Chapter 2

Celebrate The Journey,

Not The Arrival

General Principle

Achievement is a celebratory journey, not an arrival.

A Beat-Up Old Truck and a Pair of Levi’s

Let me, Steve, share with you the story of how I planted the seed of my own business. In my first year of college, I found myself working as a painter for an individual who owned his own painting business. Encouraged by this experience, I decided I should establish my own painting company for the summer months. To jump-start my enterprise, my wife lent me seven hundred dollars to purchase a dilapidated old truck, an essential piece of equipment for transporting painting supplies.

However, the truck was just the beginning. I had yet to acquire the necessary painting equipment. Fortunately, my previous employer was retiring from his painting business and had a stash of equipment up in Canada. He graciously allowed me to take the equipment and pay him later. All I needed to do was collect it.

So, there I was, with a truck procured through the last of our savings, no credit card to my name, and a shortage of funds to even consider seeking outside help. In a resourceful move, I decided to sell a few pairs of my coveted Levi’s, which at the time were considered quite valuable. With the money from the sale, I was able to afford the gas for the journey to Canada.

Upon my return, I wasted no time. I went door-to-door, offering free house painting estimates. After a long string of refusals, I finally got a “Yes.” To my amazement, they accepted my estimate, and I received a five-hundred-dollar deposit. I immediately drove to the bank, cashed the check, and my wife and I treated ourselves to a long-awaited grocery shopping trip.

This marked the inception of my painting company which, over the course of the next twelve years, evolved into a profitable enterprise employing twenty-five people. It was a rewarding venture that I was eventually able to sell.

But let’s rewind for a moment and acknowledge the series of micro victories, or “Micro-Wins,” that led up to that point. The acquisition of the truck was a Micro-Win. My ex-boss’s generosity in offering his old equipment on credit was another. And the successful sale of my jeans for gas money was a crucial Micro-Win.

If I had allowed my focus to drift onto the things I lacked to start a business, and if I had delayed any sense of accomplishment until the ultimate goal was met, I might not have mustered the willpower to surmount each individual hurdle. The lesson? Acknowledge and celebrate each Micro-Win along the way. Without this attitude, the success I enjoyed might have remained a distant dream.

The Art of Sacrifice: What’s on the Scale?

Another pivotal insight from this narrative extends beyond the concept of Micro-Wins. Part of the Micro-Wins Mindset revolves around discerning what you’re willing to sacrifice to secure your next victory.

How much of your finite resources—time, energy, even personal belongings—are you ready to invest in your goals? Which needs and wants are competing for these resources, such as sleep, relationships, hobbies, and more? What goals are clashing with each other? Which of these are you prepared to scale back or forfeit altogether? What opportunities are you willing to let slide by?

In my case, I, Steve, was willing to part with stylish jeans and our remaining savings to launch my first enterprise. I was driven by the desire for independence from a regular nine-to-five job (it’s worth noting that most people’s goals gravitate toward increased autonomy and freedom).

However, we strongly advocate focusing on what already fills your glass rather than dwelling on what’s missing. Yes, sacrifices are inevitable, and yes, the path may be rocky, but it doesn’t mean joy is absent.

We’re not suggesting that achieving your dreams requires forgoing everything. Don’t compromise today’s quality of life for a distant future. Striking a balance between surviving on bare essentials and succumbing to every whim is key. It’s not just about what you relinquish; it’s about where you exert your effort, as “effort brings rewards that can’t come without it” (kudos to Russell M. Nelson for this potent phrase!).

Consider the iconic film Rudy, inspired by the incredible real-life journey of Daniel “Rudy” Ruettiger, who dreamed of playing college football at the University of Notre Dame. Standing at just five-foot-six and weighing a hundred and sixty-five pounds, Rudy was hardly the archetype of a college football player. What he lacked in size and innate talent, however, he more than made up for with an indomitable spirit and unwavering determination.

Rudy’s story begins in a small steel mill town, where he worked alongside his father. His dream of playing for Notre Dame seemed far-fetched to many, given his modest academic achievements and athletic abilities. Undeterred, Rudy enrolled in a nearby junior college, where he tirelessly worked to improve his grades.

After multiple rejections and two long years, Rudy was finally accepted into Notre Dame. But his journey was far from over. He became a part of the practice squad, facing off against scholarship players, enduring hits and bruises, all without the glory of playing on game days.

Rudy’s claim to fame is not a montage of spectacular plays but one solid tackle in the last twenty-seven seconds of his final Notre Dame game. A moment that might seem insignificant in the grand scheme of college football, but for Rudy, it was the culmination of a lifelong dream.

