How Real Estate Investors Lose Money Through Poor Tax Planning | Mike Henninger

Mike Henninger (00:00)
I not being afraid to hire the right experts, the right team members, bringing people on when you can. You’re not going to start from scratch and all of a sudden you’re going to need a controller or a CFO or a bookkeeper even. I think understanding that there’s going to come a point where, look, I’m great at finding deals, I’m great at capital raising, I’m great at whatever, getting these projects off the ground, but I don’t really want to deal with the bank.

getting financials ready for the bank and I don’t want to deal with the books and I don’t, cause I’m not an expert in those things, right?

Scott Bursey (02:04)
Welcome back to the Real Estate Pros podcast powered by Investor Fuel. I’m your host, Scott Bursey. And today we are getting serious about the financial engine that drives every successful real estate business. Our guest, Mike Henninger of Main Street CFO is the pro who brings the pure high octane fuel financial clarity and strategic tax planning. He helps investors stop being accidental bookkeepers and start acting like a true CEO. This is

going to be an episode where we plug that profit that leaks. Get ready to fill your tanks pros. This is going to be epic. Mike, welcome to the show.

Mike Henninger (02:43)
Thanks, nice to be here.

Scott Bursey (02:44)
It’s awesome to have you and for our listeners who may not be familiar with your journey, please give us the front row seat if you will on how your career ignited and where you’re pouring your fuel now.

Mike Henninger (02:57)
Okay, I started years ago. I was an accounting manager for a software company. I left there to work in a CPA firm, prepping taxes, went out on my own, prep taxes, prep taxes, prep taxes. That’s just what we were taught to do. And then a few years back, I just started feeling like compliance work was always looking in the rear view mirror. We weren’t really doing anything other than kind of telling somebody what already happened, which…

The accounting world is great at doing that. I want to do something that was more value added, more forward looking, something that I felt really made a more of an impact with the client. So we went into tax advisory and ⁓ just haven’t looked back. It’s so fulfilling ⁓ from an accounting standpoint to actually do something that moves a needle in somebody’s life. That’s the Reader’s Digest or 35,000 foot view of the path to get here.

Scott Bursey (03:55)
And that is a great view. Thank you for that, Mike. What really caught my attention about you was the way that you’ve been able to transition entrepreneurs from reactive bookkeeping to proactive forward-looking CFO level strategy, specifically by designing simple financial dashboards that allow real estate investors to forecast and make money moves with total confidence. That focus of making finance an offensive weapon is pure investor fuel.

and it’s not easy to do.

Mike Henninger (04:29)
Well, I feel like it’s the one thing the accounting world can actually do that really helps. Besides just tell, like I said, we’re reporting to agencies all the time and doing that compliance work. ⁓ Helping people make better decisions, like taking the financials and translating them into actionable items is really where the secret sauce is for what we do, I feel.

Scott Bursey (04:51)
Spot on. Mike, now that we’ve covered your amazing background, let’s jump straight into your insights. What financial metric is the most undervalued indicator of a real estate business’s long-term health?

Mike Henninger (05:54)
I think it’s, and this isn’t normally looked at as a metric, but I think the impact of taxes themselves is something that is usually looked at in like February, March, April. And we’re looking at it again, retrospective, like for the prior year, ⁓ tax planning when done properly is really a cashflow strategy. It’s really something because if you can plan.

Like if you, you normally are sending in 50 grand, a hundred grand a year, and you can somehow cut that in half or, or eliminate it through various strategies, that’s 50 or a hundred grand that now is reinjected back into the business to grow it more marketing, more this more deals. Right. And I think it’s, it needs to, it’s something that you need to work through the year to maximize because you know, one of the things that we discover is that there’s a ton of strategies, but

Can you maximize them? Can you actually utilize them? Because a lot of things are creating these losses and they’re passive and all these types of, all these questions that you can’t answer in February, March or April, right? You only can answer them throughout the year when you’re actually in the throes of it.

Scott Bursey (07:07)
Essentially, Mike, if I’m hearing you correctly, what you measure is what you manage.

