YFP REI 115: What is Real Estate Professional Status (REPS)?

Hosts Nate Hedrick and David Bright discuss the benefits of Real Estate Professional Status (REPS) – what it is and how you can use it for tax advantages.

Episode Summary

In this episode, pharmacists and real estate investors Nate Hedrick and David Bright share insights into balancing pharmacy work with real estate investing. The podcast explores part-time pharmacy work and real estate strategies, emphasizing the benefits of Real Estate Professional Status (REPS) for tax advantages. How much time you spend and what you do with that time in real estate can open a lot of doors and create some enormous benefits, particularly if you can meet criteria as a REPS. Nate and David highlight the importance of tracking hours for tax benefits, and consulting accountants for sound tax strategy advice for anyone interested in REPS.

About Today’s Guests

Nate Hedrick is full-time pharmacist by day, husband and father by evening and weekend, and real estate agent, investor, and blogger by late night and early morning. He has a passion for staying uncomfortable and is always on the lookout for a new challenge or a project. He found real estate investing in 2016 after his $300,000+ student loan debt lead him to read Rich Dad Poor Dad. This book opened his mind to the possibilities of financial freedom and he has been obsessed ever since. After earning his real estate license in 2017, Nate founded Real Estate RPH as a source for real estate education designed with pharmacists in mind. Since then, he has helped dozens of pharmacists around the country realize their dream of owning a home or starting their investing journey. Nate resides in Cleveland, Ohio with his wife, Kristen, his two daughters Molly and Lucy, and his rescue dog Lexi.   

David Bright is a pharmacist with a heart for teaching. He’s been a full-time professor since 2009 with a passion for implementing and improving pharmacy services. Themes of “implementing and improving” in the pharmacy space are quite similar to themes of “building and fixing” in real estate, which has been a growing hobby for David and his wife, Heather, who bought their first house more than ten years ago. That fixer-upper house became a live-in house flip, which they sold a few years later, only to repeat the process with their next house. When David and Heather got sick of perpetually living in a construction zone, they pivoted to fixing up rental properties in West Michigan, where they now live. 

David invests in real estate as a way to bring greater diversity to financial planning and to fund memorable life experiences with family and friends.

Key Points from the Episode

• Balancing pharmacy work and real estate investing. [0:06]
• Part-time pharmacy work and real estate investing strategies. [5:11]
• Real estate professional status and tax benefits. [8:14]
• Tax strategies for real estate investors. [13:39]
• Real estate investing and tax strategies for pharmacists. [19:55]
• Real estate investing and tax benefits. [24:04]
• Part-time pharmacy work and real estate investing. [31:18]

Episode Highlights

“Now, the piece we haven’t talked about that is a kind of an important nuance that is this, the second phase of that is making sure that you’re actively participating in your rentals. So in order to again, like if we go back to what we’re doing, right, we’re classifying what is normally a passive activity as active, we have to be able to show that I’m actively participating in those properties, right.” – Nate Hedrick  [18:14]

“There are tons and tons of real estate agents out there today that don’t have a single rental property, they would qualify every year for real estate professional status, but they’re not getting any benefit from that status. It’s not just like you once you hit that you automatically gain a benefit. There’s a lot of pieces and parts that have to be kind of in place for this to make sense.” – Nate Hedrick  [19:23]

“I mean, you know, taking a step back from pharmacy didn’t necessarily mean that we had to take a pay cut, it just meant we shifted how we how we allocated resources. And one of those resources that I think people often just overlook is time. And you know, we are blessed as pharmacists to get a great salary. But the amount of available time and the flexibility I have in my schedule now, because of this is, it’s worth way more than that paycheck cut”. – Nate Hedrick  [22:30]

“This is a heavily audited and heavily litigated portion of the tax code, it is not something to mess around with, do your research, get a really good accountant that knows this stuff inside and out because they are gonna be the one to guide you on this.” – Nate Hedrick  [28:12]

Links Mentioned in Today’s Episode

• Your Financial Pharmacist
• YFP Real Estate Investing Facebook Group
• Nate Hedrick on Instagram
• David Bright on Instagram
• YFP Real Estate Investing Website
• David Bright on LinkedIn
• Nate Hedrick on LinkedIn
• YFP Tax
• YFP Real Estate Investing Podcast: Episode 109
• YFP Real Estate Investing Podcast: Episode 113
• YFP Disclaimer

Episode Transcript

Nate Hedrick  00:06

Welcome to the YFP Real Estate Investing Podcast. I’m Nate Hedrick.

