In This Chapter

Top Dogs focus on ways to earn income without spending too much time earning that income. Although commission earnings are far better than hourly earnings, they are still tied to your time. If you don’t spend the time, you won’t receive an income. The same is true for any fee-based service.

Top Dogs also focus on ways to earn profit free of taxation. This means investing in real estate. They have “intuitive antennas” that are always searching for ways to invest in real estate so they can earn profit and exchange out of their investment without being taxed. In this manner, they stockpile earnings tax-free, and if they do cash out without reinvesting, they are taxed at the lower capital gains tax rates instead of ordinary income tax rates.

If you start out your real estate career with the intention of creating future income streams, you will have a future marked by financial abundance even if you are unable or unwilling to work. You will develop a frame of mind that continually probes for income stream opportunities. This chapter shows you how some Top Dogs accomplish this objective.

There are four primary ways of creating future income streams within the real estate sales field:

Each of these is discussed in the following sections, but first, we take a look at your personality characteristics to see if you have an investor state of mind. Don’t worry; if you don’t, you are on your way to one right now.

I highly recommend Robert Kiyosaki’s Rich Dad books, but most particularly Cash-flow Quadrant. He categorizes people as employees, self-employed, business owners, or investors depending on the way they generate income. Employees work for someone else and find security more important than money. The self-employed are their own bosses, rarely delegate, and generally work very hard with their earnings tied to their time. The business owner hires others to do the work while she navigates the ship. Business owners make money that is tied to their time far less than the self-employed.

The last category, and the one we all aspire to reach, is the investor group. This group makes money with money, irrespective of the time they put in. When you become an agent, you join the ranks of self-employed, single-handedly taking the bull by the horns, commission by commission. But if you follow the steps in this chapter and in Cashflow Quadrant, you will join the right quadrant of the business owner and investor.

As a real estate professional, you are exposed to deals every day of your life. You’re continually in the right place at the right time. The question is, will you take advantage of your setting? Most agents do not.

Start investing in real estate whenever and wherever you can. We’ve seen the stock market collapse. Real estate has a reliable long-term rate of return, and with its preferred tax treatment, it really can’t be beat. The demand for real estate has skyrocketed as investors have transitioned from the stock market to the real estate market.

Although the real estate market has since softened, it still continues to be a preferred investment choice, not only because it is more reliable and consistent than the stock market, but also because investment real estate has more tax benefits than any other investment. You receive investment income and appreciation, but your taxable bill diminishes as you take advantage of depreciation, tax deductions, capital gains, and tax-free exchange tax benefits.

Begin to see yourself as far more than a person who assists others in acquiring real estate. See yourself as a real estate investor first and foremost and a real estate agent secondarily. Always be on the lookout for a good deal for yourself. Develop an investor state of mind, always ready to do what it takes to acquire and hold on to real estate. It is your ticket to wealth and early retirement. And as a real estate mogul, your financial expertise will benefit not only you but your clients as well. This is how Top Dogs see themselves.

In the beginning, you may only be able to afford bits and pieces of real estate. But you will learn to carve real estate into divisible co-ownership pieces because your financial plan depends on it. You will begin to specialize in a market that sees co-ownership as a valuable way to acquire the most desirable asset, real estate. Your co-ownership model is described for you below. It takes the worry out of owning property with others while you and your co-owners reap the rewards of leveraging investments through the use of combined assets and talents.

One way to create an income stream is to transform a potential commission into an interest in your client’s property. If you are not a broker, you may not be able to apply this equity conversion to the company’s portion of the commission, but you can for your own portion of the commission. In so doing, you also transform the tax laws relating to what you will earn, and you move from the quadrant of the self-employed to the quadrant of the investor.

Commissions are taxed as ordinary income whereas profits on long-term investment property ownership are taxed as capital gains. For example, $10,000 of the commission is your split. You and your client, the buyer, agree that you will convert your commission to an ownership interest in the property acquired. As a result, you start an automatic future income stream because you will earn an agreed-upon percentage of the property’s appreciation and any income it may produce. This procedure is called equity sharing, also more simply known as co-ownership or a joint venture.

It works like this. Had you received your $10,000 commission, you would have earned $10,000 exactly and been taxed at ordinary income tax rates. You did not receive a commission; instead, you made an investment in real estate. As the owner of real estate, taxation is deferred until the real estate is sold, at which time you have the option of exchanging tax-free into another investment property or paying tax at lower capital gains rates. The net result is you have deferred tax on earnings, set up future income streams, and presumably will make a good tax-deferred profit.