His inspiring tale is not rooted in his football prowess, but in his journey—the relentless effort, the setbacks, the small victories, and the unwavering faith he held in himself. Each step, each struggle, each Micro-Win, was a building block toward his ultimate goal. The movie Rudy serves as a testament to the beauty and inspiration derived from celebrating the sequence of small victories, or Micro-Wins, that pave the way to our dreams, no matter how unattainable they may seem. It reminds us that success is not just about the destination, but the journey, and the courage to keep moving forward, one small victory at a time.

Right now, by reading this book, you’re making an effort! The next step involves evaluating your needs, wants, and goals, their hierarchy, and possibly the sequence in which they need to be achieved. Reflect on the resources at your disposal. How can you leverage them to kickstart your dreams today? What’s the first, or next, Micro-Win you can work toward immediately?

Set this book aside and identify one action you can undertake within the next hour that will create an impact. Pursue that seemingly minor step, then take a moment to celebrate your achievement!

Micro-Wins and the Brain: Celebrations and Neurochemistry

Celebrating Micro-Wins serves as a catalyst to relish the journey rather than just the destination. Micro-Win celebrations act as your fuel, propelling you toward your ultimate goal.

Our brains are wired to thrive on achievements, however small they might be. Accomplishing minor goals or overcoming obstacles—akin to a base hit, a lay-up, getting a first down on third and short, or witnessing your child behaving kindly toward a sibling—triggers the release of dopamine in our brains, commonly known as the “happy hormone.” As we are naturally programmed to seek dopamine releases, these acts of accomplishment serve as potent motivators, urging us to continue our journey.

There’s a caveat, however. If you don’t recognize and appreciate a win as a win, the dopamine release doesn’t occur. It’s not just about a biochemical reaction in the brain; it’s about a mindset that involves recognizing and celebrating each accomplishment. Hence, you need to reshape your thought processes, especially when your Micro-Wins don’t pan out exactly as you envision.

Adopting this approach can be challenging if you’re not accustomed to acknowledging and celebrating victories. If you’re someone who has experienced numerous defeats or tends to be self-critical, this mindset shift might initially feel daunting. But that’s perfectly fine! With practice, celebrating small wins will help rewire your brain, making these celebrations and the sense of fulfillment they induce more instinctive over time. Humans are creatures of habit, naturally inclined to form patterns, be they positive or negative.

We speak from personal experience. In 2012, I (Kevin) was grappling with my inner demons. Despite seeming to have it all—a loving wife, beautiful kids, a comfortable home, and a growing company—I was still unfulfilled. This period led me to a profound revelation about happiness. I discovered that purposefully, even tactically, expressing gratitude for small victories, especially during challenging times, was a game-changer. This realization led to me writing a book about the tactics, benefits, and neuroscience of gratitude, FLIP the Gratitude Switch. Prior to uncovering these powerful strategies, I was perpetually discontent due to my lack of a Micro-Wins Mindset.

Over the years, many people have reached out to share how FLIP the Gratitude Switch transformed their lives. One person claimed it significantly changed his life’s trajectory, while my son revealed how the book helped him turn around a challenging day. Each of these stories, each conversation, was a Micro-Win deserving of celebration.

Though the book has now sold copies in over two dozen countries, the pre-FLIP the Gratitude Switch version of me would not have considered a book successful unless it made the New York Times Bestseller list. I might not have been happy and perhaps wouldn’t have co-authored the book you’re reading now. However, I’ve learned that Micro-Wins are building blocks for life’s major victories. Concentrating on Micro-Wins, even those that might seem insignificant to others, has inspired me to achieve more, and it’s the power of the Micro-Wins Mindset!

This approach is particularly crucial when dealing with challenges. No journey is devoid of obstacles. A mindset of scarcity can foster a fear of the impending setback that might knock you down. Instead of preparing for inevitable challenges, people tend to dread them.

The Micro-Wins Mindset is about changing your perspective and your paradigm, transitioning from a state of fear to one of determination. This mindset equips you to face challenges head-on, confident that somehow, even if you’re unsure how, you’ll overcome and reach your goal. Even if it takes a few attempts. This approach primes you mentally to tackle any obstacle that comes your way.

Paradigm Shift: Celebration in Solitude

When we advocate “celebrating,” we don’t necessarily mean you should organize grand festivities each time you record a Micro-Win. Indeed, you need not even share your accomplishment if you don’t wish to. The act of celebrating your progress is not about external accolades; it’s about internally recognizing, perhaps even quietly, the steps you’ve successfully navigated on your journey so far. Such a form of celebration can be experienced anytime, either in the company of others or in solitude.