David Bright  00:10

And I’m David bright. We’re both pharmacists and real estate investors that believe that real estate investing does not have to distract from a meaningful career in pharmacy.

Nate Hedrick  00:18

Each episode we share stories that educate and inspire pharmacists to leverage real estate investing as a part of your financial plan. Hey, David, how’s it going?

Nate Hedrick  00:31

Hey, good, thanks. How you doing, man?

Nate Hedrick  00:33

Good. 2024 is off to the races. And it’s already been a busy year, especially for us. We’ve been, we’ve been kind of crazy, right? We just…you and I just jumped into a pretty cool syndication together, which has been quite the learning process.

David Bright  00:48

Yeah, yeah. It’s been fun. It’s, it’s, it’s fun to see that it’s fun to see a couple others that could be a potential, like just getting into larger deals. And, uh, you and I both really love the single family space, I think we’re both continuing to operate in that. But just diversifying out looking at larger opportunities too is, is kind of a lot of fun. You know, I’m seeing that contrast of time in particular, though, with the syndication, like how much work goes into a large property, multimillion dollar property versus how much goes into a single family house.

Nate Hedrick  01:22

Yeah, and the type of work is very different, right? Like, instead of usual, like, show up, do an inspection, close on the mortgage, like then rehab it, it’s like, there’s a lot more due diligence, there’s a lot more background work that needs to be done first, a lot more zoning and planning and, and so that’s the nature of the deal that we’re working on. But but it’s just very different than what I’m used to.

David Bright  01:44

Yeah, and it’s a different amount of investing time into you and I pharmacists are detail oriented, we like to be in the weeds, we like to look at that stuff, right? But it’s also one of these where you and I don’t have to be doing a lot of that, because we’re participating in this sy  ndication, someone else is doing a lot of the heavy lifting. So that kind of time engagement. And like how hands on it’s, it’s also made me think about that kind of spectrum of investor, how some people like to be super hands on, they like to be there at the inspection, they like to be swinging a hammer and painting this and that and doing those kinds of things in a single family house. Other people like to sit back and let other people be experts and do the investing. And there’s not necessarily right or wrong. It’s just kind of an interesting spectrum to see kind of all sides of that. And both of what we have going on right now. 

Nate Hedrick  02:32

Yeah, and that’s that’s something that again, I’ve actually experienced firsthand, right? If you look at the the time invested in terms of how you want to be involved, like you said, it’s a it’s a full gambit of overly involved to not involved at all, like I, if you haven’t heard me talking about it before those that are listening, you know, about a year and a half ago, gosh, almost two years ago, now I went part time with pharmacy, primarily so I can focus on my family, but also so I could focus on real estate without taking that time away from family. I really liked being involved in real estate, I like being an agent, I like being I like being the one to swing the hammer, when it makes sense. And so that’s that’s something that I chose because it was something that I that I wanted to do. And not everybody is that way. And that’s that’s great. There’s there’s lots of different options out there, which is a nice part of real estate.

David Bright  03:19

Yeah, and I know we’ve we’ve made an emphasis for the last 114 episodes. You know, as we’ve gone through this, we’ve made an emphasis that it’s very possible to be a successful real estate investor and a successful pharmacist that you do not, you do not need to leave your full time job as a pharmacist, you do not need to go part time, you do not need to quit your job, you can be a real estate investor, and be a full time pharmacist. I’m in that boat. Personally, I am a full time pharmacist, you’ve stepped away from that. So in this last, you know, year and a half, two years, how has that shifted your your thinking? Are you still in that boat? Or where are you at now?

Nate Hedrick  03:59

I personally I love it. It’s been such a nice fit of I get to do the amount of pharmacy work that I like I get to stay involved in the pharmacy community involved in my practice that I like doing and I’ve worked so hard to get toward. But again, just the if you look back when I started doing real estate investing, I was doing it as a full time pharmacist, real estate agent and investor pulling 60 hour weeks in some cases, 70 hour weeks, which you know, those of you who are residents out there, like that’s nothing. But like for me with a family and trying to do all those things at once, it was just it was just too much. Something had to go. And I knew immediately it was not going to be family and I didn’t want to get rid of real estate either because I’m just having so much fun with it. So well, how can I do all these things at once? And so it really was about stepping back from pharmacy without getting rid of it entirely. So that I could kind of do everything right I’m a big fan of having my cake and eating it and having some of your cake and so that that’s just what I what I set out to do and If anything, the last year and a half, two years have given me the perspective that this is exactly what I should be doing. And I wish I would have done it even sooner, because I just I love it. It’s such a perfect fit for right, me and my family right now.

