On this episode of The Engineering Passive Income Show, Joseph discusses our relationship with time and money. Joseph also shares some tips and advice from his ‘tax toolbox’, speaks about why you should reinvest your capital as it grows and describes how trading minutes for money will cost you memories. Don’t forget to subscribe and leave a five start review if you like what you’re learning and hearing from The Engineering Passive Income Show!
HIGHLIGHTS:
0:00 – Intro
0:38 – Joseph mentions how this episode will cover the topic of time and our relationship with time and money
0:54 – Joseph gives the example of, you’re on your deathbed, how much money would you pay for an extra hour with your loved ones
1:16 – Joseph states that trading minutes for money will cost you memories
1:50 – Joseph talks about how the secret to understanding how passive income works is to view it like leverage
2:47 – Joseph shares the formula for financial freedom as being when your passive income is greater than your expenses
3:38 – Joseph mentions how there is a game called cash flow game by Robert Kiyosaki that teaches your tricks about how to achieve financial freedom
4:13 – Joseph speaks about how passive income streams such as rental houses and storage units all have major capital events like sales and refinances attached to them that build on investment over time
4:50 – Joseph talks about taxes and expenses that offset your passive income
6:04 – Joseph explains cost segregation and how it is beneficial
6:37 – Joseph speaks about another tool from the tax tool box called the 1031 exchange
7:30 – Joseph shares a final tip on how to spin the money and encourages you to reinvest the capital as it grows
8:11 – If you liked what you heard and learned on this episode, make sure you subscribe and leave a five start review!
TRANSCRIPTION:
Welcome to the engineering passive income show, where engineers and other professionals come to learn how to generate passive income, grow their wealth and get their time back. Your host is Joseph Bramante, an accomplished civil engineer, oil and gas professional, multifamily investor, an industry speaker. Learn about investment alternatives, the same types of investments that he used to achieve Financial freedom himself broken down like only an engineer can. Now here’s your host, Joseph Bramante.
Welcome back engineers. I’m your host, Joseph Bramante. On today’s episode of engineering passive income, We’re going to talk about time and its relationship with money, particularly our relationship with time and money.
Now let me give you a couple of examples. This first one’s going to be a little bit grim. So please bear with me. And the next two are a little bit brighter. But first example, we’re on our death bed. How much for the hour with our loved ones, your daughter or son is graduating. How much for the hour with them. And last you’re getting married. How much for the hour with your bride or husband on that special day, $50, $100, $150. I think it’s worth much more than that. Yet, we give it away for so cheap, trading minutes for money will cost you memories. Trading minutes for money will cost you memories.
How much of the memories of your child’s first steps or that first date with your wife or husband or the memories of graduating that also difficult engineering school, memories are priceless and thus time is priceless. So again, why are you trading minutes for money? That’s just bad math engineers and you of all people should know better than that. Math is our jam, but that’s okay. I’ve got a formula for you and it’s called passive income. And the secret to understanding how passive income works is to view it like leverage or a [01:56 inaudible] that is being applied to your finances.
As you recall, moment is force times distance. And in this case, the force represents you, it remains constant. You don’t work any harder than you normally do. While the distance from the fulcrum represents your active income or your W2 plus your passive income. So initially your W2 is going to account for the majority of the leverage, but as you’re gaining passive income is going to grow linearly. Your leverage is going to grow linearly as you’re gaining that passive income. And thus your active income is going to allow you to generate more passive income, which is going to allow you to generate additional leverage, which allows you to generate additional passive income.
But unlike your active income, your passive income is working 24/7. So while you’re asleep, it’s working except with no overtime, of course, generating income and increasing in value. And here’s other formula for you. The formula for financial freedom, it’s actually more of a conditional statement, but financial freedom is whenever your passive income is greater than your expenses. Again, when your passive income is greater than your expenses. That’s if you have a lower active income, then by default, you should have a lower expense burden than somebody who would have a higher active income. So lower active income should mean lower expenses, which means you can achieve financial freedom faster and quicker than somebody with a much higher active income. So it’s really like a catch 22. You would think that somebody with a huge salary could achieve financial freedom much faster and easier than somebody with a lower salary. And reality is just not the case.
