortune, not a fortune, a small fortune to renovate. We knew that going in, like it was a rehab. It was rentable, but not to our standards. The point is like– I remember the first good month, there was a management company running it and their numbers were awful but I was still making like 10K a month for a couple months until I fired them. I had to give them three months or something in the contract.

We took it offline for a little bit, renovated some things and our best month that year was like July, let’s say, I don’t know. Let’s say it was like almost 40K that we made, so just think about that. The 40K essentially put in almost at that time, I don’t know it was a peanut second home loan. You get good rates. It was probably $3,500 a month, give or take. Forget the expenses, the expenses, I don’t know, maybe another $500,000, whatever it is, but not even that much. There you go. That’s your $35,000 plus another $7,000. That’s like $42,000. The one month paid for the entire mortgage.

Now, I had almost $150,000 to make up for renovation costs, but I was okay with that because I knew I was going to refinance out of that. Even a slow month, let’s say $18,000 to $20,000 and to be honest, from– this isn’t a Smokeys [unintelligible 00:28:03] so sorry you’re answering that, so which everybody knows the numbers in the Smokeys. The Smokeys are out of control. Obviously, the problem is right now, the prices are out of control as well. You have to know where you’re picking this up.

Here’s the thing, I don’t want the punch line to even be about the cabin. Clearly, the acquisition of that returned some excellent cash on cash returns, and I got the money out, and I’m redeploying it and all that stuff where you can still– my best return on investment is something here even locally in like the Fort Mill area, which we’re having some troubles now with regulations. They possibly want to shut it down, but you can still pick up a $250,000 property if it’s cute and unique, and you have a vision. If it’s four walls and a bed, you’re screwed because nobody is going to pay top dollar for that.

You can make $68,000 $72,000 on a $250,000 pickup, which is ridiculous, versus you’re not going to pay $800,000 anymore for the same cabin. Let’s say you pick up one and a half. I’m seeing all sorts of people accepting under 10% returns, which you don’t have to do that in short term rentals. You just don’t. If you’re lazy, then you’re going to have to. I mean that not to insult anyone, but you just have to look through deals, look through houses, look at 5 10 in the same neighborhood because you want something that’s unique, has the ability to change it.

My partner and I, my wife, our goal is to essentially grow into much bigger developments. We’re not targeting single family homes anymore, but I push, when I consult people, I am all about, I call it like you want to look at the surrounding suburbs of like B plus cities, like the Charlottes of the world or Columbuses, or Indianapolises. Obviously, you’re going to look at their regulations but you could still pick up affordable homes where 90 out of every 100 investors are just waiting for the AirDNA report for the top 20 markets. Then when the Smokeys showed up there, everything triples in value.

That’s not really helpful where you have to spend $2 million now to get $250,000 or whatever, you know what I mean? You can make such great returns, $4,000 a month in cash flow on a $250,000 place, or maybe $3,100. Who’s not going to take that? I’ll tell you, again, I could go on and on, and on down this road but just even the level of clientele, the expectations from someone who’s just traveling for short-term housing needs, because there’s a big distinction in my mind, short-term housing and vacation rentals, different STRs and vacation rentals, I know it’s the same beast but not the same clients.

Anyway, those are the numbers. We ended up crushing it that year. We’ll still make a lot of money but we still do, but obviously, my expenses are higher because we’re refinancing and what not. The best return, I think we picked up a place for like $210,000 and made like $68,000 for the year. It’s tough because everyone wants the vanity project. They want the beach house, the mountain house with the view, the lake house but it takes a little bit more, and those are overpriced, not all of them but at a lot of the key areas that show up again on the top 20 reports.

To find a nice serviceable, uniquely different house or at least the ability to make it very charming to your own design methods, you’ll get people that book that need just a place to stay for a million reasons, and it’s not because they’re on vacation. I’ll stop there because, again I can go on and on about my thoughts, but those are the numbers, whether it’s $68,000, I think we’re going to picked up another place that’ll do $120,000. We’ll see it. We’re still renovating but I think I’m going to go past my projections into the $130,000s on something that costs $400,000. Again, there’s some renovation costs there but you can find value in places that other people won’t look, is the point.

Mark: Yes. That’s a great point and what I’ve seen from you, and which is different from a lot of my other clients, is a lot of our clients are jumping on the smokey mountains bandwagon and it is lucrative. What I’ve seen from the numbers and in everything from you and a few others, is a lot of people’s over stress and it’s like, “Oh, what location? It has to be at the beach, the mountains, the beach, the mountains.” I say, “Hey, don’t overthink this too much because if you can make intelligent decisions and manage the property well, and market it properly, and implement sound business decisions, you could still make profits in areas that are not so sexy. It doesn’t have to be all these things.”

Jon, some of these places were in the Suburbs outside of Charlotte. People aren’t flocking to Charlotte for any special events or anything, but people are moving to Charlotte very quickly. People are getting divorced, they need temporary housing, or moving, and this and that. There’s so many reasons why people will use short-term rental housing and why it can still be super profitable. We have people from less sexy areas. You don’t have to be from the mountains or the beach to look in your own backyard and generate significant profit.

For some of you hustlers out there who have the ability, you can just buy a home 3% down-owner-occupied-alone, move out, buy another, move out, buy another, furnish it, want it to be a short-term rental. In 10 years, you can live off your rentals and live really well, and you don’t have to be rich to making a six-figure cash flowing business. You don’t have to be a brilliant genius mastermind. I’ll tell you, it’s a lot easier to get rich with short-term rentals than it is to pass the CPA.

Jonathan: Yes. It’s funny, seriously though, I just want to throw this out there real quick. I’ve been investing technically in real estate for, I don’t know, maybe 15, 20 years, but one of the mistakes is that I did some, that’s not a mistake, long-term is still one of the best ways to. Well, problem is you just need a lot of them. Again, I mean a lot of them. Long-term tenants, long-term rentals, you need a lot. That’s why people get into multifamily, and there’s nothing wrong with that. I just got burn out a little too early and I wish I had stayed with more investing.