David Bright  05:11

Yeah, I think that that’s, I think that’s good to just talk about all those angles, because I am one that I really enjoy the full time world and doing real estate, you know, with fewer hours on the side, you like putting in that time and, and just different blend for different people. And that works really well. I think one of the reasons why we wanted to unpack this a little day and dive into this kind of split position piece is that there’s probably a lot of pharmacists out there that are that are like that, that for all kinds of reasons are maybe wanting to go to part time in pharmacy and looking for something else. Maybe that’s a retirement, maybe that’s a season of life, just stepping away, looking for something else trying to figure out a way to make the 70 hours look more like 40 again, and things like that, like I think you you can’t be alone there. And so as we look at that there’s not just some tax strategy, there’s some business strategy, there’s some just personal strategy of what gets you excited and gets you out of bed in the morning. And so I think looking at all of that can be something good to unpack particularly as we kick off 2024 here. 

Nate Hedrick  06:14

Yeah,and again, just like full full perspective, right? Even just that our own house, right, my wife is still well, she’s kind of pseudo part time, or pseudo full time, as a pharmacist, she’s 32 hours a week still, and helps with the real estate investing stuff all the time. So like, we’re still really engaged with with pharmacy and real estate just in different ways. And that’s you can be successful on either one. So they’re just an important caveat, no matter what spectrum you’re sitting on, there’s a way to do it successfully. 

David Bright  06:40

Yeah, that’s a great point like this doesn’t mean that a whole family has to jump in like this, this can, this can look very different in different environments. So I think that it’s just really important to emphasize that you know, how much time that you spend, and what you do with that time and real estate can open up a lot of doors with benefits, whether that’s tax benefits, whether that’s business strategy that can open up. So just looking at what kind of opens up if you invest more time into your investing. And what that does, particularly let’s start off with with tax side of things, because we keep teasing that a little bit. It’s the beginning of the year, everyone’s getting their tax stuff together. They’re trying to figure out 2023 taxes and compliance there, but also looking at taxes for 2024. And strategy there. So we’ve talked about on previous episodes, this concept of the real estate professional, not just from what you might put on a business card, but real estate professional from an IRS definition. So Nate, do you want to kick us off with real estate professional definition from an IRS tax standpoint?

Nate Hedrick  07:48

Yeah, if you start looking around, at okay, what can I do with when I go part time? Or what is what happens when I start doing more real estate work, one of the things you’ll you’ll hear talked about quite frequently is this real estate professional status or REPS. And this is not meant to be an all inclusive guide to that, right. We are not tax experts. We are not lawyers like right, there are more caveats apply. But I just want to give you an idea of what this might look like. And, and what real estate professional status does is that if you qualify, and I’ll explain how you qualify in a moment, but if you qualify, it allows you to re characterize some of your losses from the real estate side of your investing from passive to active. Now, that might not sound like anything, and I promise I’ll get to some explanations in a second. But before we do that, I think how you qualify is kind of one of the key ports we’ve been talking about. In order to qualify for real estate professional status, you have to work more than 750 hours in a real estate, trade or business. And you have to do that job more than any other job. So if I work 750 hours as a pharmacist, I have to work 751 hours as a real estate professional. Similarly, if I work 1,542 hours as a pharmacist, I’ve got to get 1,543. I’ve got to do at least more in real estate than pharmacy. And so when you start to break down those numbers, it can be really difficult to get that as a full time pharmacist. And that’s why a lot of people when they go part time, start taking a look at real estate professional status as an option. So, so again, we’ll dive into some of the more nuanced pieces, but that’s sort of on a 10,000 foot view. If you get that status, you can start to recharacterize some of your losses.

David Bright  09:33

Okay. And I know that a lot of pharmacists that have a W2 job, you might get like that number of hours on your paycheck or something like that, where you can document your pharmacy hours. How do you track 1,543 real estate hours? Like what do you do and for that? 