And if you really want to see this played out in pseudo kind of reality, there was a game called cashflow game by Robert Kiyosaki, rich dad, poor dad. I encourage you to go check it out. We love playing it. And it’s great to play around with the table with your family. It really teaches your kids and yourself all these different tips and tricks about achieving financial freedom.
Now, I know what you’re thinking, but what if I don’t have that much active income to invest, right? We just talked about this. If my W2 is lower, how can I more quickly achieve financial freedom than somebody who has a higher W2? Because I’m going to be investing smaller amounts.
Well, engineers, many passive incomes like rental houses or flip houses or apartment complexes and, you know, storage units, all those typical passive income streams that you may have heard about. They all have major capital events tied to them, such as sales or refinances that acts like static electricity that builds on an investment over time, only to shock the crap out of your finances with a surge of capital every couple of years, whenever you do trigger such event, allowing you to reinvest at 50% to a 100% more than your previous investment amount and get this, usually it’s tax-free.
Now this leads me to my favorite passive income topic, taxes, death, and taxes, as they say are the two things we all have in common.
I used to believe this until about 10 years ago, when I started investing in multifamily, then I quickly learned about something called passive losses, that is right passive losses. And these are basically expenses that will offset your passive income. And the biggest one is a very special one called depreciation that applies to commercial and residential real estate. But isn’t actually a real expense. It’s more like a theoretical expense. It’s like gravity or dark matter. Like we know they exist, but you can’t really see it or touch it.
The formula is really quite simple. It’s total investment value, Plus all closing costs divided by the useful life of the property, which is either 27 and a half or 39 years for residential or commercial buildings. That’s it. That’s the amount that gets applied to your tax statement each year that is used to wipe out a lot of your income. It is the largest expense each year and causes significant losses for at least the first couple of years, offsetting that passive income as I mentioned, i.e., you’re not going to pay tax on your passive income in the first couple of years.
You can further amplify this by doing what’s called a cost segregation, which segregates the components of a property into 5, 7 and 15 year property. And thus allowing you to accelerate the depreciation on those items, into the present and bring those future depreciations to the first couple of years, allowing you to go even further into the future. Allowing you to have a couple more years of passive distribution, passive income without having to pay the taxes on those paths of gains.
But wait, there’s more, as they say, one of your last tools in the tax toolbox is called a 1031 light kind exchange, or just 1031 exchange. Or we all obviously just say 1031 and we all know what that means. And it’s basically used to defer all of your gains when you do eventually exit a deal and allows you to continue to defer those gains indefinitely so long as you meet the requirements.
So let’s say you sell a deal and you’ve got a hundred thousand dollar gain that you would normally have paid taxes on. Well, in this scenario, you’re allowed to defer that gain into your next investment. The main requirement is that you’re reinvesting into a larger like kind property and that you do it within 180 days of the sale. There’s additional complications as well, but that’s in a nutshell, it’s basically what a 1031 is. It’s like the, one of the greatest gifts to real estate investors from the IRS.
The last tip I’ll give you for this podcast is how to spend the money. The Cardinal rule for financial freedom is to live on the cashflow. You should never ever spend the money you get from these capital events. They are the fuel to your nuclear reactor. And if you take out the fuel cells, the reaction stops producing the financial energy you need to power your life. Plus you trigger a tax event every time that you pull the money out. Which is like flooding your reactor with water, no Bueno. Instead reinvest the capital as it grows, thus increasing the power of your reactor and amplifying your passive income.
And that engineers is the power of passive income. I hope you learned something today, and if you liked what you heard, please subscribe, and give it a five-star review. I’ll see you in the next episode of engineering passive income, bye for now.
This was another episode of Engineering Passive Income with Joseph Bramante, download resources and join our private investor group at www.engineeringpassiveincome.com. Then be sure to leave us a review on apple podcast. Thank you for listening. And we’ll see you on the next episode.