I would just know more and I was investing just not as heavily as I was dedicated. I was the one of a million people to hundreds of millions of people probably who read Rich Dad Poor Dad, 20 years ago or whatever, and now I know I’m so motivated, blah, blah. It led me down a good path but I didn’t stick with it as much. My whole point is when I was recalibrating how I’m going to get out of my corporate career with where I really didn’t have to just give up everything lifestyle-wise. Obviously, mine’s a little biased because, Kim, my wife, she still had her job. She still has her job up until any day now when we get this line of credit approved, which is again, we’re just leveraging W2, the magical W2.

Anyway, I’ll get into more of that some other time but we’re retiring her too. We set a 24-month goal after I quit last year, we cut it in half to 12. We could have done it a couple of months ago but the bank dragging her ass. Anyway, the reason I chose this is because I knew businesses are what make a lot of money. Businesses make money. Long-term investing is just that, it’s long-term investing, it’s paper cutting your way to prosperity and it’s great. It works and it just takes a while, but what’s different about short-term rentals is it’s you’re now entering the hospitality space.

You are now in the business arena, you can make business-type revenue with tax advantages and all these other things, but without the business-type operating expenses once you’ve streamlined your business. I remember I did all this franchise research. We were going to buy no franchise, yadi, yadi, yada, all this capital investment, all this, we visited a ton of different ideas. Anyway, I ended up talking to a guy, he ended up doing a pest service, let’s say, and he made a million dollars in revenue. I’m like that’s pretty good and after everything, he walked away with 70 grand. I’m like, “That’s a fucking job.” Excuse me, sorry. I’m like, “That’s a job.”

Now you’re responsible for all this business and you’re going to 7%. I’m like, “That’s just awful.” The beauty of this is you, obviously– Mark talked about it with the cost, said you have some injections of steroid, if you will, of cash flow or capital through tax strategy. Now you have the ability to make– some make $28,000, some make $47,000, some make $200,000. If you pick up the right ones, all of a sudden, you’re making $200,000 with just your mortgages and utilities, and obviously, you have to have the capital to furnish it and stuff. Even that, you could find partners where they’ll be like, “I’ll give you $20,000 of property to furnish it, whatever you need, I want X percentage.” You don’t have to come up with that capital.

Like Mark said, 3%, you get owner occupied that you rent it, move out, and it’s all legal. It’s all legit. It’s a legitimate strategy but imagine making a hundred and let’s just use the proverbial $100,000 in revenue is six figures. You have a good tax strategy. You’re making $100,000 in revenue, and your mortgage and utilities is 30. Now you’re making 70 but it’s a different 70. It’s not 70 to run a fricking pest control company with all these employees, and you’re always on, and blah, blah, blah. You’re making 70 which is actually worth more non-W2.

This is Mark’s job. He’s the one who’s going to express that but this is what he taught me. It made a lot of sense. Making 70 as an entrepreneur is way different than an up W2. I’m thinking, well, I can get to 100 in revenue with these things with limited expenses. I thought again the summary is business-type revenue without business-type expenses, and I just saw how quickly one short-term rental cash flow-wise. Again, let’s just be conservative, like who wouldn’t want $1,975 a month in cash flow on one property to manage?

We could all do so much with that and then you just times that by two, four, maybe stop at six, maybe stop at three. It doesn’t really matter but it’s the power of scaling your new intentional life that you’re trying to create was just so evident in short-term rental real estate investing, versus multifamily, which is definitely the way to go in that arena but you harder to find deals, price the perfection, the capital requirements are harder and the long term, you’re doing all this. Yes, the work is technically less but you’re walking away with $150, $200, $300, $400. You need a hundred of those things. That was where my mindset was.

Mark: Think about how long it takes to close on those transactions, unless you’re maybe a wholesaler getting insane deals, it is really hard. It’s possible but it’s very hard to build wealth and financial independence with single-family rentals with the margins being as low as they are and how you’re competing with ordinary families, and it is tricky. We have a lot of clients here who are using short-term rentals and tax strategies to get financial freedom. A lot of them what they say their goals are is to replace their W2 income.

With us, I think that in our first two years together, we reduced your taxes by over six figures. I think that without a strategy, you may have owed money in taxes because your margins were good. We eliminated the taxes on your rentals and also created some nice refunds for you. Now, what was your thought process or can you tell a little more about what were the steps that you needed to do to gain that comfort and confidence in saying, “Okay. Now, I’m ready to leave my W2 job. I’m ready to make the leap. I’m ready to quit”?

Jonathan: Look, I’m not going to pretend that everyone’s scenario is the same, it’s hard. A couple of things, I had my wife who does well, so that’s helpful. Then you can argue, we had two kids, which is a bunch of expenses that they pick away at that. They have the old adage like the DINKs, double income, no kids. That’s the ideal spot, you have two working adults, no kids. We had her. We also had made– or her salary.

We also were very responsible with our money for the decade before we met, and then while we were together and married. Thankfully, we didn’t have a lot of cars and fancy this, fancy– That matters. If you’re trying to get out of debt, you got to phase where you’re at. If you have debts to get rid of, if you’re just trying to remove your W2, you’re trying to transition away, you got to write everything down and you got to be very articulate with exactly what you’re trying to accomplish.

For us, it was more of a gut feeling. I don’t suggest doing this just because that’s just how I work. I didn’t say I want to be making $175,000 in revenue because I was getting to the point where I wanted to exit, regardless. What I think you need to do, what makes sense is– Again, everybody’s in different stages of what they need, is– This is, I guess, a pyramid that I go off. I’ve learned this in various sources, it gets presented in different ways. The three generations of financial freedom.

It’s financial security, which is gen one, which is basically bring your food, and your housing, and just general lifestyle things that you can get by and you can sacrifice a lot of stuff like going out, and drinks, and movies, and whatever, dinners, and you’re fine. I can deal with that if I can quit my job, I’m good. That’s gen one, whatever that is, it’s different for everybody. Maybe it’s I need $3,900 a month in cash flow.

Again, I don’t think about this is eventually you want it to be all passive, but you’re talking about being an investor way down the line where you have people running your businesses and all that stuff. Don’t even get there because I’m not even close to that, that’s the goal. I want to remove myself from these things, but I’m totally cool operating these things with the vast, less amount of time it takes to manage my portfolio for the amount of money I make versus my old Wall Street career.