Nate Hedrick  09:48

It’s terrible. And I think I’m probably overdoing it because I’m a super detail oriented, like type A pharmacist, but I created a big old Google spreadsheet and literally every day tracked, what work I did, whether it was pharmacy or real estate, how much hours. I even broke mine down by category. So I had like real estate agent work. Rental work. I had showings I had like meeting with prospective tenants like, all this stuff was broken down in way more detailed, and then they would want but but the thought was like, if I ever get audited on this, right, I’ve got this awesome detailed log that I can throw at the IRS or the auditors and say, Look, this is this is what I’ve done and make sure it qualifies. And so that’s that’s the way to do it. I know that some people just kind of throw it on their calendar and hope they don’t get audited. But I’m, I’m a type A pharmacist, so I had to go crazy spreadsheet.

David Bright  10:42

No, it makes sense. And I think that there’s probably value there even just in managing your own business of how much time you putting in different investing activities. That’s kind of the how the business strategy overlaps with a tax strategy. Because you can say at the end of the year, I spent 600 hours doing this was my return worth it on that I spent 400 hours on this. If I did twice as well on that thing, I should probably do more of that thing. And so there’s probably some business strategy in that record keeping that also, I would imagine. 

Nate Hedrick  11:12

Yeah, we didn’t really evaluate ourselves that way as pharmacists, right? Have you ever looked back and said, Oh, I worked 2000 or whatever hours like was that worth it? You just I mean, you just do your job, and you come home and get your paycheck. And that’s great. And like you get fulfillment out of your job, or you don’t. So I think it’s kind of neat to break it down and see the hours you’re spending there. Especially when you compare that to like, if you just take a back of the napkin math that like the hours you spend at home, if if you run all these, these numbers, and it looks like wow, I’m doing, you know, 12 hours of day at work and three hours at home, and then the rest of the sleeping like I don’t know, that’s kind of a bummer. So it’s nice to be able to break it down and see where you’re actually spending your time. And is that valuable to you? 

David Bright  11:54

Yeah, I like that. I like that. You mentioned the tax benefits are being able to take passive losses and and do things with that. But fundamentally, if if I’m not as familiar with passive losses, that sounds like if your real estate is going really bad, you have a way to offset it. Is that what’s going on here?

Nate Hedrick  12:15

Yep, no, you nailed it. Yeah, you have to have bad real estate investments in order to make money. Know, what we’re talking about is really taking, you know, what are considered real estate losses, typically from things like depreciation, which we’ve talked about depreciation in past episodes, but essentially, what depreciation is, is that, as you own a building, it starts to break down over time. And the government allows you to write off taxes from that breakdown of that building over time. And so that is typically a passive loss, which you can use to offset against your rental income, which is great, right? Passively gaining money on my rental property, passively losing money from depreciation, they start to balance each other out. But what this allows you to do is, again, to take that to another level where you can say, okay, these losses that I’m incurring, they’re no longer passive, I’m gonna re characterize them as active because I’m an active real estate professional. What that allows you to do is to say, well, any active income can be offset by this loss, because again, now it’s an active loss. And so we’ve heard stories from others out there, where they’re taking massive depreciation losses on big buildings or on vacation rental properties. And they’re eliminating their pharmacist income as a taxable thing, right. So it’s not just your rental properties anymore, they’re applying it to all their income and they’re applying it to their spouse’s income. And so it can get really, really out of control in terms of the the amount of things that you can, you can write off because of the depreciation from your real estate.

David Bright  13:39

Yeah, I think a good example of that, just back on Episode 109, Julia talks about buying this vacation rental, the Outer Banks and through her story talks about a Cost Segregation analysis, which will link to a past episode on cost segregation, how that could come into play. We’ll link back to this episode with Julia how all that works. But by buying this property in the Outer Banks is a vacation rental. They created $600,000 of depreciation, with cost segregation, other kind of tax tricks there. And then Amanda and Matt on Episode 113, talks about how the short term rental loophole can be used, if executed perfectly, to do exactly this. So of how to take that depreciation, offset your active W2 income. And then Julia told the story of how her and her husband and their pharmacy jobs did not pay federal income tax that year that they did this. And as pharmacists, we’ve all seen how much gets taken out of each paycheck for federal income taxes, right? Like, we know that that’s a chunk of change, and so to not have to pay that in that time, right. Like this is delaying taxes. And so it’s not making taxes go away. It’s delaying, but by delaying that it keeps a lot more money in your pocket until you go to sell that asset someday. And so this was the short term rental loophole in 113 and what you’re saying is this is different than the short term rental loophole, but it has a similar effect. Is that right? 