Finding satisfaction from these personal celebrations can lead to a potent paradigm shift. When you ultimately reach a significant milestone, a celebration involving others becomes an extension of the fulfillment you’ve already been experiencing throughout your journey. This perspective makes every victory, regardless of its magnitude, even more gratifying.

Kevin here. In some of the speaking I do on gratitude and celebration of the things you have accomplished, I love to consider the biblical story of the ten lepers, found in the Gospel of Luke, a narrative that transcends religious belief and speaks to the universal principle of gratitude. In this parable, Jesus encounters ten lepers who beg for healing. He instructs them to show themselves to the priests, a required act according to the Law of Moses, that symbolizes a declaration of their cleansing. As they follow His command, they find themselves miraculously healed.

Nine of the lepers continue on their way, presumably rejoicing and celebrating their newfound health loudly, basking in the physical evidence of their transformation. But one leper, overcome with a deeper sense of gratitude, turns back to thank Jesus, falling at His feet in humble recognition of the profound change in his life.

This parable, often interpreted as a lesson in expressing thanks, carries a more nuanced message about the nature of gratitude and celebration. It is my belief that the tenth leper’s act of returning was not a mere afterthought or a simple reaction to a miraculous event. Instead, it was an outward manifestation of who he had already become—a person engaged in recognizing and celebrating the small victories, the Micro-Wins, of life. His disposition of gratitude had been cultivated over time, shaping his character and guiding his actions.

Contrary to the loud celebrations of the other nine, the tenth leper’s gratitude was a quiet, personal, and intimate expression. It was a moment of realization and acknowledgment, not just of the healing but of a lifelong journey marked by humility, resilience, and an ever-present sense of appreciation for the small blessings.

This story resonates with the essence of Micro-Winning, emphasizing that the celebration of our victories doesn’t need to be extravagant or public. The joy and fulfillment derived from recognizing and acknowledging our Micro-Wins can be a profound and personal experience, just as it was for the tenth leper. It teaches us that the practice of gratitude, manifested in the mindful celebration of life’s small victories, is not a reactive behavior but a proactive cultivation of character.

In the same way, your engagement with Micro-Wins shouldn’t be an attempt to accumulate external validation but rather a journey to embrace and celebrate the subtle yet significant progress in your pursuit of happiness and success. By recognizing the quiet victories within, you can lay the foundation for a life rich in satisfaction and fulfillment, regardless of the outward circumstances.

While there certainly exist individuals who indulge in loud celebrations, we’ve often observed that such bravado typically stems from a lack of genuine self-assurance. If one were to decode such pride-laden, ego-centric celebrations, they’d likely translate to: “Please validate me. I need external affirmation that I’m awesome!” From our perspective, truly effusive individuals are essentially showcasing their evolved selves, a persona cultivated over several years. Their exuberance is generally fueled by ingrained gratitude and numerous small-scale celebrations over the years.

Your task, therefore, is to shift your mindset from a binary perspective of success versus failure, or having it all or having nothing, to a process-oriented approach. This approach should be powered by hundreds, thousands, or even millions of Micro-Wins and to acknowledge that each of these tiny victories deserves a celebration. Not necessarily an extravagant must-share-it-on-social-media-and-hope-it-goes-viral kind of celebration, but a modest, meaningful acknowledgement that will continue to fuel your journey forward.

Real Estate Application of Principle

The choice to begin investing in real estate deserves celebration, and your investment journey will provide multiple opportunities to celebrate as you move toward economic independence.

Real Estate: The Quintessential Micro-Winning Tool for Wealth Creation

The dynamic nature of real estate sets it apart from traditional investments and especially from conventional retirement plans, given that real estate has multiple avenues for wealth generation.

When you invest in stocks, bonds, mutual funds, and the like, your success is contingent on the growth of the market. Your wealth accumulates when unfamiliar individuals and companies, over which you exercise no control, miraculously align in an ideal set of conditions that augment the value of your investment. “Oh, don’t worry,” your broker assures you as he glances at his Apple Watch. “The S&P 500 has historically delivered an average yearly return of about 10% over the past century. You’ll probably be just fine” (note the unmistakable sarcasm).

