In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Toby Mathis, a 25-year tax attorney and founding partner at Anderson Advisors. Mathis advances his client’s interests by combining expert tax advice with his personal experiences investing in over 200 real estate projects in the US. His expertise reaches many others through his award-winning publications, including Tax-Wise Business Ownership and Infinity Investing: How the Rich Get Richer and How You Can Do the Same.
In this episode, you will learn:
- What it means to infinity invest, including the five infinity sources of passive income.
- The top asset categories that Toby has seen make the biggest returns.
- How dividend kings provide decades of growth.
- How covered calls work and how to use them.
- And more!
Tax-Wise Business Ownership | Infinity Investing: How the Rich Get Richer and How You Can Do the Same | Toby Mathis’ YouTube Channel | tobymathis.com/podcast | infinityinvesting.com | Schedule an Introductory Call | Bautis Financial: 7 N Mountain Ave Montclair, New Jersey 07042 (862) 205-5000
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. On today’s show, I brought on a special guest. Toby Mathis is a 25-year tax attorney and founding partner at Anderson Advisors. Mathis advances his client’s interests by combining expert tax advice with his personal experiences investing in over 200 real estate projects in the US. His expertise reaches many others through his award-winning publications, including Tax-Wise Business Ownership and Infinity Investing: How the Rich Get Richer and How You Can Do the Same. Toby, welcome to the show.
Hey, thanks for having me.
I pretty much find that everyone is interested in investing these days, and the idea of infinity investing may be new to some of our listeners. But before we get into the concept of infinity investing, can you start off by sharing your background, including what led you to becoming a tax attorney?
It’s a long and windy road, like a lot of people’s stories… I had a really good mentor when I was in high school and college. I didn’t really intend to go to college – I just went because I could kick a soccer ball. But growing up, I had a mentor who said, “Hey, come work with my business,” and I did. He was a liquidator, so we would sell anything to anybody, anywhere.
What we found is that the lawyers were horrible to work with. So my mentor looked at me and his son and said, “You guys need to go to law school… These lawyers are going to kill our business.” And that’s when I went to law school.
I never worked for a big firm. Instead, I worked with small business owners and investors. That was in 1997, and I’ve never looked back or had a single regret – I really enjoyed it. I just looked at the law and said, “You need to know these things if you’re going to be a successful business owner and a successful investor.”
Along the way, I realized that the same crappy advice we get from a lot of the legal profession, and no offense to my lawyer brethren out there, but let’s be real, a lot of us have never run the business that our clients are in and don’t understand the nuances, but we’re still willing to charge a lot for our opinion on things that maybe we shouldn’t be. Just because you know the law doesn’t mean business. I realized that CPAs weren’t much better and EAs weren’t much better, and accountants, again would always tell you all the horrible things that would happen to you and never really draw out a path of here’s how to do things. There are some, but I just realized that in my experience, it was a disheartening experience.
I remember sitting down with the first CPA, and I know this is a long answer, Marc, but you might identify with this, but some of your listeners might. I didn’t have any money when I started my business. I had a 400 square foot studio and I saved up to meet with the accountant. It was 300 bucks for an hour. When I say I saved up, I used to joke. It was like I didn’t have the funds to go and just go see a professional. I actually saved up. I didn’t want to have debt, so I was one of those guys that actually, it’s going to be two, $300 so I’ll start saving it up. I’ll put a few dollars here. Then I got to go sit down with this guy and I was all excited because I thought he was going to give me some great knowledge and he made me feel like an idiot for opening up my own business. He used big language. He talked over my head.
I was an attorney, so it wasn’t like I was a dummy, but what I think he did is just [inaudible 00:04:43], how they pontificate, show you how smart they are. I walked out of that hour long meeting 300 bucks poorer and feeling about two inches tall. I just made a commitment to myself at that point I would never do that to somebody else. This is not difficult. Making money is not difficult. Anybody who’s done it will tell you, yeah, that first million’s tough, but after that it gets a lot easier because you quit paying attention to the little stuff that is a distraction and you start focusing on what’s important. Uber successful people tend to be disruptors. They see something that we don’t see, they feel a need that we didn’t realize could be filled, and they do that, but at the end of the day, what it comes down to is taking a little bit of risk and believing in yourself and you’ll be successful. In investing, it’s just math. It’s just understanding the math and believing the math so that you don’t do things that harm yourself because of your emotions.