Gen one, really, it’s about financial security. Then it’s about financial independence then too. It’s like, “Okay, well, I want the car.” Again, I hate the whole car thing because that’s just a waste. We all know that, but whatever it is that you drive, you need a car, whether it’s new or that, whatever. The independence piece is you’re starting to layer on luxuries in a lifestyle that may be more travel like, “Oh, I want to be able to–“

Kim and I, we want to, once she retires, we’re going to spend a week hanging out with my uncle in his Florida house and just vegging for maybe 10 days or so. There’s no real timeline because the kids are in daycare and we can do that, [unintelligible 00:43:33] kids. That’s just an example where maybe it’s a month up in Michigan with our family during the summer, there’s no one to report to. That independence piece is like what is the next number? What is that for you? I want to travel four times a year. I want a trainer and I like to go out once a week.

You have to think about it that way. If it’s $3,400 to cover rent and your basic expenses, maybe it’s $6,800 for financial independence. Then the third gen, again, way down the line is financial freedom. This is really do whatever you want whenever you want. Again, you could say, “Well, are you talking about planes and Ferraris?” Well, that’s going to take a long time to get to, but maybe it’s literally if I have $25,000 coming in every month, I pretty much–

Within reason, I’m not talking about medical expenses or kids going to private college and all that, you want to work towards that separately. As an individual, what kind of nice life would you have if you had just 20,000 to 25,000 coming in? You could basically do what you want when you want to do it within a reasonable sphere of things. Again, what did I do is it started with one, you have to acquire one of these things.

Maybe you can speak on this a little bit in a minute, Mark, because I don’t know how many tax advantages apply. I’m always about ownership, full control, and owning the asset, which obviously comes with more tax advantages than let’s say, arbitrage, which is a better way to scale because you could pick up more properties with less money down, and do deals, and lease things, and stuff. The bottom line is owning things come with just so much more advantages and you’re actually owning the wealth and the appreciation and all that, which is just how can you navigate that pyramid for you to quit?

Again, the tax advantages that Mark’s talking about, the same $100,000, the same $50,000, W2 wise is not the same $50,000 entrepreneurial wise. We just put it as, I want whatever’s coming into our account to cover all the new business expenses from running this thing, to be able to me cover all of our expenses, living wise, to where we’re not– My wife, she doesn’t pay anything other than just a little bit of shopping for the kids or something but I can cover everything. Then it’s like, “Okay, I can quit.”

Then we’ll build it further to where we can do whatever you were paying or whatever you want to pay, and then she’ll be quitting here shortly. We’re just taking a leap of faith at this point. It doesn’t come with a compromise of lifestyle. Every time you do that, you’re taking away a six-figure salary, that still sucks, it still hurts, or whatever, whatever the salary is. Let me stop there. Does that answer the question, Mark? I know it’s not as specific but every small little specifically written goal monetarily is really all it’s about. Is it $1,200? Is it $2,400? Is it $30,000? I don’t know.

A long-term rental bringing you $250 a month, that’s going to take a while, but what if you pick up the right one and it puts $2,500 a month? Boom, that’s 10xing it. That’s huge.

Mark: For some of our younger audience members, and clients who don’t really have as many financial needs, and maybe they’re willing to live with roommates and house hack just so they can get out of the 9:00 to 5:00 and enter the entrepreneurial world where thinking long term, the upside is so much greater when you’re a business owner. Then for some of you guys with spouses, when we look at the tax– I have a whole webinar and the title is Tax Incentives and Strategies To Quit Your Job for Real Estate Investing.

When we consider the fact that you can create refunds from your spouse’s W2, and you look at the after-tax effect of this activity, you realize that when you go that the impact of this and switching into full-time investing, and what that’s going to look like with how much cash you’re going to pull in every month compared to you or your W2, you slowly start to realize, it becomes more and more feasible. Personally, when I think about what did I need to quit my job, the number I had was actually extremely low. I just said, “I need to have a setup that is feasible for me to get by” because I know if I stick it out over time, my income will grow and I’ll make it work.

For me, I just said, “Okay, I’m actually–” I took a pay cut to start my own business and go on my own but I set myself up. I had rental income as well to complement my consulting income, and I set myself up so I knew that I would never have to go back to a W2 to survive. It took about a year, year and a half before I was actually making more money than my prior position. With some strategic planning in myself, and my path was a lot different than Jon’s, I just started roughing it. I was house hacking and renting out another property.

The house hack was pulling in more revenue than my overhead, so I was profiting on where I was living. For me, I was able to live on my endeavors psychologically. Just to get me to the point where I knew that even with worst-case scenarios and rough months, I had enough to keep the ball rolling and to keep things moving forward. Now, for you guys as short-term rental investors, you also want to think about how can we set this up. It’s a little tricky, you want to have capital to reinvest and to grow it, so some of your planning is going to be considering your ability to qualify for loans.

It will based on your income and your spouse’s income. To get that push, to get enough of that momentum where you know that when you make that leap and you leave your job, you have enough sources of capital and revenue cash flow to make this something that you can continue to build, and grow, and to support yourself.

Question for you. What are some key success strategies that, let’s say– Obviously, there are some obvious strategies, but thinking about, let’s say, if you were to tell yourself, the Jon Pacilio from three to five years ago, and you were to have a conversation with you now, what are some key things that you would tell yourself that has or that would’ve been the most important thing for you to really thrive and succeed?

Jonathan: I think, I mean, less thinking and more doing, right? Just a lot of action. I know that seems generic, but it’s been proven that a lot of individuals will overanalyze taking some sort of step. If it’s investing a property, they’ll run the numbers even, but then they’ll think about all the things that can go wrong. Then they paralyze themselves. If it’s starting a business. I’ve done this, right? It’s okay. I have this idea that I think might resonate with somebody or enough people to pay me, but what if I fail or nobody wants it, or I leave my job to go do this and it doesn’t work out.

It’s not like I have 30 years behind me to validate what I’m going to say, but I pay attention and I follow so many different successful entrepreneurs and influencers, if you will, and public figures that are successful, Tony Robbins, Tom Bilio, Gary V and then just people you never even heard of. From different philosophical perspectives. I don’t really think I need 30 years to validate this. I just hear it from everybody who’s been there and they’re not selling me anything. They don’t get anything out of seemingly having the same message, which is you just have to try and get started, and be willing to fail and have something not work out.