Not-so-Top Dogs do things differently. They are famous for not taking advantage of their ideal circumstances. Somebody asks them to keep their commission in a property, and they take offense, responding, “Don’t you think I deserve to earn a living? Don’t you think I have expenses to pay?” This is self-employed mentality speaking. Top Dogs are different. They enter into the investor quadrant and take advantage of the opportunity to create future income streams. The by-product of income stream mentality is that you become financially sophisticated, and both you and your clients benefit from your expertise. You earn respect for your real estate acumen, acting as both agent and financial partner in your client’s transactions. Always remember, however, that a potential conflict of interest arises when you become an owner with your client. Detailed, written disclosures are required along with a good measure of integrity.

Top Dogs are set up to take advantage of ideal economic conditions by specializing in emerging markets. In the current marketplace, the public can no longer count on the stock market as a means to make them rich. Real estate, with its enviable consistent record of performance and beneficial tax treatment, is more attractive than ever. In addition, as long as low-interest mortgage rates continue, real estate leverage is extremely advantageous.

Of course, one key to a ripe real estate market is for mortgage rates to be lower than property appreciation rates. So always gauge your investments by this test. If loan rates start approximating appreciation rates, you might want to hold off on new investments until either rates come down or appreciation goes up.

These conditions provide the ideal setting for Top Dogs to facilitate investments to the real estate market. Your average investor is highly motivated to invest in real estate, yet he does not have the know-how to tap the lucrative real estate investment pot. Top Dogs step in to create a ready marketplace to fill this need. They are able to fit the needs of the investor wanting to acquire an investment property on his own or just a small percentage of a property.

Top Dogs create stock-size investments in real estate to satisfy the stock market investor’s desire to easily diversify and buy in with small contributions. These bite-size investments also meet the Top Dog’s goal of diversifying his own real estate investments and sharing the financial sting of real estate acquisition with others. Investors are accustomed to calling their stockbrokers and saying, “Buy me some Cisco or put me into something with fixed income.” Who do they call now? How does your typical investor directly invest in real estate?

Enter stage left, the Top Dog specializing in stock market investor transition. Agents who can help clients invest in bite-size percentages of property ownership are able to scoop up the business stockbrokers had in the 1990s. In fact, a number of stockbrokers have transitioned into real estate sales and are providing this very service, yet now it is under the umbrella of real estate and is called limited partnership interests instead of shares in Cisco. They acquire investment real estate in the name of a limited partnership or limited liability company and offer investors bite-size ownership percentages.

The Top Dog is the person an investor can now call and say, “Put $30,000 into a good, appreciating real estate investment.” The Top Dog has a client base of investors and is able to pool them together in real estate investments. In return, the Top Dog receives a percentage of ownership instead of a commission on purchase and again on sale. The following sections show you how this works.

Aside from consistent appreciation, real estate is more attractive than the stock market because real estate comes with a set of tax benefits that stock market investments do not enjoy. With real estate, investors can deduct payments made and pay no tax on gains. All you need to do is collect stock-market-weary investors, which is not a hard thing to do. Just put yourself in the middle of any group of thirty-somethings and up. Or stand on a corner with a sign that says, “Real estate investments, $30,000 each.” They will come in droves.

Next find the properties into which you will pool your investors. The philosophy is that the investors supply the initial capital and make the payments while you convert your commission, put the deal together, manage the investment, and receive a commensurate ownership interest. You will also receive the listing at sale later, which can again become a commission conversion to tax-free equity. Stock market investor transition is an opportune market for the Top Dog who is willing to work creatively and with income stream mentality.

You can make your investment pools as simple or extravagant as you desire. Your investments can be simple single-family homes that are rented out. If you decide to put development projects together, you may want to add additional members to your investment team, and your Power Team members are the most likely candidates. The following are categories of professionals that may choose to contribute their time to a project in exchange for a portion of the appreciation at the end:

When the professionals whose services are required to put a development project together contribute their time in exchange for equity, a development project has the best chance of success and profit. Top Dogs cultivate contacts with professionals with similar income stream mentality and have ready teams to put together when a development opportunity comes along.

You can either use a business entity such as a limited partnership or limited liability company to hold title to these properties or you and your clients can go directly on title. The more investors participating in one property, the more inclined you will be to use a business entity. Lately we have seen a resurgence of limited partnerships that were so popular in the 1990s.

Before the tax reform of the late 1990s, limited partnerships were a popular method of owning and operating real estate because they allowed limited partners to take tax losses for their investments and to enjoy limited liability. In those days the savvy agent became a general partner in a client’s investment and earned a portion of the appreciation in return for his services in pooling investors and managing the investment.