That’s my thumbnail version of how I got into this and how I think. Then as a result, I’ve been practicing in this area for 25 years plus, and I work with a lot of really great investors. My firm has over 500 people in it. It’s CPAs, accountants, EAs, bookkeepers, you name it, but I learned from my clients. I watch them carefully. I look at the successful people and it becomes really obvious what works. Just as equally you could see what doesn’t work because it repeats itself. In our practice, because we do over 10,000 tax returns a year for investors, I can watch the trends. I can see, oh man, these guys are getting slaughtered. What are they doing? Hey, they’re all doing the same thing. Let’s not do that.
What Does it Mean to Infinity Invest?
Is that how you got the idea for Infinity Investing, in what you saw from all these investors that you work with?
Yep. I don’t have an original idea in my head. What I do is I observe and I write down after years, I think I wrote Infinity Investing a couple years ago, but it started about six, seven years ago when one of my clients was asking me questions and asked me to come address a group. It was like 2000 people. Their regular speaker on financial planning wasn’t able to make it. I said, well, I’m not a financial planner. The client’s like, I’ve been working with you for 20 years. You’re a better financial planner than my financial planner. It’s actually pretty obvious, Marc. The tax code tells us what to invest in.
It’s almost like if you’re willing to listen to the universe and you realize where you’re getting smacked, then you stop doing the things that get you smacked. If you go over here and you get a reward, you start going over to where the rewards are. It’s like we’re kind of like lab mice. Just let ourself realize that there’s a lot of things that we get hit on, and in the tax code it’s pretty blatant, but all I did is I wrote a book called Infinity Investing and I realized that the people that really did well and did well over a longer period of time and made substantial wealth that’s not going away, their time horizon was a lot longer than yours and mine. They were thinking in terms of generational wealth. They were thinking of 200 years down the future, 100 years, 300 years. It was never, hey, am I going to have enough for retirement? They were thinking of I want to build something up that creates wealth for future generations, and I’ll be danged, but they were hitting it over and over and over and over again.
I’d watch these folks, and again, I had a great mentor, but he had a whole bunch of folks that were successful and I looked like, my God, these guys are all doing the same thing. They’re in different businesses, but they would transition their wealth to the exact same stuff. Real estate’s the obvious one, and from a tax standpoint is by far and away the best investment just about. Maybe you could argue oil and gas or something like that, but as far as just the tax benefits and the step-up in basis when we passed, 1031 exchanges that don’t exist for any other assets.
You could literally grow a substantial amount of wealth in real estate, and if you resist the temptation of selling it off, you could still sell as a 1031, but if you resist the temptation of getting rid of your real estate, you could live off that real estate, borrow on that real estate and never pay a nickel in tax on any of those funds. Then when you die, not only do your kids not have to pay tax, but then they get to re-depreciate it again at its fair market value when you die, so they get to take another deduction. There is nothing out there like that where you can actually buy, deduct because I bought it, trade it for something worth more, not pay tax, borrow against it, not have to pay tax on that, and then when I die, the people that I leave behind can actually do it again. That type of obvious stuff is what’s in Infinity Investing.
What else, in addition to real estate? Did you see any trends in asset classes or habits?
Yeah. I could say that studies with the IRS, and I’m a data freak, so I love looking at their publications every year of who pays taxes, who doesn’t, who gets audited, who loses audits and all that fun stuff, but millionaires make the minority of their income from active income. By all accounts, when you look at the stats, it’s less than 40% of their income comes from working. I say active; things that they actually materially participated, and that’s a technical term. Material participation means basically 500 hours or more a year working in. I could have lots of businesses, but there might be only one business that I work in, and it’s making the least amount of my money on an annual basis if I’m making a million dollars or more. The vast majority is in the portfolio income realm and rents.