Nate Hedrick  15:04

Yeah, the biggest nuance there is that the short term rentals and I know we’re going over a lot of different different pieces, but I encourage you to go back and listen to that episode. The short term rentals are called a loophole because it’s real estate investing, but it’s automatically considered active. Like I said earlier, what we’re trying to do is take rental property income, and losses and re-characterize those as active, right. I’m trying to prove to the IRS that I’m actively engaged in the world of real estate, that’s what real estate professional status is saying. And so by doing that, I’m proving that these are active things. And I can then re-characterize those those passive losses as active. With short term rentals, you’re already active, these are these are active losses anad gains, because you’re actively managing that property on a day to day basis. So what they’re doing is basically using that short term rental piece in the fact that it’s already active and just applying it towards their additional income. So it’s a, it’s a shortcut, sort of speak from what I’m doing. Way less document, well, it’s still documentation, but way less documentation. But if you’ve if you’re not going to short term rental route, and again, we don’t have a short term rental at this point, it’s a nice way to be able to tap into that.

David Bright  16:11

Yeah, and the short term rental seems like kind of a sub market of what a lot of folks are doing a lot more folks are in to kind of the long term buy and hold the single family, the duplex, the small apartment building, something like that. And those kinds of properties, definitely have depreciation potential, but don’t have the same short term issue. So this, this works for you. And you’re also describing that if you are a real estate professional, you and your spouse both get these benefits, then is that correct? 

Nate Hedrick  16:40

Yeah, that’s correct. So you can apply it, if one of you qualifies, you basically file that return as a joint return. And so all of your income can be can be affected by that, which is really nice.

David Bright  16:52

Yeah, and this this story, this was I can’t remember the exact purchase price, but I want to say this beach house was in the neighborhood of like, a million dollars, right? Sounds right. Yeah. You know, something like that. So this isn’t like you need to go buy like $100 million of real estate to offset anything like this is, you know, a few properties a year, kind of the cadence that you’re already doing ends up having a really significant impact to, to your financial your tax picture that.

Nate Hedrick  17:19

Yeah, and for me to like, like you said, this was already a part of what we were doing, right, I didn’t really need to add anything to my regular life, once we got down to 20 hours as a pharmacist, then it just became, okay, let’s make sure I’m getting 21 hours a week as a real estate agent, and actually doing that level of work in taking care of our properties. And so it wasn’t like I added a whole bunch of stuff on it wasn’t looking for like a trick to beat the system. It was just, we were already doing this, let’s take advantage of the the the options that are out there. 

David Bright  17:49

Yeah, so if you so remind me of the rules, then if you are at least 750 hours, and you’re working more in real estate than anything else you’re doing by at least an hour, then you put all that together and track your time. And you can you can have this major tax benefit, then. 

Nate Hedrick  18:06

Yep, exactly. And that that gives you so so what you just defined that 750 hours and more than anywhere else you work, that gets your real estate professional status. Now, the piece we haven’t talked about that is a kind of an important nuance that is this, the second phase of that is making sure that you’re actively participating in your rentals. So in order to again, like if we go back to what we’re doing, right, we’re classifying what is normally a passive activity as active, we have to be able to show that I’m actively participating in those properties, right. So there are a bunch of different tests you can do. And again, I don’t want to quote all of them here just for the sake of time. And really, it’s something you should be researching on your own. But there are about seven different tests that you can you can meet. And if you hit any one of those to basically show you are actively participating in your rental properties, you can then apply those to this to this rule. So once you get real estate professional status, and once you’re actively managing your own rentals, then you can basically take those those dollars and, and apply them as active losses and active gains.

David Bright  19:08

And that makes sense to you. Because having real estate professional status probably wouldn’t have huge benefit if you didn’t have that depreciation, right? If you didn’t have rentals to depreciate, it doesn’t really give you a whole bunch of benefit there. But you do at this point, you’ve over the last several years collected some rentals. 

Nate Hedrick  19:23

Yeah, and this there are tons and tons of real estate agents out there today that don’t have a single rental property, they would qualify every year for real estate professional status, but they’re not getting any benefit from that status. It’s not just like you once you hit that you automatically gain a benefit. There’s a lot of pieces and parts that have to be kind of in place for this to make sense. And again, the trick is actively managing your own properties or at least being actively involved in your properties and meeting that real estate professional criteria. 