The traditional investment strategy essentially implies that if you invest a sufficient amount regularly, remain hopeful that everything escalates as projected, and time your exit flawlessly, you might end up with a sizable sum that you can gradually exhaust until you pass away. The undeniable fact, however, remains that your growth and wealth accumulation is solely dependent on one factor: the market must surge.

By contrast, real estate inherently offers numerous Micro-Wins to celebrate along the journey. This is because it provides several means to accumulate wealth compared to traditional forms of investment, where you surrender financial control. Consequently, when executed correctly, real estate makes it simpler than most other vehicles for the average, hardworking individuals to create substantial wealth. This eventually enables them to confidently proclaim their economic independence.

There are seven major ways that real estate generates money for you that are worth mentioning. They are:

1. Real estate produces cash flow.

2. Real estate appreciates over time.

3. Real estate allows you to buy with leverage.

4. Real estate is paid off by your tenants, not you.

5. Real estate hedges inflation.

6. Real estate provides tax benefits.

7. Real estate creates infinite returns.

Each of these seven are critical to the Moneyball Real Estate approach we take. So, let’s take each in turn.

1: Real Estate Produces Cash Flow

As we’ve outlined, when you invest in 401(k)s, stocks, IRAs, or other traditional retirement vehicles, the method is pretty straightforward: you save and hope the money will be there when you need it. Assuming the money is indeed available, you then gradually deplete it each month, or each year, by withdrawing your necessary living expenses from this pool. Contrastingly, real estate is capable of producing a perpetually growing cash flow that you can use and spend without draining a financial account.

Consider this, can you purchase milk at the store with your 401(k)? You don’t approach the cashier, flaunt your 401(k) quarterly statement, and anticipate receiving a gallon of milk. However, if you have invested that money in real estate, which generates a steady cash flow every month like clockwork, you’ll possess actual, tangible dollars that you can exchange for milk, bread, diapers, and more (this also helps you evade an inevitably awkward conversation if you do attempt to buy milk with your 401(k) statement).

When you purchase a property, there will be expenses linked with that property. If you lease that property for an amount greater than the costs, you have a cash flow surplus that you can retain. This cash flow is produced because your tenants typically pay you more in rent than you need to pay the bank for your principal, interest, tax, and insurance. If you buy the right kind of real estate, in the right market, with a precise analysis and favorable market conditions, your cash flow becomes practically guaranteed.

2: Real Estate Appreciates Over Time

Regardless of your location, a swift Google search will reveal how much homes in your area cost a decade ago.

We’re based in Utah, where homes have experienced a 120% price increase, or appreciation, in the last ten years. That’s an annual average of 12%, implying that property values have more than doubled during this period.

One might regard Utah as an exception—it has been one of the top appreciating markets in the country for most of the 2010s and into the 2020s—but even one of the slowest-appreciating markets in the country, Louisiana, saw a 43% price increase over the same ten-year period. That equates to an average increase of over 4% per year.

Since real estate is cyclical, we have maintained for years that appreciation should not be the main factor you take into account when deciding to invest in real estate. However, it should not be disregarded either. In our many years of investing in real estate, and assisting our clients to do the same, we have never observed a consistent, sustained decrease in real estate values. We did notice a price dip during the Great Recession, following the mortgage crisis, and a slowdown after the housing boom during the Covid years, but there has never been a consistent decrease in price.

One thing that I, Kevin, always found fascinating were the magnets that listed the prices of various items the year you were born. My parents have had such magnets on their fridge for many years, and I’ve looked at them with pure curiosity countless times. One of the magnets listed prices of items in 1938, the year my father was born. Here’s the list:

New House: $3,900

Average Income: $1,731 a year

New Car: $860

Milk: 50¢ a gallon

Gasoline: 10¢ a gallon

U.S. Postage Stamp: 3¢

Imagine that! Spending less than $4000 for a house and less than $1000 for a new car? It’s all relative, of course, but it’s still mind-boggling to think about.

Another magnet displayed prices for the same items in 1979, the year I was born:

New House: $58,099

Average Income: $17,533 a year

New Car: $5,758

Milk: $1.92 a gallon

Gasoline: 86¢ a gallon

U.S. Postage Stamp: 15¢

Remarkable, isn’t it? If we solely focus on the housing price increase over the four decades between 1938 and 1979, the math indicates an average of a 33% increase per year. This is significant considering there were seven recessions during this period, including a lengthy one that lasted 16 months between 1973 and 1975. Yet, despite economic turbulence, appreciation prevailed.