In portfolio income, it’s worth touching on this and I’ll explain the difference from a tax standpoint in a second, but portfolio income is things like dividends. It’s capital gains. In dividends, for those of you guys don’t know, qualified dividends on US companies, they’re taxed as long-term capital gains. If you’re a married couple and your taxable income is less than, I think it’s $89,000 this year, you pay zero on that dividends. You could be getting money every year tax-free, and why people aren’t doing it, why are they chasing other investments, this, that and the other where they’re getting hit with a tax stick every time they make a dollar. I don’t understand. I look at it saying, hey, it’s not what you make, it’s what you keep. I could get $8 over here. I get $10 over here. If I make $10 and I only get to keep five, that means I probably shouldn’t do that if I get to keep 100% of the seven or eight bucks.
There’s investments where you get to keep every dollar and then there’s investments where you only get to keep a partial. The most obvious is you and I work and if we make a dollar, you have withholding, you have federal income tax, you have state income tax, and you have this thing called social security, which never gets discussed unless they’re saying we’re going to lose it. No, it’s old age, disability and survivors benefits. It’s 12.4%, and Medicare, which is 2.9%, so it’s 15.3%. If you look at our gross receipts from our country, all the tax revenue that it makes, every now and again, employment taxes, social security, is more than income taxes to our treasury, but we never talk about it. They never talk about, hey, the biggest burden on all these people who supposedly don’t pay… they always say half the people don’t pay income taxes. Well, they’re still playing employment taxes.
I worked at McDonald’s. I was making $4.15 cents an hour, and I didn’t get $4.15 cents an hour. I got about $3.50 an hour because every dollar I made, I had to pay the government and I had to pay employment taxes. Even though I made so little that I get a refund of my income taxes, they did not refund me my employment taxes. I had to pay every day. That’s active income. We do not charge social security taxes on dividends or rents or other types of portfolio income like interest or royalties, capital gains as a whole. We do not pay employment taxes on it.
If you just remove the employment taxes, which is about half the money that we collect as a country, could you just imagine what happens? That’s what the rich do is they avoid those employment taxes as best they can. Even if you’re an active business, you could avoid them. People don’t realize that even as hey, I have my own gig, I could cut my employment taxes by simply being, for example, an S corp and taking a small salary and I can cut my employment taxes by about 60, 70%. It’s just knowing what the rules are.
I think you find most people want to get on that side you’re talking about, that passive investment where portfolio income is generating and you can minimize the tax, but what are some of the ways that you’ve seen people get to that side so that a majority of their income is there? Because the typical one is you hear, okay, I’m going to have this active income from working that’s going to feed the portfolio, but is there a way to accelerate that to get to the side where the portfolio income is producing a majority of your income?
Yeah, absolutely. I systematically do it. That’s part of the whole infinity income idea is that I look at five types of income: real estate, royalties, dividends, interest, and short-term capital gains from the sale of options on your portfolio. I’m not an option buyer. I’m an option seller, so I sell covered calls. In essence, I call it being a stock market landlord. We treat our stock investing just like we do real estate, but you’re looking at those five types of income sources and you deliberately go out and acquire assets that produce them. I recommend people use a simple 70/30 rule. Live off of 70% of your take home and 30% of your take home you assign to… you could even set up different bank accounts, like hey, when my paycheck comes in, I don’t trust myself. I might see money in my account and go out and splurge.
What you do is you take 10% and you put it aside for giving. Don’t worry, guys. I was broker than a joke before. I’ll tell you the work around on that, but if you can, you put 10% aside for giving, 10% aside for paying down your debts. Not paying your debts, but paying down your debts. In other words, extra above the minimums, and 10% for investing. I’m not one of those guys. I understand Dave Ramsey’s out there like, hey, pay all your debts down. I say pay your debts down and invest, but live off of less than you bring home. Then if you’re one of those people that says, hey Toby, I don’t make enough to have less, then I’m like, okay, first off, we have to talk about priorities. There’s generally a way to live below your means unless you’re below $2,500 a month or something like that. I get it.