Mike Henninger (07:13)
Absolutely, absolutely. And I think taxes is just something that was.

Scott Bursey (07:16)
Now let’s shift gears.

And I’ll go ahead and expand on that if you would, Mike.

Mike Henninger (07:23)
No, I was

just saying, I think we have these other, like you said, these metrics and these normal KPIs that we measure and taxes are just something that happens. I think if we can kind of look at it a different way and count taxes in those metrics, in those KPIs that we’re monitoring throughout the year, I think it’s gonna have much bigger impact.

Scott Bursey (07:45)
absolutely. Thank you for expanding on that, Mike. And curious to know what is the most common and expensive profit leak you find when checking a person’s financial systems, let’s say.

Mike Henninger (08:00)
Well, I think…

think a leak would be, again, this kind of ties into the waiting to the last minute kind of thing or waiting till it’s too late, but taxes are always leaking somewhere if you’re not on top of them, right? And I think, you you get to, like a lot of times people want to talk about short-term rental strategy, short-term rental loophole, right? That’s a big, especially for high W2 earners, right? That don’t have a lot of other things going on. That can be an awesome tool, but there comes a point where, you know,

there’s specific parameters and timeframes and things that need to happen before December 31st. That if you don’t, if you’re not watching that and you, that time is leaking. The time and the ability to maximize those types of things is leaking throughout the year because you’re not really on top of it. Right. So I think, you know, just monitoring yourself throughout the year, monitoring your tax vision throughout the year, avoids the holes where the tax leak out and the tech and the opportunity to kind of lower, defer or eliminate them leaks as well.

Scott Bursey (09:05)
That knowledge prevents expensive errors. We need to plug those leaks immediately. Now let’s rub up the RPMs here a little bit. What is the biggest yet most underutilized tax deduction opportunity for the average active real estate investor currently?

Mike Henninger (09:12)
100%. Yep.

Okay.

I think, and then this is one that’s kind of over and underutilized. This is the cost segregation combined with bonus depreciation. Basically what that does is it allows, normally if you have a rental property or whether it’s residential, commercial, you either have to depreciate it over 27 and a half years or 39 years, right? So you get one 39th of that, one 27th and a half of that. Cost segregation says, look, in this building, there are pieces of it we’re gonna carve out.

and shove into these shorter life buckets, five, usually five and 15, sometimes seven, but usually five and 15. That takes that 39 years, condenses it down to 15 or five. In addition, bonus depreciation comes in and says, hey, if you have these assets that are in these five, seven, 15 year buckets, we’re gonna take it all in one year. So you took those expenses and you maximized it from 39 and you shoved it into the first year. That, if not done properly, is a massive, a massive,

Miss if it’s something you can utilize and that goes into the other part. said there’s sometimes they’re overutilized. Sometimes you create these massive losses, but you don’t have. You don’t have passive income to offset or you don’t have. You don’t have a way to actually utilize that big loss you created in that year. Now you don’t lose it. It sits in a bucket until a triggering event happens. But so yeah, I think cost seg and mixed with bonus appreciation is sometimes either missed or it’s overutilized, but it’s one of those things you have to massage it.

and make sure you’re under all the crossing T’s, dotting I’s, but that’s a big one. That’s a big one.

Scott Bursey (11:33)
Mike, if someone’s listening to this and they’re thinking, hey, this is somebody that I like to learn from. What would you like them to know first about Main Street CFO?

Mike Henninger (11:43)
Well, I think, you know, we have the name Main Street CFO and where that came from was, so we were really Main Street tax advisors, right? But we created, we first were trying to get into, we were working on CFO work, right? And that’s a nice thing to do. It’s just not, I found out it wasn’t something that I was good at. You know, something that we weren’t, we were more of the tap, we, that’s not like.

Total nerd here, but I love tax right and I love ways to utilize the code to minimize it like the tax code is it really a cheat code and Working on fractional CFO work was just something that was not I wasn’t getting fulfilled doing that right so We moved into the tax advisory firm. I what the question was but so that’s we We just made the pivot to say look we are tax advisors. We’re good at what we do what we do

And that’s a hundred percent of what we’re focused on, what we’re going to focus on doing. And that’s kind of, know, the story behind it.