In this case, let’s make it relevant, short-term rentals. It’s all you’re doing is buying a house. Don’t overcomplicate it. Whether you have the financing or not, there’s clear tax benefits, there’s clear cash flow benefits. I’ll just be one to validate there’s ownership benefits through equity and appreciation. In this case, this conversation is for those that want to do two things, I’m just going to assume maybe this audience has some that have zero, or maybe they have one or two, and they’re experiencing some positive things in it, but they’re like, “Could this really help me quit my job or leave that path?”

When I say, just start taking action, is you’re just buying a house. Maybe some of you already have a house, but you just were conditioned in the past to go, well, you live in a house. You don’t use it as a asset. You don’t sell it. You don’t rent it. Or maybe you’re sophisticated enough. All of us have heard about landlords and we rent it. The proof is there. If you find even a decent short-term rental in the place that this industry is in at the moment, and I think it’ll be much more squeezed over the next 5 to 10 years margin wise. How much you’re going to make the same $2,500 houses will be $1,500, it’ll be $1,000.

All you’re doing is buying a house. If it’s a capital problem and you got to approach it the right way, but find somebody who wants you to do the work. If you can do the work and you have a plan, and you’ve picked out a property, and you’ve assessed conservatively what you think that will make, then go to somebody and go to an investor group. Don’t go to your brother. Or unless they’re, like because I keep using the word tribesman, and Mark can attest to that.

People in investor groups are looking for partners. They’re looking for money. They’re looking to learn how to get deals. They’re looking for something. They’re there because they want to do something similar to you. In this case, like your first property, even if you net $950 a month, and it’s as simple two-bedroom, one bath, like what’s the worst thing that’s going to happen? Even if the market crashes. Forget like the $2 million mountain house that could potentially go down to like $950. I get it. You’re not ready for that.

Maybe the overpriced in 2022 inflationary period, two-bedroom, one bath, that’ll net you $39,000 for the year is $230,000 and a couple years ago it was $180,000. You’re like, “Man, I’m the one paying the $50,000 more.” It’s so much easier for you to qualify for that kind of a property, you have tax advantages. It’s actually still a real asset. You still own it. Even if it went back to $180,000, and I had this happen during the ’06 thing. I had someone, it was appraised at $250,000. I tried to sell it. No one wanted it. It went back down for like 10 years or whatever. It was back down to $170,000 or something like that.

The point is you have the asset. Any one of us could pick up a two-bedroom, one bath, somehow, some way. There’s so many programs. Train on that. Again, maybe it’s $600 a month, but it will be more than the long-term rental. You will learn so much, just do it. Then now, again, all these entrepreneurs, these influencers, all these people I keep hearing just get going and you’ll learn along the way, and all these things. Yes, I’m not saying don’t assess it, but just try something out of your comfort zone that’s reasonable for you to acquire.

It’s amazing how just two years later, our first short term rental was $150,000 a little over two and a half years ago. Now we’re buying $2 million plus places. It’s not bragging. That’s just I have the confidence. It still may blow up in my face, but I know so much more, and I have so much more confidence because I just quickly went like this because I stopped thinking about it. I assessed; I did my due diligence. I invested in myself, I went to masterminds, but just try to pick up one short term rental. You should almost certainly net like $1,000 a month.

Whether it’s arbitrage, you sign a lease. Then you go obviously with the landlord’s permission, there’s a lot of things behind that, but just try it. It’s the simplest thing. Mark, you tried it and they shut you down. You weren’t supposed to do it. You learned you. You gave it up. Okay. It’s such a powerful, positive potential versus a very low floor risk-based investing. The positive ceiling is very good cash flow on your first deal and a bunch of learnings along the way. The bottom is maybe you overpaid either in a lease, which is easy to get out of, no big deal. Or you overpaid by buying a house that’s $30,000 more than what it should be worth, because people are overbidding it. W

If you’re an investor in the one and a half million and up range, you’re overpaying by hundreds of thousands. There’s so much bloated garbage right now in the market. That those are the people that really, if they don’t know what they’re doing, they could lose the $300,000 swing in a heartbeat. I can see that. I guess I don’t know if that it directly addresses what you’re saying, but to derive it or to align it to this conversation and taking action, and just getting started, that first pop of like, “I can do this,” is as simple. Whether you want to grow to $2 million properties or whatever is not the point. Three of those thousand-dollar properties, all of a sudden, you have 3K that’s semi passive. Now you have choices.

Mark: Here’s one of the ways that I looked at it before I purchased my first property, is that think about– look at the purchase price and then think about your overhead mortgage tax insurance, and then your maintenance, and then look at what you can get on Airbnb for it. You can just go in as though you don’t need AirDNA and AirDNA doesn’t do every neighborhood, but you can go in as a guest and just see what the revenues would be.

Now, don’t just look at how much it would cost as a guest, because some of those costs are going to go to Airbnb for their fees, the lodging tax which is 8% of the revenue amounts, which is an insane amount of tax. Airbnb handles that for you and the customer pays it. Think about the actual amount that you’re paying to the host for the stay, for the clean, maybe consider that they’re paying for a cleaner. Just ballpark that, but just for the actual staying at the place.

Then think about what percentage of the time, how many days do you need it to rent out, just to break even. What you’re going to find is you only need to really rent it out, maybe 50%, 60% of the time to break even. If you break even, that’s still a win because now you’re paying down equity, you’re building equity from appreciation, but you’re going to do a lot better than break even in almost every instance, unless there’s some extraordinary events or some calamity. Everyone here should be able to find something that cash flows and to find a way to finance it. It is not the most impossible thing.

Jon touched on arbitrage. If you can’t afford, let’s say you have a bad credit score. You don’t have a down payment. If maybe you need someone to sign off as a co-tenant on a lease, you could buy some furniture with a credit card, even with a 25% credit card interest rate on your credit card debt. You’re going to pay that off way faster, that you’re going to get the cash to pay off your credit card debt way faster than that interest is going to grow.