Let’s replicate this exercise for the subsequent 40 years—the first 40 years of my life. Here are the figures for 2019:

New House: $320,000

Average Income: $69,560 a year

New Car: $35,756

Milk: $3.45 a gallon

Gasoline: $1.19 a gallon

U.S. Postage Stamp: 55¢

The momentum continues. Over the ensuing 40 years, home prices escalated on average by over 11% per year. What’s notable is that, during this period from 1979 to 2019, there were four additional recessions. This includes a back-to-back recession between 1980 and 1982, another triggered by the Iraq war in 1990, a downturn influenced by the dot-com bubble, Y2K, and 9/11 in 2001, and of course, the significant Great Recession spanning 2008 and 2009. Despite the occurrence of eleven recessions throughout the eighty-year interval between my father’s birth and my fortieth birthday, real estate still witnessed an impressive total percentage increase of over 8000%.

You might wonder: why this stroll down memory lane? The answer is simple. If we discussed the benefits of real estate investment without highlighting appreciation as a substantial profit center, we would be turning a blind eye to an immense volume of historical data. This trend of appreciation has remained consistent, irrespective of varying market conditions, economic cycles, and even changes in presidential administrations.

To underscore, while appreciation should not be the sole profit center you take into account when considering real estate investment, it remains an integral part of the seven crucial profit centers that you should acknowledge and understand.

3: Real Estate Allows You To Buy With Leverage

Leverage is often understood in the context of real estate as the use of an existing mortgage to purchase a property. For many people, having a “mortgage” equates to carrying a considerable amount of debt. However, we propose a different perspective: leverage simply implies that you can collaborate with a bank to acquire real estate (more on this in Chapter 4).

Imagine you wish to invest in stocks, bonds, or mutual funds worth $250,000. In that case, you’ll need to invest the entire sum to gain an asset of equal value.

In contrast, when you use a bank as your partner, you don’t need to invest $250,000 to acquire a property worth the same amount. You may instead put in $50,000 to $75,000, or more (depending on current mortgage guidelines), including closing costs, to buy an asset valued at $250,000. If you have a 30-year fixed mortgage, the bank will provide 75% or 80% of the total capital needed to purchase that property, and you’ll contribute the remaining 20% or 25%, plus any loan costs and fees. Essentially, you bring in your part, and the bank takes care of the rest.

Certainly, you’ll need to be a qualified buyer for a bank to partner with you. This entails having verifiable taxable income, a decent credit score, and liquid assets that can be verified as available for the required down payment. Assuming you meet these criteria, the bank will likely be willing to provide 75% or 80% of the purchase price.

Reflect on the power of leverage for a moment. You can own an asset worth $250,000, but you only need to provide 20% or 25% of that amount as a down payment. That asset or property will continue to appreciate over time, and you will own 100% of that growth. The bank allows you to profit fully from the property, with the obligation on your part to repay your principal, plus interest at the agreed rate when you close on the loan. This significantly enhances your potential return on investment and amplifies your purchasing power, making real estate an unparalleled investment option.

Sidenote: By the time you read this book, it’s quite probable that the average purchase price for a property aligned with the Moneyball Real Estate strategy has surpassed the $250,000 mark. However, this shift in value doesn’t alter the underlying principle or the mathematics of the approach. Leverage continues to be the key, enabling you to invest just a fraction of the asset’s total value to acquire it. This fundamental concept ensures that the Moneyball Real Estate method remains relevant and effective, regardless of fluctuating market prices.

4: Real Estate is Paid Off By Your Tenants, Not You

In the United States, it’s not uncommon for companies to match your 401(k) contributions, which can be perceived as receiving “free money.” This perception often motivates individuals to delay investing in real estate and instead max out their 401(k) contributions to extract the most from their employers.

We’re not advising against accepting free money, but we do encourage you to consider real estate investment as equivalent to, or often superior to, a conventional employer’s 401(k). What if we contemplated the concept that a basic and conservative real estate investment could act as a parallel to the “free money” situation; except this time, it’s your tenants instead of your employer who are funding your retirement?

Principal reduction, a benefit often overlooked by real estate investors, plays a huge role here. Your tenant’s rent typically exceeds your mortgage payment, so each month they pay rent, they’re effectively making your mortgage payment for you. They’re covering your principal and interest, with a little extra on top (cash flow) for the privilege of residing in your property. Your tenants are essentially financing your entire property purchase.

Let’s delve into the numbers. According to a study by SHRM and XPertHR, about 82% of the employers they examined matched a portion of their employees’ contributions. The average match was 4.5%, as reported in Vanguard’s annual study on investment behavior.