Scott Bursey (12:48)
I can

certainly sense that your passion resonates Mike and regarding your business. What do you feel is the biggest opportunity for Main Street CFO?

Mike Henninger (12:52)
You

⁓ I think that there’s so it’s you know behind the scenes what’s happening in the accounting industry is there’s a lot of a lot of firms have older owners and nobody to transition the business to so they’re going to be leaving there’s going to be a lot of clients that are going to kind of left in the in the dust. ⁓ I think the fact that we are more we kind of abandoned the backwards looking stuff that

compliance work and we’re more forward looking. think that’s going to be a huge, a huge opportunity because the tax code is not. Have you ever read it? Please say no. ⁓ The tax code is like it’s some of the driest stuff and it’s almost written in a way that makes you think whoever wrote it hated their readers because it’s so weird to read. It’s like talk about something here that references something over there and then it references something back there. So I think.

being able to utilize this, to understand the code and utilize those strategies to lower, eliminate defer taxes is going to be, it’s a huge opportunity, especially for all the people that are getting kind of abandoned from these firms that are just going off into the sunset. So I think that’s, there’s a huge opportunity.

Scott Bursey (14:13)
I love your transparency on that, Mike. What non-compliance risk or most growing real estate businesses, where are they ignoring that could lead to an audit nightmare?

Mike Henninger (14:15)
You

I think, especially in the investor world, there’s a couple of things. If we’re talking about the majority of real estate investing, think, and when we talk specifically about things like real estate professional status, that requires a lot of documentation and a lot of tracking of your hours, right? And I think people kind of, and we’re talking about materials participation in general for.

Material participation comes in because anything is passive, either any rental activity or any trade or business in which you don’t material or participate. And that material participation piece is tracking the hours. It’s based all the usually based on all the hours. So I think in general, people underestimate the importance of that and they underestimate the amount of ⁓ diligence they should they should put towards.

tracking those hours and making sure that they’re compliant. There’s a lot of things to, if you want to be a real estate professional and maximize those losses against your ⁓ passive income, there’s a lot of tracking, a lot of hour requirements and a lot of things that you need to tell the IRS that they come knocking that here’s my proof that I’m a real estate professional. Yeah, I think that’s probably the biggest compliance issue in investor industry.

Scott Bursey (16:23)
That’s a massive injection of value right there. Document, document, document. It’s everything.

Mike Henninger (16:31)
It is, it is, it really is. mean, it sounds cliche, but it’s not cliche if you’re having to sit across the desk from an IRS agent. That is completely normal. Yeah, you’re right. Compliance is great. Our documentation is great.

Scott Bursey (16:46)
Mike, if a real estate pro wants to stop being the bookkeeper and hire their first dedicated finance role, what is the title or key responsibility of that first hider?

Mike Henninger (16:59)
Depending on the type of investing that you’re doing, think having a solid bookkeeper is key. A bookkeeper that understands real estate, a bookkeeper that understands how depreciation flows, those types of things. one that, because you’re probably going to have, you have the bookkeeper, you may have a CPA prepping the taxes, and you may have a tax advisor over here and a financial planner. They’re kind of working together. That bookkeeper needs to understand the language to communicate with all of them. And they need to…

have the ability to talk to each other and not talk over each other or through each other. So I think having a bookkeeper that understands the accounting side and then understands how to speak to these other team members to make sure that the whole machine is functioning, all the cogs are oiled up and greased, I think that would be the first thing to look for.

Scott Bursey (17:50)
Two-way communication, so important. And Mike, you’re really delivering the serious value here today. Now let’s get into the high octane fuel. money question. Considering a real estate investor’s journey from a handful of deals to a multimillion dollar portfolio, your journey, what is the most financial impactful system or operational expense that if streamlined will unlock the greatest amount of

Mike Henninger (17:53)
Huge.