If you’re even broke, you can still find a way to get into the game. You’re not going to see the advantages of depreciation, but you’re going to get your cash back a lot faster and eventually build up the capital to purchase properties as well. It is not just a game reserved for the wealthy, and it is funny because when I was in New York City and seeing the cost of properties, and you needed 20% down on New York City, real estate, I always thought that the barrier of the entry was so high and only the wealthy could get into this game, but anybody can do this stuff.

You can be making 40, you could be serving tables and you can get started in this and build a multimillion-dollar investment portfolio with just sound decision making.

Jonathan: Let me throw this right. Real quick, Mark. Just real quick on that because it’s true. So many people started with not a lot of capital, if any, and they they’ve built this. Does it take time? Is it quick, fast money? No, but in this case, it’s nice size rewards and that’s what you’re going for because you’re not getting 7% returns. You could get 20%, 25% returns, maybe more. There’s really three ways to build the businesses and that it addresses everybody’s financial situation. Obviously, you can own, you can buy 20%, 10%, that’s for people with a little more capital and better credit, whatever the case may be.

You can arbitrage, which you just said, but you could also start your own management company. Obviously, you are like, “Well, I don’t know how to do that.” That’s fine, but that’s almost like a sub-tier option that you can incorporate once you start learning how to do these, because you know one, you can know two and three, and four, but if you even just, again, go to an investment group and say, “Hey, listen, I have a tremendous amount of knowledge and desire to run an Airbnb. This is what I was thinking.”

There are a lot of investors who have long term rentals that they know they hear about the power of this, and they want to turn it over. When you tell them, furnish it, get linens, hire a cleaner, you got to message guests every weekend. You got to have a good sense of style, and you got to manage payments every couple days. They’re like, “Yes, I want the cash. I don’t want that work.” That’s where you can come in because that stuff it’s just grease. It’s just elbow grease. It’s no big deal. It’s just some work.

Seriously like the phones. This is it, you’re just on your phone. You are for every other aspect of your life. It’s just now you’re on Airbnb platform instead of texting. Then you’re sending messages through that and you’re picking up the phone for a cleaner. There’s just so many ways to enter this business, whether you have capital or not. It it’s just a really good point, Mark. You just got to look in the right places. Don’t just search on your own and stay on your own island, and hope it’s going to come all together, and you’re going to figure it out.

Go to somebody who has something to gain by you being involved in the formula. Then as soon as you add that value because a lot of long-term tenant’s conversion investors, that they have no desire to learn this business. Look, it’s a lot of work. You got to know guests, it’s a different mindset. It’s a different business model, but if this is what you want, then it’s easy to bring that value.

Mark: Another demographic of people that I haven’t touched on, we get a lot of physicians and dentists, and high-income earners who are using the strategy and I’m working with as well, because you’re paying so much in taxes, if once you’re making around $800,000 to a million and up, and well with all the limited opportunities, if you’re in a high paying W2 type of job, what they have found is that this is the single most effective way to reduce their taxes and replace our income, which is just investing in short term rentals because with long term rentals, you can’t get the real estate professional tax status to reduce your taxes. This is it.

We have clients who we’re able to reduce their taxes by as much as $500,000 per year with this strategy and they love it. Because they have so much cash to deploy and so much cash on hand, they’re not as stressed out about their margins. Some of them really just want to reduce their taxes. They know they stick it out and pay off the equity, in the long run, it’s all going to come together anyways but they don’t even care have much about the return because they like their jobs. They just want to win the tax game. We have some folks like that taking advantage of these strategies as well.

Jonathan: Can I throw something out, Mark, on that real quick? Sorry. One of the clients you had sent me, let’s take the flip side. I don’t know everybody on the call, maybe they are making a million dollars a year in a sales job or something. Obviously, the problem is the more money you make, especially in corporate America or sales, you become more and more of a slave to the company, which that’s fine. It’s what you wanted. You make a lot of money. That’s great, but at some point–

I don’t really firmly believe anybody truly wants to just sit on the beach for the rest of their lives for 30 years. I think we want to do that more and more with breaks and actually work on something that we enjoy. It’s usually not selling other people’s good and services, even if you’re getting well compensated. You’re making them rich and you’re getting compensated well. Or let’s say, again, you’re a surgeon. I don’t know if anybody has read this book, but you hear it a lot. The Cashflow Quadrant, it’s such a brilliantly and simplistically well written book on explaining the essential four ways you make money.

Let’s say that someone on this call making a million bucks and obviously capital’s not a problem for you. You’re going to want to strategically pick these things up so that you can make $50,000, $60,000 a month, but maybe you can move faster, which is you can definitely make $50,000, $60,000, $70,000, $80,000, $90,000 a month by having 10 of the right rentals, maybe less. It all depends but it’s just relative, whether you have no money or a lot of money, you’re essentially trying to do the same thing. You’re trying to get out of your 9:00 to 5:00 by building a 5:00 to 9:00.

Whether you literally have to approach someone because you got no money or you have lots of money and you don’t necessarily want to be in this business, you still just got to acquire the right amount that creates that new intentional income-based passive semi or passive income-based life. Then there’s a question here eventually. I want to get to this, but I’ll let you go, Mark, because this one’s a good one but go ahead.

Mark: Great. We’re going to get to guest questions just a little bit, but before we do, I want to ask two questions. What I want to know is what’s the biggest mistake you’ve made as a real estate investor and that you’ve learned from, or that other people can learn from by just hearing your story? The second thing is I want you to tell the audience what you’re working on now.

Jonathan: Yes, sure. I don’t know how this might come across. I feel like I don’t have a horrible mistake yet and that might be the mistake actually, is like I said, I started maybe 15, 17 years ago and I hit the quintessential like, “Oh, I’m going to be richer on real estate and it’s going to be easy.” My first tenant problem, I just was like, “This sucks. I don’t want to have to call about–” The proverbial, you hear it all the time. “I don’t want to have to fix a leaky toilet at 2:00 AM,” which that kind of stuff rarely ever happens, but it’s just the consistent dealing with tenants and stuff.