Let’s presume your employer matches the full 4.5% of your annual salary of $100,000. You contribute $4500 a year, and your employer generously matches this with another $4500 a year in pre-tax, tax-deferred dollars—although these are not immediately spendable and are illiquid. Sounds impressive, right? Of course, you may have exchanged over 2000 hours of your time on payroll to secure that contribution, but it remains a noteworthy advantage.

Now, imagine you own a $250,000 property with a 6% interest mortgage. In the first year of ownership, your tenants would repay $2301 of principal for you. That’s $2301 going straight to your bottom line. If you have an additional net cash flow of $200 each month on top of the principal reduction, your tenants would contribute a total of $4701 to your bottom line, with half of it being liquid and immediately spendable. Better yet, you didn’t have to exchange a single hour of work for this.

And that’s just in the first year. The longer you own the property, the more principal is paid off annually.

By year five of owning your investment property, combining cash flow and principal reduction, your tenants would contribute closer to $7000 to your bottom line in year five alone. Consider this: you’ve borrowed money from a bank, which allowed you to purchase a $250,000 property for an average of $65,000 plus closing costs, and your tenant covers your interest, principal, and provides a little extra for cash flow. This is all in addition to the appreciation and tax benefits you’ll also enjoy from owning the property.

Rental real estate, it seems, certainly has the potential to surpass even a generous employer contribution to your 401(k).

5: Real Estate Hedges Inflation

Inflation means there are too many dollars chasing too few goods in the economy. Inflation is a phenomenon that arises when there are more dollars circulating in the economy than goods available. This imbalance makes everything more expensive, from labor costs to the materials required for building homes. Consequently, the construction of new properties becomes pricier, which in turn escalates the prices of homes and rents.

Let’s envision a scenario where you purchased a house in a desirable neighborhood as an investment ten years ago. Now, due to increasing demand, a developer has bought a plot of vacant land near your residence to exploit the favorable market conditions. Their plan is to construct more houses, similar to the one you bought a decade ago.

What does the developer have to pay for? They have to shoulder the costs for land, labor, and building materials, essentially bearing all the expenses necessary to construct that house. After completion, their intention is to sell it for a profit, certainly not for less than their total investment.

If the cost of constructing a house today is higher than it was ten years ago due to increased resource and labor costs, then the newly built house will inevitably sell for a higher price than what you paid for your house a decade ago, regardless of whether the floor plans and square footage are identical. The sale of these new homes creates a natural upward push on the price of similar real estate properties in the area.

Owning real estate means possessing a tangible asset. The government may be able to print more money, but they can’t print more land. The basic principles of supply and demand, along with upward pricing pressure, contribute to the appreciation of real estate over time.

Moreover, if your mortgage is at a fixed interest rate, it remains unaffected even when the property’s value appreciates. Consequently, when rent prices rise, your mortgage payment remains the same. You get to pocket the difference between the increased rent you collect and the mortgage payment you make, thereby providing an additional safeguard against the rising costs stemming from inflation.

6: Real Estate Can Provide Tax Benefits

Tax benefits are an often-overlooked profit center in real estate for new investors, mainly due to a lack of understanding or knowledge about it. However, there are several ways to lower your taxable income and enhance your cash flow via real estate investments.

Some common tax deductions for property owners include mortgage interest expenses, property taxes, and depreciation. Depreciation is a non-cash expense that is spread over the useful life of the property. Furthermore, when you sell a property at a profit, the gain might be eligible for the lower long-term capital gains tax rate, resulting in substantial tax savings.

One particularly significant benefit of owning real estate in the US is the provision for a 1031 Exchange in the tax code. This allows investors to defer paying capital gains taxes on the sale of a property by reinvesting the profit into the purchase of a similar property. This strategy can help conserve cash, which can then be used for other investments or for repairs and upgrades on the new property. Moreover, a 1031 Exchange can be used to upgrade to a pricier property or diversify an investment portfolio. However, to qualify for this tax deferral, the 1031 Exchange must be structured and executed correctly, so it’s crucial to consult a tax professional or attorney with experience in this area.

Your real estate investment can also benefit your heirs through a concept called “step-up in cost basis.” This refers to adjusting the cost basis of an inherited asset (like real estate) to its fair market value at the time of the original owner’s death. For tax purposes, this adjustment is significant, particularly for capital gains tax calculations when the beneficiary decides to sell the inherited property.