David Bright  19:55

So then that brings us that that’s the big picture on the tax side. And that brings us kind of to the business strategy side from there. So we’ve talked for a while now about rentals. I’m imagining that in order to leverage this well, some of your real estate investing strategy should be in long term or short term rentals. Is that right in there and are there other things you would think about in that bucket of business strategy to spend that 750 plus hours on? 

Nate Hedrick  20:21

Yeah, so that’s part of the trick, right? A lot of people will spend it either as a real estate agent, they’ll do it as a property manager. If you’ve got a lot of rentals, you might meet that criteria, just managing your own rental property, maybe you’ve got an apartment building that you manage, and it takes several hours a week. And that starts to add up. I mean, there’s a lot of different ways you can slice this as long as you’re in a real estate, trade or business. And again, the IRS has pretty clear definitions on what that looks like. So I encourage you to check that out. But the idea is that, you know, whatever you find, and this was something that I took on for myself is that like, whatever I find, as an enjoyable part of real estate, I’m gonna go do that, right? If I can outsource something that I don’t want to do, by all means, I’m going to do that. But the stuff that I like doing, right, whether it’s rehab, whether it’s managing tenants, whether it’s placing tenants in in the property, whether it’s tenant turnover, things like, those are things that I like doing. And so that’s the part of the business that I participate in, I also really like being a real estate agent, so I actively participate in that part of the business. But then there are other pieces that, you know, maybe aren’t as appealing or that I do want to start to take a step back from and so the syndication is a perfect example of that, right, I can still actively manage my own rentals, but take on a bigger project that I don’t have to be involved in the day to day by being involved in the syndication deal. So I encourage anybody that’s looking at this road, find what you like in real estate, do the things that you like, and then offshoot the stuff that you don’t.

David Bright  21:50

Yeah, and the way that you’re describing is too makes it sound like you stepped away from a bunch of hours in pharmacy, and those of us that get a W2 rom a pharmacy job, you see that if your hours went down, your pay would go down also, right. So that’s, that’s kind of concerning. If that happens so that you can go invest, you hope that there’s some some short term some kind of immediate financial gain, too, that starts to backstop that in a lot of cases. And in your case, you’re able to do that also with a real estate agent work, right? Like this isn’t all just like the the typical investing that people think of this will benefit me in retirement. This is this is helping you now this is helping you long term this is helping in tax strategy, all those things. 

Nate Hedrick  22:29

Yeah, 100%. I mean, you know, taking a step back from pharmacy didn’t necessarily mean that we had to take a pay cut, it just meant we shifted how we how we allocated resources. And one of those resources that I think people often just overlook is time. I think that, you know, pitching is great. And you know, we are blessed as pharmacists to get a great salary. But the amount of available time and the flexibility I have in my schedule now, because of this is, it’s worth way more than that paycheck cut. I mean, way more. And I think that’s something that it’s hard to do. It’s hard. It’s it’s easy to say, I think for some, it’s hard to do in real life, because all of a sudden, like, Okay, I’m making half of what I made before, like, that’s a lot less. And so you have to kind of get over that hump. But once you take a good look at what you’re doing, and the time that you’re afforded as a result, it more than pays for itself. 

David Bright  23:20

Yeah, and one way that it can help to pay for itself is some of the tax work here, right? Because if you’re taking home, much closer to 100% of that paycheck, have that that starts to help as well with that kind of instant cash flow to, to keep the lights on and those kinds of things in the budget. 

Nate Hedrick  23:39

Definitely, it’s a little a little more inconsistent. But it certainly provides a nice boost.

David Bright  23:44

Yeah, so what about any other kind of business strategies? Like I know, for instance, one thing that we hear from pharmacists is, there’s no way I would have enough time to rehab a house either as a rental or a flip, like, has this opened up doors for you to do different investing with more time available to you? 