Two quick things, I probably should have stuck with it more, and not that I didn’t. It’s just I bought on way too much of an infrequent basis. When I read Rich Dad, Poor Dad, it was all about real estate. It was all about different sources of income. I gravitated back towards my career. If I had just quit then or just figured it out then when I was 25, ‘4, ‘5, ‘6, whatever, I have a lot of confidence in myself. I’m not cocky. I’m obsessive about things I learn. I like being a student and then I learn as fast as I can to just make changes happen. I just feel like if I had that extra 12 years, who knows where I’d be now, but it is what it is. No regrets, I think that was a mistake in not having too many mistakes, which I would’ve had a ton in the last 12 years.

The only other one too is because I know this conversation is specific to short term rentals, but the reality is I don’t want to wake up and even five years and only have short term rental income, and all that. I’m working on multiple streams of income. I have some consulting income. My wife and I just play around with e-commerce because it’s just fun. We’ll get our hands on some stuff and we’ll flip it for profits and stuff, but there’s people obviously who have automated that. I’m not saying go do that, but I think there’s a way to– you can easily make $1,000 a month just selling business services on eBay or whatever, Amazon and stuff, and many more than that.

The goal is to really essentially and have multiple businesses. The goal is to have multiple income streams which we’re funneling out some of our additional ones. I think the saying goes like have four to six or something, then you’re really covered. When one business is doing poorly, other ones are picking up or they’re stabilizing and all that. Another just quick lesson, I bought into a business, which I didn’t know anything about. It was around real estate, but it was around property management. This was six years ago. It was the inverse of what I’m telling you guys a little bit, just take action.

In that case, I literally didn’t even assess why I wanted to do it. What was I trying to do? What was I trying to accomplish? I just bought into this business because I was so pissed that I didn’t–

Mark: Jon, I think we lost it.

Jonathan: I’d be probably a lot further along. Did you lose me for a second?

Mark: Yes. You’re good. We got you.

Jonathan: Anyway, I was just saying, I wish I had better stories for you. I think that’s the mistake because the stories are what lead you to prosperity. When you have really great stories, it means you’ve been through a lot, which means you learned, which means you ultimately led yourself to the promised land, which is a lot of success. That’s just the way it goes. Then you had another question, sorry.

Mark: To add on that, a lot of people are like, “Oh, the market’s too high right now, when’s going to crash. Everybody’s waiting for the real estate to crash. People were waiting and prophesizing on the crash for the past 10 years now.” What I’ve said to people, instead of waiting for the right time, if you’re going to do that, you’re going to miss out on all these lifelong opportunities, all these opportunities to learn how to work with attorneys and tenants, and think about contracts, and thinking about working with contractors and evaluating deals, just get the repetitions and don’t overstress about the timing.

Before we get into Q&A, because I know you do some consulting and coaching for other investors and short-term real investors. If you could tell some people about that project you’re working on and some of your other rental projects you’re working on as well.

Jonathan: Just if my internet’s spotty, I’ll try to repeat myself just a little bit because I don’t know, it’s giving some trouble but anyway. As I said, my mindset was this, we started a couple years ago, we hit our goals. I think this is a couple things. I think the short-term rental industry is going through transformation because it’s new, it’s a new asset class, institutional investors are just now getting involved. I think in the years past, you could just throw anything up and make money, and that’s true and it’s still technically true but you have to raise your game just like any industry.

I see that in the future and a lot of people I follow clearly can dictate that that’s the case. My goal has very quickly shifted from instead of single family, is like how do we create unique experiences? How do we buy maybe more land with structures on them but maybe we create a destination? My partner, Mark Wrightman and I, we’re creating something called a destination within a destination. That’s like the vision. Is where can you go to places that people want to travel to and you insulate yourself from maybe some of the regulatory risk but also the unique the copycat risk.

The two things we’re working on now, I have something locally that I’m renovating working on but and that’s going to do well. That’s aligns to when I was telling you guys just look outside Indianapolis, look outside Columbus, look outside of somewhere in Ohio, somewhere in Arizona, just find– and I think some it’s all relevant. It’s something like my initial reaction. I totally understand why it’s analysis paralysis because you know why? You’re actually really good at what you’re doing and you’re analyzing the numbers, and they suck.

They don’t suck. They’re just not as strong as what maybe you heard about in the past. Let me stop there real quick. Mark, am I bouncing in and out or are we good on my internet?

Mark: We lost you for a couple seconds there but I think we’re good.

Jonathan: My point was we’re looking for unique destinations and we’re looking for places that obviously, people are traveling to and that we can create a destination within a destination. Where I pivoted was this is an anonymous question here about analysis paralysis. You are getting stuck on the smokey Gulf shores and destined. Those are literally your three areas. Now if you would’ve bought three years ago, you’re golden. I don’t think you’re not paralyzed because you’re scared. You’re paralyzed because you’re looking at numbers which are just not very strong and I don’t invest in those markets.

If I went to any of those markets, it would be doing what I’m doing now, which is to find a way to find a piece of land that I could develop, maybe with a structure, build something unique. Again, it’s probably going to be expensive so maybe those markets aren’t for someone without a lot of capital or a very crystal-clear vision but don’t beat yourself up. I look at those markets and I say, “Man, I just don’t like the returns here. I can make some money but is it worth it?” It is tough totally agree.

We’re working on this big development in Texas and this one that we just got under contract for about $2 million yesterday. A lot that I don’t know about that yet because we have to do our due diligence stuff. What I was telling Mark at the beginning of the recording here was essentially, how can we work on things that are non-recreatable in the experience. It doesn’t necessarily even mean the house, but the surrounding area, the views, the compound you might inevitably create.

Maybe the house is just so cool. This just happened to have a structure that was just really cool. I could just envision amazing memories being made during Christmas and Thanksgiving and stuff. There’s two huge deals we’re working on with developing. One’s obviously further along than this one we just found, but those to me are like how I’m pivoting from single families, your average Airbnb pickup, to really an experience and hospitality connoisseur of creating something amazing that I’m not going to compete with other people in the future for that business, if that makes sense.

Mark: Cool. Tell them about the short-term Dojo.