For example, suppose you invest in a property for $250,000, which appreciates to $500,000 at the time of your death. Upon inheritance, your beneficiaries’ cost basis is “stepped up” to the fair market value—$500,000. If they later sell the property for $550,000, their taxable gain will only be $50,000 (the difference between the stepped-up cost basis and the selling price), significantly reducing their capital gains tax liability.

When diving into the world of real estate investing, understanding the tax landscape can be just as vital as recognizing a prime location for your next property. The Internal Revenue Service (IRS) offers significant tax advantages to those who qualify as a “real estate professional.” But what exactly does this title mean, and how can it benefit you as an investor?

According to IRS Publication 925, a real estate professional is an individual who meets two key criteria:

1. More than half of the personal services they perform in all trades or businesses during the tax year must be in real property trades or businesses where they materially participate.

2. They must perform more than 750 hours of services during the tax year in real property trades or businesses where they materially participate.

Achieving this status is not merely a title; it opens doors to some of the most enticing tax benefits in the investment landscape.

As a real estate professional, you gain access to a powerful tax strategy known as cost segregation. This technique allows you to identify and separate personal property assets that are grouped with real property assets. By breaking down a property into its constituent parts, you can apply different depreciation schedules to different components.

Imagine you purchase an apartment building. Rather than depreciating the entire building over 27.5 years, you can segregate costs associated with specific items, like appliances, carpeting, or landscaping, and depreciate those over a shorter lifespan. The result? More significant depreciation deductions in the earlier years of ownership.

Then there is accelerated depreciation, which takes the concept of cost segregation one step further. By front-loading the depreciation of certain assets, you can reduce your taxable income substantially in the initial years of investment.

Let’s say you’ve isolated the cost of a new HVAC system in your rental property. Instead of depreciating it evenly over its useful life, you might use a method that allows you to write off a larger portion of its cost in the first few years. The accelerated depreciation can lead to a much more substantial tax reduction in the short term.

Combining the designation of a real estate professional with the strategies of cost segregation and accelerated depreciation creates a synergy that goes beyond simple tax mitigation. It molds your tax obligations into a profit center, optimizing your cash flow and enhancing your investment returns.

Navigating these waters can be complex, and missteps may lead to missed opportunities or compliance issues. Leveraging professional advice to harness these strategies can be the key to unlocking the full potential of these benefits. The convergence of these tactics is not just about reducing your tax burden; it’s about amplifying your investment’s power, turning taxation into a well-tuned engine that drives your financial success forward.

Furthermore, as a proprietor in the real estate business, you have the privilege of deducting various expenses associated with your investments — think property management fees, travel costs to check on properties, or even home office expenses. When combined, these tax advantages can significantly alleviate your tax liabilities, becoming increasingly beneficial as you scale your income from your portfolio. To get the most out of these perks, it's crucial to consult with a tax professional or attorney to tailor these strategies to your specific tax situation.

7: Real Estate Creates Infinite Returns

One of the most potent advantages of real estate compared to traditional retirement is the potential to generate infinite returns. This essentially means you can earn money from an investment where the initial capital has been entirely recouped, making the subsequent returns seemingly emerge from “nothing.”

Let’s take a simplified example to illustrate this concept. Imagine you have a magical machine that, once you insert a dollar, gives you a quarter every hour, as long as you leave the dollar inside it. Initially, you might think, “What good is a quarter an hour?” But let’s look at the numbers. In 24 hours, you would have $6. Since the first dollar was your initial investment, you gained $5 for taking action and giving it time. After a week, you would have $42, and after a year, over $2000, all while your original dollar stays in the machine. The balance sheet would show a gain of $1999, plus your initial investment. It’s an endless cash spigot that you’d likely never want to turn off.

Applying this principle to real estate, let’s say you invest $75,000 in a home. If this property generates $200 a month in net cash flow, plus a few hundred dollars in principal reduction from the collected rent that pays the mortgage, and a few hundred more from the estimated monthly depreciation tax savings, your property could represent $400 to $600 a month in financial increase. And we haven’t even factored in appreciation! If your home averages an additional 5% a year in appreciation growth for the year, your total monthly increase could exceed $1500, or $18,000 that year,

It may take a few years to recoup your initial investment, but once you do, every bit of profit for the subsequent decades is effectively infinite return. What’s more, you can boost the total amount of infinite return by refinancing or selling and using a 1031 Exchange to expand your portfolio over time. Smart, calculated moves with your portfolio could result in increased income and growth, all stemming from an original investment that has been returned over time. In essence, this is the power of infinite returns in real estate.