Nate Hedrick  24:04

Yeah, I think for me, I’ve always liked doing some of the work around these properties. And that was just something that I never had time for before. Right? It was either it was home with the kids or I was at work nine to five. It just it didn’t didn’t work out. But now with with some time off, right, I can actually go do some rehab projects, and actually be involved in it myself. And again, that’s something that I want to do, right, some I guarantee that people aren’t listening. I was like, okay, so you traded a really cushy, pharmacist job that pays great for going out to a property and like hanging drywall? That sounds terrible. I would never want to do that, right? But like my point is go find what you find enjoyable and go do that. Right. And I can do it on my own schedule, too. Right? Like nobody’s telling me what I have to be at the at the job site. I can just show up because it’s my own property. Right. So the flexibility for that has been been really key for me and I just It allows me to kind of do what I like and what I want to do with those properties.

David Bright  24:59

I like that, and I’m happy that you enjoy drywall because that is one of the things I hate the most. I’m so bad at it. I make so many mistakes and use way more mud and create way more dust. 

Nate Hedrick  25:09

I’m not saying I’m good at that. I’m not saying I’m good at it yet I just saying I like figuring it out. It’s a cool. You know, for me, it’s funny, I think about this all the time. Pharmacy is such a neural brain heavy activity, right. Whereas construction rehab, project planning, like it’s such a physical and like skill-based. It’s a different part of my brain, right. And so it’s so nice to be able to go and work on a Monday or Tuesday be a pharmacist, and then a Wednesday or Thursday, I’m going out and I’m rewiring a light fixture. Like that’s just such a different part of my brain, it gives you such an awesome break of just doing something totally different that I’m not doing on another day of the week. It’s really nice. 

David Bright  25:52

I like that. And I feel that for sure. I think shifting into a different gear, I feel like that. I feel like it even makes me a better pharmacist, because I’ve gotten out of that gear, I’ve had some rest I’ve come back recharged, having done something else. It’s it prevents some burnout. I echo that for sure. I think that that kind of diversity of experiences is really good. And doing some hands on work like that, depending on on it. I’ve heard other examples like I have a friend who does a lot of work on just the general maintenance, like he’ll mow the lawn in front of the apartment complex and stuff like that. So there’s a lot of like, I’m I’m assuming that it’s pretty surprising how quickly you can stack up these hours doing things that are real estate related, do you find that easier or harder than you thought.

Nate Hedrick  26:38

It was harder than I thought actually, once you really put those hours on paper, it was harder than I thought. Because the IRS is pretty, pretty specific on what you can and cannot track. So like one of the examples I’ll give you is that I think is pretty interesting is that if you are going to do like research, or let’s say you here’s an even better one, let’s say you’re going to do the financials for your rental properties. So it’s the end of the month, you’re sending out your bills, you’re you’re doing all your books, making sure that all your money’s where it’s supposed to be you’re tracking all your accounts, almost all of that account tracking and like money management does not count as real estate professional. 

David Bright  27:14

Interesting. 

Nate Hedrick  27:15

It’s basically running a business at that point. It’s not running real estate. So I’ve got to be I have to be showing clients, I have to be like you said, actually taking care of the property like cutting the grass or painting or whatever, plowing snow for my properties, you have to really be involved in that real estate trader business to have it count. And so I think when you really step back and and actually count the hours you’re doing that work, I was surprised that at certain weeks, I’m like, Whoa, I only did like 12 hours this week. Hold on. Okay, next week, I really got to overcharge and make sure we’re doing a lot of work here because it can be like that.

David Bright  27:47

Yeah, so it sounds like then one tip is before you go part time and your job expecting to do this, like read the rules carefully and make sure that the kind of things on that list are the kinds of things that you want to do as a real estate investor, if you’re expecting a tax benefit. If you just want to have a split career go part time for other reasons, like for sure, do it. But if you’re looking for that tax benefit, do your homework and figure out that the precise details of that list. 

Nate Hedrick  28:11

Yeah, this is a heavily audited and heavily litigated portion of the tax code, it is not something to mess around with, do your research, get a really good accountant that knows this stuff inside and out because they are gonna be the one to guide you on this. If there’s no other tip you take away from this this conversation is that a really good accountant that understands real estate professional status is going to be your your end all be all because that’s how you make sure that you do this the right way. You get the advantages that it provides. But you’re doing it in a way that’s going to protect you down the line. 

David Bright  28:44

Yeah and it sounds like a good accountant can give some tax strategy as well into you should think about doing a cost segregation study on this property. Yeah, may not needs you on this property. You have depreciation potential here, if you’re doing a rehab here that’s going to count, they can help you with some of that forecasting and some of that strategy as well in advance. 