Scott Bursey (18:19)
Passive time and profit.

Mike Henninger (18:21)
I not being afraid to hire the right experts, the right team members, bringing people on when you can. You’re not going to start from scratch and all of a sudden you’re going to need a controller or a CFO or a bookkeeper even. I think understanding that there’s going to come a point where, look, I’m great at finding deals, I’m great at capital raising, I’m great at whatever, getting these projects off the ground, but I don’t really want to deal with the bank.

getting financials ready for the bank and I don’t want to deal with the books and I don’t, cause I’m not an expert in those things, right?

That you have to understand, you have to be willing to say, look, the system has to be able to move when I’m not in it. And if I’m doing everything, if I’m not, if I get hit by a bus, nothing goes on from that moment. So you have to be willing to say, okay, yeah, I have to expend some money to bring on the CFO or this controller or this tax preparer, this advisor, whatever. But in the long term, in the long run,

All the time I was spending trying to be an expert in that thing that I suck at, I could have been doing more deals and making three, four, five X what it cost me to bring that person on. I think just kind of being able to know when the system needs to grow and it needs to grow without you at some point. know, those are the kind of the tough things I think that we all struggle with because we’re all kind of control freaks as business owners, but that can be like, that can be a choke point if we’re not.

we’re not diligent in making sure that we don’t get hung up on our own ego and like delegating things the right way. That’s just my take on it.

Scott Bursey (19:54)
100 % delegating and having those systems in place. It is so, so critical.

Mike Henninger (20:00)
Yep.

Yeah, I think if I could just add something to that, think, you know, it doesn’t mean that you’re not, ⁓ have no buy-in or no leverage in those other positions because what you need to do, like you were saying, the systems, you need to create those systems so these people can step in and operate the way your company operates. So you do have a lot of say in those other areas because you created the SOPs that they’re going to be working with them, right?

Yeah, you’re right. The system is and then being able to delegate the people to do those, to take care of the system.

Scott Bursey (20:38)
Mike, that insight is priceless. Thank you so much for breaking that down, but we can’t let you go just yet. You’ve given us so much great advice. What additional golden nuggets or additional advice can you leave with our pros here today?

Mike Henninger (20:55)
Um, I think, you know, and this is just coming from the world of tax where I were, I think don’t, again, I think I mentioned in the beginning, like proper tax planning is a cashflow strategy. think you need to, and I’m not saying jump into any kind of, I wouldn’t jump into any tax strategy unless I understood it inside and out, if I was a non tax professional, right? So I think talk to somebody, just have a call with somebody to say, look, this is where I’m at. What strategies.

are available to me that would fit my specific situation and what would they do for me cash wise? Like how would they impact my cashflow? How would they impact if I can grow or eliminate taxes? Like I paid 100 grand last year. Do I have to pay 100 grand? Why did I pay 100 grand? Like don’t let the tax side be this mysterious nebulous of things that you think are like the scary or just unknowable things. They’re not unknowable. Like it’s not rocket science. It’s basically just getting with somebody that can…

explain it to you in normal person words. I think that’s probably a big thing that people skip, or they just don’t think of it as something that is actually impactful, because it’s just this thing I have to do. I have to do taxes. You do. You have to do them. But there’s a lot of stuff you can do before that day to make sure that you don’t give too much if you don’t have to. So I hope that helps.

Scott Bursey (22:14)
Mike,

that is absolute rocket fuel right there. And for those of our listeners that want to keep this conversation moving or collaborate with you, what is the best way for them to plug into your pipeline and reach you directly?

Mike Henninger (22:28)
Just email me, [email protected].

Scott Bursey (22:33)
Awesome, awesome. Mike, thank you for joining us here today.

Mike Henninger (22:37)
Thanks for having me, it was great.

Scott Bursey (22:39)
And to our listeners, we appreciate you. If you got value from today’s episode, please subscribe. We’ll be fueling your tanks with a lineup of elite guests just like Mike Henninger, who are accelerating and setting the pace for the rest of the industry. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.