For Your Consideration: Negative Cash Flow

Here at DFY (Done For You Real Estate), it’s uncommon for our clients to encounter properties with negative cash flow. However, it’s a worthwhile exercise to ponder if it could still make sense to invest in a property that isn’t generating positive cash flow. Most individuals, particularly those who wouldn’t classify themselves as investors, would likely say investing in a negative cash flow property makes no sense.

However, we’d like to challenge this perspective, as it can help shape a more holistic investment mindset.

Generally, the notion of purchasing a property with negative cash flow is unappealing, as we often view it as a sunk cost. We’ve been conditioned to believe that real estate with positive cash flow is the only type worth investing in, that we rarely consider the potential value in a property with negative cash flow.

Consider this reframing: instead of viewing it as negative cash flow, we can perceive it as “a positive monthly real estate retirement contribution.” This view could fundamentally alter our approach to such properties.

Negative cash flow, in this context, becomes an investment expense toward owning an appreciating asset. An initial acquisition cost for real estate is followed by the monthly expenses to maintain the property until it appreciates enough to provide a return. Isn’t this similar to a traditional retirement investment approach?

Many people may be reluctant to make recurring monthly investments into a property. They may consider those a “negative cash flow” because they associate successful real estate investment with a monthly income. But if you weren’t allocating capital to such real estate, where else would your money go?

A 401(k), an IRA, or maybe even cryptocurrencies? The average American consistently invests money from their pocket to fund a retirement account that provides zero cash flow today. They consider these payments an investment, not a negative cash flow, despite the financial commitment.

And if we’re talking about investments, real estate can often outperform traditional investment vehicles. Even in the case of a property with negative cash flow, you’re using a portion of your monthly income to fund your investment. But unlike traditional retirement accounts where your money is often inaccessible, real estate investments offer additional benefits, such as tax advantages, leverage, and potential appreciation.

You might argue, “Yes, but if I’m investing in a 401(k), my employer also contributes to my benefit.”

However, with a property that requires monthly contributions (the “negative” cash flow), you’re not only contributing toward your own retirement but also reaping the benefits associated with real estate investing. And let’s not forget, you still have someone else contributing toward your investment—the tenants who are paying rent and thereby reducing your mortgage principal each month. This results in a real-time, dollar-for-dollar benefit to your bottom line, and a considerable enhancement to your overall retirement portfolio.

Celebrate the Journey

Embarking on the journey of Micro-Winning your way to millions is a momentous step. Each milestone, each profit center you unlock, each strategic decision you make as you grow your portfolio should be a cause for celebration.

The process of Micro-Winning your way to economic independence is infinitely more enjoyable and fulfilling than merely dreaming of a big future payday. If you concentrate on executing a solid “base hit strategy” today, you don’t need to obsess over the scoreboard. You can be rest assured, knowing that your big win is already in progress.

This approach fosters a healthier perspective toward wealth building. Instead of experiencing stress or anxiety about the future, you can derive satisfaction and motivation from each small win in the present. With each victory, no matter how small, you are not just building wealth but also gaining the knowledge, skills, and confidence that are essential in this journey. This way, you’re not just waiting for the destination; you’re genuinely enjoying the journey.

Remember, the path to financial freedom is a marathon, not a sprint. It’s about consistent progress over time. Each step you take brings you closer to your goals. Celebrate these steps, cherish the journey, and watch as your financial future transforms.

Chapter 2 Ideas Summary

● Embrace the journey of achievement, celebrating each step rather than just the destination.

● Cherish Micro-Wins with quiet, humble celebrations that fuel further progress.

● Recognize and celebrate the multiple profit centers in real estate investment.

● Reframe your perspective to enjoy the process of achievement, not just success or failure.

Chapter 2 Micro-Wins

● Consider the skills, assets, and connections you already have. How can you leverage them to kickstart your dreams today? Recognizing and utilizing what you have can lead to a valuable Micro-Win, sparking the beginning of a new phase in your journey.

● What’s the first, or next, Micro-Win you can work toward immediately? Set this book aside and identify one action you can undertake within the next hour that will create an impact. Even a small, actionable step can become a significant victory in your pursuit of success.

● If you’re involved in real estate, review your portfolio or goals. Identify a specific area where you can apply a strategy or principle learned in this chapter. Even if you’re new to real estate, exploring potential opportunities can be a motivating and insightful exercise.

●Consider a past failure or setback and try to reframe it by identifying what you learned or how it helped you grow. Shifting your perspective to see failures as part of the process can lead to greater resilience and determination, turning a negative experience into a positive Micro-Win.