Nate Hedrick  29:02

Yeah our accountants even go so far as to say, okay, Nate, for next year, we think you need to buy, you know, $500,000, pick a number of real estate in order to fully offset your your income. If you think you can do that great, like, if not, no big deal. But like, if you want to offset all of this, we think you need X, Y and Z and like they should be able to project that out for you. And then you know, okay, I need to go out and buy three more rental properties or one more property or whatever that looks like.

David Bright  29:29

I like that. So then you can talk with the CPA to get the advice and the tax side and make sure you’re doing the things. You’ve talked about examples of like flipping houses and doing that rehab, talking about being a realtor, you talked about property management. I know you’ve studied a lot of what’s going on there with other people doing this and the other good examples of ways that other tasks in real estate that people find, make this a fit. 

Nate Hedrick  29:55

You know the biggest thing for me honestly, is being a real estate agent as well, that I’ve See as a real property trader business, I’m taking care of other clients. And that’s been a great way to kind of pad the the numbers throughout the year. The biggest caveat though, is that if you are doing real estate work, you are not actively working on your rentals, right. So you can count those hours for your real estate professional status. But you cannot count those hours toward your active participation in your rental properties. So it’s a bit of a nuance, and something you need to make sure you dive into. But if you are a real estate agent as well, or even if you work in some sort of real estate trade, you might be able to get extra hours, where you know, you’re not even working on your own rentals. But you have to be careful on how you apply those and how you’re counting them. The other thing I’ve seen people do is like they’ll take another side hustle like for law, for example, right. Let’s say you’ve got a JD as well as your PharmD and your work in law. Well, if there are there are, again, nuances to this, but you can apply some of that if you’re working in a real estate capacity, you can apply some of those hours towards real estate professional status. Now, again, there are caveats. There are nuances to how you can apply that, but but there are other options there as well. So the the opportunity is out there, you just have to make sure you’re doing it in the right way and applying the hours appropriately.

David Bright  31:18

Got it. Got it. Well, I appreciate you being the guinea pig and letting me pick your brain about this as you go through this. And I kind of watch from the sidelines of counting all the hours. But I think it’s hopefully helpful for a lot of other pharmacists may be listening from the sidelines to the podcast and thinking through, you know, if at some point for whatever reason, I want to go part time in pharmacy, and I want to do more real estate investing that would start to count for more hours. How could that look? Both from a business strategy standpoint and from a tax strategy standpoint? So I like it, this is great. 

Nate Hedrick  31:51

Yeah, I hope it’s helpful to somebody out there. And again, if you’re just thinking about, you know, what options do I have? Maybe this is something you haven’t thought about, maybe it’s something to consider. And again, if you don’t know where to start, if this sounds intriguing, but you’re wondering what to do, definitely recommend talking with your accountant. If you don’t have an accountant that knows this stuff inside and out. I also recommend checking out YFP’s accountant Sean is fantastic over at YFP Tax and can actually walk you through some of this stuff. So there are resources out there for you. We have some available and it’s worth looking into if it’s something that you think would be a good fit for your life. So hope it jogs somebody’s interest. This is a time of year to start your super nerdy spreadsheet like me, and hopefully you guys can use that going into the new year.

David Bright  32:37

No, I love it. And it’s kind of the same advice we’re giving often right like study the details, talk about the professional plan and out but yeah, like you said, this is so much easier to dive in in January now than it would be in June. So this is a time to have these these decisions and these discussions and to set your strategy for the year.

Nate Hedrick  32:56

Awesome guys. Hope you enjoyed.

David Bright  33:00

Thanks for listening to the YFP Real Estate Investing Podcast. If you like what you heard in today’s show, please leave us a review or subscribe to the show so you never miss an episode. If you have a question know someone that would make a good guest or want to connect with us head on over to YFPrealestate.com and join the growing YFP Real Estate Investing Facebook group. 

Nate Hedrick  33:19

As we conclude this week’s episode of the YFP Real Estate Investing podcast and important reminder that the content of this podcast is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. information in this podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with their financial advisor with respect to any investment. Furthermore, the information contained in our archive newsletters, blog posts and podcasts is not updated and therefore may not be accurate at the time you listen to it. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the date is published. Such information may contain forward looking statements which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

David Bright  34:12

Thank you for your support of the YFP Real Estate Investing Podcast. Have a great rest of your week.

[END] 

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