Then I would say, hey, you better get some side gigs, an extra job because we’re going to have to fund these buckets somehow. If you are in that category where you’re like, I just don’t have enough money to give and some people tithe, I’m not a believer in just tithing. I’m like, you could give it to a number of resources, but let’s say you can’t, then give time. When I was in college, I didn’t have any money, so I gave time. I worked at Northwest Harvest, and you donate time to do things. You’ve got to do it. Everybody I know that’s been successful and all the really wealthy folks are givers. Period.
I just don’t know anybody who doesn’t give back. It’s this whole reaping and sewing thing or karma, however you want to articulate it, but I think it’s really, really important because I don’t see people breaking the rule. If you go out and you give, you tend to receive, and I think that’s important. You’re not doing because you’re going to receive. You do it because successful people, it’s what they do, and it’s also good for society. You could take that 10% and dump it straight into your investing if you wanted to maximize it.
The other side is debt, paying down your debt. Once your debts are gone, you could literally be putting 30% of your take home pay into investing. Here’s how I know it works. There’s a guy, Steve Hogan, he works with Dave Ramsey. I think his name is Steve, but they did this big study of over 10,000 millionaires. The top three categories, I don’t know if you know this, Marc. I’ll put you on the spot. Do you know who the top three professions that were millionaires were out of that group?
No, I don’t.
It’s going to blow your mind. Accountants, engineers and teachers. It wasn’t real estate agents, it wasn’t banking executives or whatever else. When you look at it across the whole, it was some pretty… like engineers make some pretty good money, accountants do okay, teachers, come on. They’re probably averaging about 70 grand a year, but they were making up the biggest categories. Why is that? I look at it and I’m like, I think I know. Engineers are methodical and they follow numbers. Accountants are methodical and they follow numbers, and teachers love what they’re doing and they get into a habit of having money taken out of their paycheck and put aside usually through a retirement plan or something. If they just do that long enough, they magically become a millionaire. That’s all I’m saying with the 70/30 is if you could have it to where you have a different bank account, every time a check comes in, you auto-pay 10% into account number one, 10% into account number two, 10% into account number three, and then you live off of what’s left into account number four.
If that’s all you did, you do that for 20, 30 years, you’re going to be flabbergasted if you put that money aside. If all you did was put it into an index fund like SPY, and all you did is just religiously consistently paid that in there, and it’s 20 years later, you have about a 92% chance of beating all the money managers. You’re going to do better than everybody else and you’re going to have a pile of cash sitting there because the S&P since what 1922 or whatever they have is averaging over 10% return, which means your money’s doubling every seven years. You’re putting money in there. It could be two, 300 bucks a month, it could be 100 bucks a month. You just consistently do it. It’s going to be a pile of money by the time you retire.
Dividend Kings: Decades of Dividend Growth
You bring up an interesting point about the S&P 500. One of the things in your book that I found interesting was the conversation around Dividend Kings. A Dividend King is a company that’s raised its dividend for 50 years straight, right?
50 years or more? Yep, there’s about 25 of them.
Yeah, and I guess that’s a big show of strength from a company that in all kinds of business environments, they are strong enough to not even cut, not keep it the same, to actually raise it every year, but what your study was, if someone took, and I think it was a $100,000 and put it into, and I think this was from 1991, if they put it into the S&P 500, which everyone loves, everyone can identify with then wants to beat and this, you put $100,000 into the S&P 500 in 1991, put $100,000 into the list of Dividend Kings, those 25, and what you’d come out with at the end. I think the S&P 500, that $100,000 would be worth 1.3 million, but the Dividend King portfolio was worth 3.2 million. That’s kind of a testament to how powerful some of these dividend payers are.
It’s the magic of compounding because even when you look at the S&P, it has a dividend yield of I think it’s right around 2.5%ish. Don’t quote me on that, but it’s somewhere just above two. The kings, I don’t know where their total yield is, but sometimes it’s great. The thing is that not only is the stock growing, but the dividend’s growing. If it was 10 cents in year one, and it’s 11 cents in year two, 12 cents in year three, 13 cents in year four and you go fast-forward 30 years, you’re making back in the dividends almost on an annual basis about what you paid for the stock. I think Warren Buffett’s proved this point because he bought Coca-Cola in the 80s, and just go look at the dividend that was being paid out in the 80s and look at it now, and Coca-Cola is a Dividend King. I think it’s been raising its dividend for 56 years thereabouts.