With tax reform, the limited partnership no longer enjoys preferred tax treatment, yet the structure of the limited partnership is ideal for agent-facilitated real estate investing. Whether a limited partnership or limited liability company holds title or the agent and client go on title individually, the intent is the same—the agent takes an ownership interest in lieu of a real estate commission and as compensation for her finder and management services, just as the general partner of the limited partnership did.

Now that your imagination is working, you say, “This would be an incredible venture if investors could use their qualified retirement funds to buy real estate.” Since you’re wondering, the answer is, “Yes, they can.” The one qualification is that if the property is subject to a loan, special rules apply. Retirement funds can be invested in co-owned real estate, as long as the retirement funds are safely segregated in their own ownership interest. The main considerations with retirement funds are as follows:

One very popular way of using retirement funds in real estate is to acquire a retirement home. Until your client reaches retirement age, he is not able to use the home for personal or family use, not even for the typical vacation home personal use period. Thus, he rents it out and income is paid to his retirement account. At retirement age, the retirement home is distributed to him. As facilitator of these transactions, you help your clients move their retirement funds to appreciating and tax-preferred real estate, you help them choose their retirement homes, and you manage or facilitate rental of it until they retire.

If we had as many real estate investment brokers as we have stockbrokers, taxpayers would understand that their retirement funds can purchase real estate. Since it is not in the best interest of stockbrokers or retirement fund managers, taxpayers are unaware that their retirement funds can purchase real estate with the assistance of an account custodian, whose role is very similar to that of the exchange intermediary.

An important place to look for an income stream is right in your own backyard. Well, not exactly your backyard, but in your business. Every business owner looks to his business for current income streams. Every successful entrepreneur looks to her business for future income streams. The entrepreneur’s mindset is to plan for the future now by setting up her business knowing she will sell it when the time is right.

Knowing that you are building something that will live on indefinitely, the administration of your business becomes less mundane and may even border on exciting. Your marketing talent comes to life on behalf of your clients’ properties, and your business also becomes the beneficiary of your active imagination. You dream up names to call certain tasks. You begin to assign logos and mottos to your business. You see it as a thriving enterprise because you know it is your nest egg. It is not just a humdrum place where you earn a living until you’re 60, and then it’s gone. It is your golden egg that will live on perpetually, and earns you a good living now and an early retirement later.

I can hear you say, “How can I sell a business that is part of another business?” You can. The clients are yours; they do not belong to the company you work for. The clients go wherever you go. When you leave this real estate firm, your solid reputation and strong client base go with you.

Many agents obtain their broker’s licenses when they reach a certain level of success. Some choose to go work on their own alone while some hire other agents to work for them. Some never leave the firm they’re with because they are comfortable with the reputation or the support it provides. Whichever route you follow, your business and your clients are yours. When you sell your business, if you are with a firm and you feel the continued success of your business depends on staying with that firm, you will build in a contingency that the successful purchaser must place their license with the same firm. You should be interested in your business succeeding after its sale because part of the sale price will be paid to you over the next many years.

Most people are not entrepreneurial-minded. They develop successful businesses and when they retire, the business does too. In other words, they stay in the second quadrant of the self-employed. For Top Dogs, the business lives on and provides an active income stream into the future. Even if your business is a professional service such as real estate, it is a highly marketable business opportunity if you plan it that way from the beginning.

When you retire, you can refer clients to your successor and make money from each referral. To do this, build into the purchase agreement a contingency period to approve of your buyer, so before you commit to a sale you know your successor will continue the business with a similar degree of success and integrity. Stay involved in the transition from yourself to the successful purchaser for a year or two. To ensure successful continuity of your business, it is in your best interest to allow the transition to take place over a well-measured period of time, so your clients and your successor will find a successful rhythm together.

Because your income stream depends on your successor’s success, you want to do everything you can to ensure that the purchaser will be successful. Also, you want to leave your clients with someone who treats them well and will fill your shoes effectively in satisfying their real estate needs.

It might seem early to start thinking about selling your business if you’re just starting it up. But income stream mentality should become your state of mind early on, especially in the business formation stage. The time to ready your business for sale is now, not when the goodwill of your business has dwindled and you need to find an income stream. With this state of mind, every function of your business should be set up as a prototype that can be operated by the person or company to whom you sell your business. Everything should be turnkey. Your buyer turns the key and the business operates itself.

Here is a checklist of points to consider as you set up your business with an eye toward selling it later: