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investing

Lifestyle, Small Business, Taxes and Investing

Investment Commercial Real Estate Profits and Pitfalls

Residential investment property is forgiving for the most part. Professional managers exist in most markets and except for the very worst of conditions it is possible to fill most apartments even if it is not at a profitable rate.

The number of residential properties available is large and unloading a single family home or duplex is fairly quick and simple. Many economists consider a six month supply of homes on the market a healthy balanced market.

Things get slightly less forgiving when you graduate to multi-unit apartment complexes. There are fewer to select from, they cost significantly more, there are more tenants to manage and it usually takes longer to sell the more expensive buildings. Not as many investors can swing a multi-million dollar deal or even finance one.

It might not be intuitive, but the more expensive the property the more likely it will be purchased as a cash deal. Big buildings carry big responsibilities and risks, but also are coupled with larger rewards.

Generally the rules are straightforward with residential rental properties. Lease contracts are generally standardized in most states and the landlord/tenant rules are clearly defined. The laws tend to protect the tenant more than the landlord. Still, the landlord, if she bought right, should turn a tidy profit.

Real estate investors usually start small, a single family rental or duplex, moving up to multi-unit buildings later. Most landlords stop at the duplex level with maybe a 4-plex or so tossed in for good measure.

The next leap takes courage. Financing a large deal is more difficult. Only a select number of banks are willing to fund a seven figure project. You need good credit, experience and a documented plan. At the end of the day the multi-unit complex is still a forgiving animal in the real estate world.

Then there is the commercial property.




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Early Retirement, Frugal Living, Lifestyle

Get There Before You Arrive

How long does it take to crawl out a hole you dug? How long to formulate a plan? Execute it? Reach your goal? Financial independence (FI) is a goal most people have. Some want it bad at a young age and work toward that goal. Others wait until Father Time ticks closer to the traditional retirement age. Still others get a wakeup call when their body fails in some way.

Before this blog I was a tax Endorsed Local Provider (ELP) for the Dave Ramsey organization. His story resonated with me. I agreed with Ramsey that debt is the acid which destroys the vessel that holds it. Ramsey is fanatical against any kind of debt; I am a bit more moderate in the faith. Still, debt is a problem for many people.

Before FI can be achieved debt first needs to either be eliminated or seriously curtailed for most people. The Ramsey plan is to eliminate all debt and invest in actively managed mutual funds offered by a financial advisor. If you read that last sentence carefully you will begin to understand why I could no longer in good conscious be a Dave Ramsey ELP. Ramsey’s philosophy is right on so many levels and wrong on so many more.

Debt in and of itself is not bad. It’s just a thing. Too much debt is the real issue. Credit card and similar high interest debt is caustic, no doubt. A home mortgage can make all the sense in the world. Even a small, short-term business loan is a positive in many instances. A blanket faith in no debt is something I don’t subscribe to. When very wealthy people borrow for a home or investment it is frequently the right choice. Borrowing $10,000 for working capital in your business instead of selling a profitable income producing investment I will argue is a good call, especially when you consider the tax consequences.




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New Tax Law Changes Dangerous to Your Wealth

On a recent ChooseFI podcast where I was the guest speaker I mentioned the possibility the backdoor Roth and her sister tax strategy, the laddered Roth, could be going away. Many people heard me say it WAS going away. That is false. It is only a proposal at this time.

Because so many potential tax law changes now whispered in the halls of Congress have the potential to cause great damage to those in retirement or working an accelerated program toward financial independence (FI), now is the perfect time to review those with the highest possibility of happening. A word of caution before we begin. These are only ideas floating around Congress. They are NOT current tax law! Not all ideas whispered in the halls of Congress become law, but all laws start as a whisper in the halls of Congress. There is a difference.

Most ideas for tax law changes never see the light of day or are significantly modified before becoming a law. Some ideas become law in a few years, other may take a decade or longer before working through both houses of Congress and signed into law by the President. As we review the ideas now floating around Congress I will give my opinion on the likelihood the change will take place and how soon.

Remember, this is one guy’s opinion. My opinion carries weight because I have decades of experience. I also rely upon sources outside my own viewpoint, such as continuing education courses I’ve attended, The Kiplinger Tax Letter, and calls to several Congressmen. (It should be noted I rarely get to speak with an actual lawmaker. Usually I speak with a staff member. They can still be very helpful with potential tax law changes working through the system.)




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Lifestyle

Increase Your Success at Anything with Warren Buffett’s “20-Slot” Rule

Charlie Munger

The best way to learn is by studying the best. Experience has value as long as it also has a foundation in knowledge. Reinventing the wheel again and again is a fool’s errand and not conducive to personal development.