Procter and Gamble, 3M, Federal Realty Trust, if you like real estate, but there’s a lot of different companies on that list that you just know the names, but they’re not sexy. You say Tesla and people are like, I could go up 1000%. I don’t want 1000%. What do I want? Consistent growth for 200 years. I need to have a company that I know has been there, done that, has got the t-shirt, and I’m not just going to do that. I’m going to make money in another way. I’m going to write calls out of the money. Basically short term calls if I want to make a little extra return, and then that 3.2 becomes 4.5, five million.
How Covered Calls Work
Can you walk through an example? Let’s say someone buys 100 shares of Coke – how can they use that to write calls to generate more income?
Yeah. Let’s say that you do Coca-Cola, which I think it’s around 60 bucks or something like that. Let’s say that you buy 100 shares and your purchase price was $60. You might write a $62.50 call for next month, and maybe you get 50 cents, so you’re getting 50 bucks minus might be commission, maybe two bucks or whatever it is, depending on your brokerage house. Sometimes they’re free, sometimes they’re a few bucks. Let’s just say it’s $5. We’ll estimate high, so you got an extra $45. That’s all.
Now, if Coca-Cola jumps up and goes to like $65, you’re going to get not only the $62.50 for your share, but you’re also going to get to keep the money that you got. Let’s say it was 50 cents, so you basically got 63 cents. Worst case scenario, there’s a way to roll out of it and keep extending it, but in its simplest sense, you get to keep that 50 cents no matter what. Let’s say that Coca-Cola doesn’t go above $62.50, but it stays around $60 to $61. Then your option expires. You keep the 50 bucks, and then you sell it again the next month.
You still have the shares of Coca-Cola at that point.
Yes. I have clients that do really well with covered calls. And there’s a guy named Kevin Simpson who does this, and he has about a $7.5 billion fund – it’s an ETF called DIVO. I’m not suggesting your listeners get into it, but he’s a really neat guy.
Real estate is the same thing, except real estate you get an added bonus. If I have $1,000 that I invest in stock, let’s say I bought $6,000 worth of Coca-Cola and I put $6,000 down on a house, I can’t depreciate the $6,000 I bought in Coca-Cola. If I buy a house, I get depreciation. Let’s say I put $6,000 down on a house and I finance 100,000 bucks, so I have a property worth $106,000. I can’t depreciate the land, but I can depreciate it’s improvements. Let’s say I get $70,000 of depreciation that I’m going to take over some time horizon. We can make it shorter. We can make it long depending on whether you know what a cost sag is.
The point is that I could put $6,000 down and I could actually get greater than a $6,000 loss every year if I wanted to. I don’t know of another investment like that, or I could literally invest in something and the IRS says, you know what? Because you invested in that, you’re entitled to a nice big fat deduction, but I didn’t lose any money. I actually made money. Yeah, I know, but we’re going to pretend that you lost money. That’s what depreciation is.
They got really mad at our last president, Trump, because he was able to carry back a bunch of losses on one of his real estate projects. I think it was Trump Tower, and he took back and got all these monies back that he had paid in taxes because they let us carry back real estate losses. He’s a real estate professional, so he can write off against all of his other site types of income. Well, they did that during COVID too. They allowed us to carry back, but most of the time you’re just looking at it saying, hey, I made an extra $20,000 in my real estate and it’s tax-free. I’ll take that action all day long, every day, 24/7.
Is there a way to take advantage of some of those tax benefits that you’re talking about with real estate, like depreciation through listed stocks or stocks, or is it just no, you have to go out and actually take title or purchase the property yourself?
Yep. You actually have to do it. I think that there might be syndications. You could go out and do it, you can have the flow through depreciation. We have passive activity loss rules, and then it’s always going to be dependent on the tax structure, but if you go out into partnerships, you probably could, if you go do syndications, you could, but in the publicly traded realm, when you’re doing REITs and stuff, you’re not. You just have your basis in the stock that you purchased.