Jonathan: I put together a little group just to pull very specific like-minded investors together. I’m still formulating how I’m going to take that, but I have some really close members that I’ve personal relationships with, which essentially there’s multiple ways we’re taking this. That’s going to be like a mastermind group where again it’s going to be all about your tribe, and who’s pushing each other, what are you going to be doing? I’m not into mixed martial arts directly but I respect it, it’s probably one of the most disciplined things you could be a part of.

To maintain focus and hit goals, and not make excuses, and the only way to grow. I just have such a respect for it and so that’s where the concept came from. The reality in any industry, it takes that. You have to feed off each other, you have to get in front of each other, you have to be comfortable. If I was sitting here and this was a round table, and Mark had me on the hot seat, he’d say, “Listen, you had that place under contract. You said by the end of the year you were going to have an architect draw plans and you’d be breaking ground on at least two structures.”

If I didn’t have even a remotely good reason why I learned something along the way that prevented that from happening, and it’s legitimate, then it’s an excuse and he should press me on that. That’s something where if I’m meeting the right people that are a good fit for that, they can join that and be a part of that. Then just consulting. Me as a general I leverage that brand, but I always look at that as like a community and any consulting I do you can say it would be aligned under the Dojo Brand, the short term Dojo because that’s what I’m teaching a lot about, is short term rental investing and consulting, and how to pick up properties, and what to do with them when you get them, how do you set them apart.

I can go on and on but I like directly interacting from a consulting and a coaching standpoint with prospective clients that I teach with multiple things, not just short-term rentals but really investing and then mindset. Mindset’s huge mindset and action taking, it’s a whole different– you can apply that to anything in life.

Mark: Awesome. Okay. Now let’s get to some of these questions here. One of the earliest ones here from Daniels that asked, if you have a property manager can you still materially participate? There’s nothing that says that you cannot materially participate with a property manager. However, you got to look at the material participation tests. There are three tests that are most relevant and it’s going to be hard to pass that test if you have a property manager doing all or most of the work on that property.

When you’re starting out, you’re probably not going to be able to get in enough hours to pass the material participation test with one rental when you have a property manager overseeing everything. Even if you’re doing some of the decision making, you’re not going to hit that material participation test threshold. What you want to think about here is what our clients do is when they’re starting out, I tell them fire your property manager, say you can hire them in a couple of years or whatever. You want to self-manage when you’re starting out.

As you grow your portfolio, and we think about that material participation test where you want to say we put in either a 100 hours and more than anyone else or 500 hours total. Then there’s a substantially y’all test occasionally that applies where we say we did more than 50% of the work performed by anybody. We’re going to be able to reach those thresholds by looking at not just one property but your whole group of properties. If you have 15 properties and you’re putting it in more than 500 hours per year, and then you buy another property and you have a property manager managing it, you’re still materially participating over your portfolio of properties, you’ll pass that test.

It’s fine to leverage property managers but if you want to win the tax game, you wait until you are confident. You can pass that material participation threshold by looking at your combined hours before off boarding so much of your responsibilities. Here’s one from Derek —

Jonathan: Mark, can I just throw one thing because, well, first of all, just to add on that just quickly. Nothing wrong with the property manager obviously. I think just learning the industry and I get it. Some people are just like, “I want to make money and I want to invest, and I’ll pay the expense,” but there’s so much that goes into the initial onboarding and setup of a property like learning the business that you’ll hit that 500 hours probably pretty quickly. Then you can have that conversation with Mark, because it’s like furnishing it, setting it up interacting with guests, you’re constantly doing that.

It’s easy to hit that threshold, hit whatever the requirements market needs you to have, and then now you actually know enough to challenge your property manager, if they suck or not, which a lot, they’re just not very good. It’s like it’s a short amount of time of a commitment for a massive capital gain and then you can turn over the reins, I believe, Mark, isn’t that accurate technically?

Mark: Yes, especially like you said, you’re getting started on new property, and you’re putting a lot of time into setting it up. You can get to the 100-hour test, passing the 100-hour test, relatively easily. I find most of our clients in their first year be able to say that they materially participated, so absolutely. Now, but make sure we talk before we do this so we can play, and especially if you’re going to buy a property towards the end of the year, you may not have enough time to pass the 100-hour test, so then we may be able to get the substantial all tests or maybe change our facts around. Make sure you’re talking to me or whoever your advisor is to make sure you’re doing this in your one.

Derek asked something along, so how do you guys’ approach partnering with individuals for funds of high-income earners who are interested in partnering them for tax savings and need for cash flow. How do we structure this, so they get the tax benefits? Or how should we structure this? From a tax perspective now, there’s some things we want to consider here. What is the value of our losses? If these partners have real– let’s say they have passive income, let’s say for instance, and this is not common.

Let’s say their passive partners in businesses, or their rental properties are operating at a profit and they want general passive losses, they can be a cash partner, you can manage the properties, and they’ll get their share of the losses, and they’ll be happy, and it’ll be a tax win. Let’s say that these are high-income earners with W2 jobs, and they want to just put all their money into this real estate, and they know about cost segregation, and they want to get a fat refund at the end of the year and have you do all the work. Well, they’re going to be disappointed to find that because they’re just cash partners, they’re going to fail the material participation test, and they’re not going to be able to use those losses to offset their W2 income.

The best they can do is have some nice cash flow that’s going to be untaxed because we can offset the revenues with our write-offs and depreciation. If you’re going to partner with someone and a cash partner, make sure that they understand the treatment of these losses, and maybe they can get involved in another decision-making and management with either that deal or that combined with grouping it with some other short-term rentals, so we can say that they materially participated and now we can treat the losses as non-passive.

On how to structure it? You want to make sure you talk to someone before you do this, especially if it’s cash partner because these are treated as regulated securities, and we really want to make sure that we have our proper documentation here. There might be opportunities to allocate more depreciation to the cast partner with a special partnership allocation, so if they’re bringing the funds, you can give them more than depreciation write-off benefit, and now it’s a win-win for everybody. You get the cash flow, they get the write-offs. [unintelligible 01:24:11]

Okay, Brandy, we’ll talk. Send me an email. Okay, we have a question here about going on schedule E or Schedule C for your rental properties. When you have a short-term rental, I used to take the position that a short-term rental where the average length of stay is seven days or less was on Schedule C, but I’ve decided to follow the masses and put it on a Schedule E as well. There’s a lot of reasons why, which we don’t have to go into too many rabbit holes here. However, you can still treat your losses as non-passive on the schedule E, even if you don’t have real estate professional tax status.