Then whatever income flows down.
The good news with the REIT is basically a real estate trust that is a company that’s required to follow some guidelines to operate. One of those guidelines is to pay out 90% of its income every year to the shareholders. If you want to be in real estate without actually buying real estate yourself, that’s a good way to get started because I could buy Federal Realty Trust or any of these public storage there. Yeah, there’s a few that you could do pretty… I’m trying to think of how expensive they are, but Federal Realty Trust, I think it’s maybe 150 bucks a share. You can go out there and buy some of these things and be exposed just with hundreds of dollars and not have to go out there and deal with all the complexities of actually owning the real estate.
The second tier is as you build up assets, you might look at some private placements and doing syndications, but I would really say make sure that you’re an accredited investor at that point. If you’re asking what an accredited investor is, you’re probably not. The credit investor, you’ve got over a million bucks of assets without including your house or you’re making, if you’re married, I think it’s $300,000 a year for three years. If that’s not you, then I probably would avoid the syndications to start, I would just do REITs and I would also be focusing on smaller real estate projects like cash flow real estate in your backyard, or pick places like you’re in New Jersey. Probably not going to find anything that’s going to cash flow there, but maybe you look down the coast and go to North Carolina or some other states. Kansas City, Missouri is a good one. We do a lot in Winston-Salem, North Carolina, so I can speak to that one. You can buy houses for less than a hundred grand that are little cash flow machines making maybe seven, 800 bucks a month.
You do some of that, it’s not horrifically expensive. Sometimes you’re shocked at how inexpensive it is, and you just realize people need a place to live. We are probably five to 7 million units shy underbuilt in the United States. There’s a big demand. People keep saying, real estate’s going to crash. I keep saying, it might go down a little bit, maybe on the coast, but I’m telling you, doing this a long time. Rents aren’t going down. They may be slowing down, but real estate went up 38% in the last three years? They’re saying, oh, it’s going to crash. It might go back down 10%, but that just means that we’re 35% over where we were three years ago. Again, I’d still take that action.
Yeah. Especially if it’s cash flowing. Then you don’t have to worry too much about whether the asset value has a temporary dip or not.
Exactly. Could you imagine having a ticker signal over your house, measuring it’s value every day? You’d come home from work feeling good, and then all of the sudden realize your home is in the red.
If you’re not going to sell your house, you don’t care. I certainly don’t care what my house is worth, I’m not moving. I always tell people that watch their stocks (or real estate) like hawks to quit doing that. Maybe once a year you want to do a valuation, but knock that daily stuff off.
Yeah. I often wonder what actions people would take if they saw a daily breakdown of their real estate and its fluctuations… I think a lot of people don’t realize how much it fluctuates, but it does. Yet, when the S&P fluctuates, investors get scared and sell off…
Isn’t it wild? The best thing you can do as an investor is sit on your hands. I actually did a video on this. I called it a “life hack”: Set your account on auto-pay and auto-invest, lose your password and find it 20 years later.
We have to remember that making money is mathematics, and mathematics doesn’t consider our feelings. What matters is the average gains over a long horizon. If you can stay in for that long horizon, you’ll get results. Just be patient.
Yeah, it’s dangerous to try to time the market. Instead, I’m a proponent of automating your savings and investments, such as through a 401k. If you set up a 401k contribution and don’t look at the account for a year or two, you’ll be surprised how fast the money grows. It really is a testament to compounding and having an automated machine.
Compounding is where it’s at, but compounding over a long time horizon. That was another thing I kept noticing among successful people – they didn’t spend the money when they made it. Instead, they had long-term objectives.
Yeah. Well, we’re just about out of time. Toby, I want to thank you for being on The Agent of Wealth Podcast – you provided a ton of takeaways for our listeners. We’ll link to both of your books in the show notes. How best can someone learn more about what you do?
Look for my YouTube channel. All the content there is absolutely free, and you’ll realize it’s all about reaping and sowing. I don’t ask for a thing in return except that you go out there, be successful and do something good for society.
Great, we’ll link to all that in the show notes. Toby, thanks again for being on The Agent of Wealth. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review on the show.