Tell your accountant to see if you can mark off the losses as non-passive rental activity on the Schedule E. E has the comfort of being scheduled E and you can still treat the losses as non-passive on your 1040. We had a question from Rob Anderson, what about depreciation recapture when you sell the property someday, is the idea to exchange it never sell? You can defer the straight-line depreciation recapture with a 1031. However, the depreciation that you took from a cost segregation study and that bonus depreciation, you cannot avoid that with a 1031 exchange. It gets recaptured in you are taxed at your marginal rate on that recapture.

However, there are some strategizing we can do. If you take 1031 into a larger property, you do another cost seg, and potentially creating up losses to offset that other depreciation recapture, and then maybe then a little more to further reduce your taxes, you can reevaluate the market value of that property that’s being recaptured and maybe not recapture 100% of that bonus depreciation because you could say that it has become less valuable over time. Maybe you’re not recognizing all of that prior bonus depreciation back, is recapture with some strategizing in analysis.

We have a question here that I think both of us can address especially you, Jon. How does one get out of analysis paralysis going through this in markets such as– I think you already addressed this, right Jon? Smokies Gulf Shores and Dustin. I think we already talked about that topic.

Jonathan: I want to reiterate because it’s like he or she should feel good, that’s not analysis paralysis, that’s you just looking at numbers and not being comfortable. That’s good. I’m not saying those markets are dead, they’re great, they’re busy, and it’s a lot of money, but if you don’t like the numbers, then you’re doing the right thing. I probably lost you.

Mark: No, we heard you.

Jonathan: Okay.

Mark: Awesome. Jon, what I would like for us to– I think we’re reaching a good stopping point or approaching the stopping point, I think we’ve answered all the questions, and this was a really great conversation. I think a lot of people are really going to appreciate your story and insight. Can you tell us a first where to reach you, if people want to reach you, and also any calls to action or anything that you’re asking the audience, or anything to check out, or anything along those lines?

Jonathan: Yes, just for me, look, if you think there’s something I could do to help you in the future, especially around this business, or really getting out of your own way, I think that’s what I’m going to focus on. There’s a lot of knowledge that I have around the short-term rental industry, but just helping you with the mindset component of just how to take your first step. You could reach out to me. I’ll put it, maybe you want to share it after this, it’s just, is my landing page to engage me and set up some time with me, if that’s what you still want to choose.

Then, again, the short-term Dojo is a group I’m going to be building. It’s really tribe specific. If that’s something you’re interested in at some point, let me know, can see if you’re a good fit to get involved in that community so we can push each other. The call to action is, this is obvious, specific to I can’t stress enough how just making one acquisition of a piece of real estate that you turn into a short-term rental can do from both the immediate cash flow perspective, and then I call it this injection of capital with the right tax strategy.

Forget even where you’re going to go in the future and you’re going to have multiple deals, and you’re going to work with Mark in the future to take one 1031 and roll it into something bigger, and now you’re working on a lot of things. One of the best and I don’t want to say– I use easiest loosely, but one of the best, easiest ways to vastly improve your wealth situation is to pick up a property, try short-term renting it, get the cash flow, and then integrate it into a smart tax strategy. It’s like the quickest way to see this boost in your net worth and have capital come your way because it’s very, very difficult to change your financial situation without owning things, owning assets.

You have to own assets. Even if you start business, that’s great but if your business is poorly performing, if it’s not even an asset. Real Estate is always an asset. It’s a hard asset. It’s a million things, Bitcoin, stocks bonds, but it’s literally the most secure. It’s how the whole banking system is built. It’s to lend on a hard asset, like real estate. No one’s going to lend you money on stocks. They just don’t do it. If you just try one small one, manageable, learn the business, get the cash flow, and have one injection of this new tax strategic implementation of capital to get a little bit more of a return, it’ll teach you so much about what it does for your net worth and your financial situation to own an asset, have it cash flow, and then have the third cherry on top, tax advantages.

That’s how everybody manages their wealth, whether you’re a politician or a businessperson, a billionaire or whatever, they own stuff, they have businesses and then they make sure their tax strategy pulls it all together, pulls the thread through, and protects them from losing money. It’s not how much you make, it’s how much you keep. Just try this out, even if this was about crypto, which I’m exploring, and stock trading, which is great if you’re good at it. There’s so many ways to make money but this is like literally, and it comes from 20 years of risk management, it’s one of the easiest ways to limit your risk and securitize a financial gain for yourself. I don’t know how else to say it.

Mark: Absolutely. That’s all-wonderful things. It’s a wonderful insight that you provided. When you compare that and think about how hard it is, how long it takes to get a raise or a promotion at your job, and you have these promotions or raises, what are you going to make? Maybe an extra couple of $1,000, maybe $10,000, $20,000 and that doesn’t even compare to how fast and how much more powerful it is to invest in Real Estate. For some of you guys listening and looking to become entrepreneurs, this is really where the upside is.

I think that before we wrap it up, some calls of actions I have, obviously, if you or anyone are interested, we can assess your situation, email for prospective clients. If you know someone who wants to work with me, to work for me, we are hiring nonstop. You know a good accountant looking for work, just send them my way because we we’re looking to grow, and we can’t serve all the clients that want to work with us because we need more manpower. We do have openings, but we are selective, and we could be a little less selective when we get a little more manpower.

If you know anyone who might be interested in this and may see value, you can send them the recording. I’ll send this all to anyone who’s attended or just registered for the event. You could also watch it on the YouTube page or listen to the recorded version of the podcast anywhere you go on any of the major podcast players, it’ll be released there soon as well.

All right. Hey, Jon, thank you so much for your time today and everybody else, thanks for tuning in and giving me your questions. Again, next in two weeks we’re going to be talking about cost seg. You’ll see the invite, register. It’ll be another great insight from another guest speaker. Until next time, best of luck in your investing journey and we’ll be keeping in touch.

[01:33:33] [END OF AUDIO]