Studying the best takes many forms. Working for someone at the top of their game is the best way to learn, but the opportunities to do so are limited. Formalized education communicates facts without always presenting the best in your selected field. The number one way to learn from the masters is to study them through intense research of their work. The greatest minds are available like never before. YouTube videos of their speeches and books and news articles on their practices give us massive quantities of material to learn from.

Today we will focus on a simple story shared by Charlie Munger, Warren Buffett’s friend and right-hand man at Berkshire Hathaway.




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Fighting the Profit Train

One of the mantras of the FIRE (financial independence, retire early) community is the owning of income property. With rare exception, investors do it all wrong, taking on extraordinary risk for no reason.

Side gigs are handled the same way. Whether you run a full-fledged business or a side gig, you probably make the same mistake real estate investor’s do.

Americans love to invest at home. There is a tendency for people from all countries to focus their investment dollars in the domestic market. The comfort of understanding the local business climate clouds the investor’s judgment. American’s are the worst. For decades I have recommended 70% S&P 500 index fund/ total market index fund and 30% international index funds for my American clients. This is still weighted heavily toward U.S. companies. The diversification in broad-based index funds with a third of the portfolio in international is a good mix in my opinion. Small business owners and real estate investors rarely make such a sound decision.




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Frugal Living, Lifestyle

The One Guaranteed High-Return Investment You Don’t Own

Every investment, even guaranteed ones, require priming the pump. Before you get paid by your employer you work; before you get paid a dividend or receive capital gains you must invest in the index fund first; before you get paid rent you need to buy the property and prepare it for tenants; before guaranteed government bonds pays you a penny in interest you must first buy the bond. You only get something out if you first put something in. This is true in every part of your life.

I grew up on a farm and after a few years living in town I moved back to the countryside where I feel happiest. Town still has a magical pull. Living in town means everything I need is close by. I can bike everywhere. The need for a car when living in town is minimal. If I lived in town I wouldn’t own a car. For long trips I would rent a vehicle. Uber, my bike and legs would handle 99% of my transportation needs.

Living on a small farm has advantages. The cost of living further from town is offset by the amount of free food, or nearly free food, I get. Raising my own meat (beef, chicken, fish and pork) means I know what is in it. Abundant garden produce means healthy living while the crops are in season. Asparagus in spring, radishes and other fast growing vegetables follow, and apples, apricots, cherries, peaches (yes, peaches in Wisconsin!) and grapes round out the abundant autumn harvest. There is so much good food and it is all free or nearly so. Too bad it doesn’t last all year round.

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Applying Cost Segregation on a Tax Return

A few weeks ago I wrote about the massive tax benefits to investment property owners and business owners who also own commercial real estate using a cost segregation study. Some of you took me up on the offer and now are up for a significant tax reduction. Then the problems started. I didn’t anticipate the large number of tax professionals who didn’t know how to handle cost segregation studies on a tax return.

Before you call your tax preparer bad names, know most tax professionals rarely, if ever, see a cost segregation study in their office. When the rules changed a few years back I doubt 1 in 100 accountants handled their client tax returns correctly as it pertained to the repair regs and tangible property rules. The good news is the changes only required certain actions in the first year of accounting method changes. The bad news is that most tax professionals don’t know how to handle a cost segregation study on the actual tax return when a client comes in with one. Not to worry. Your favorite accountant will spill the beans on how to get it done right.  No picking on your accountant either. This is advanced tax planning and tax law can be miles from tax application at times.

Tax professionals will find this helpful; taxpayers should find value, too. Knowing of a tax advantage is only worth something if you can apply it. There are two major issues surrounding cost segregation studies: tracking the components/elements listed by the study and taking full advantage of the additional depreciation allowed.

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What the Wealthy Accountant Owns and Why

In my last post I discussed how difficult it is for personal finance bloggers to find fresh material. There are a few areas where fresh material is always available: spending reports, net worth reports, and investment reports. My spending is boringly low so I rarely share those numbers. Net worth reports are fun to watch as people go from zero to millionaire; afterwards it becomes bragging and tends to discourage those starting out.

Even though we all have a timeline where we reduced/eliminated debt and built our net worth, each personal story is a marker along the road to financial independence. Readers love these stories because it provides a framework as they reach for their financial goals.

Killing debt is hardest once the habit is established. It seems impossible for those buried in debt to see any light at the end of the tunnel. Hell, they think the tunnel is a bottomless pit. And it can be if they don’t crucify their old habits! Dear Debt is an awesome example of a young woman breaking up with debt and getting her life back. She said it better than I ever could because I didn’t dig the hole as deep in my younger days. And not because I am smarter. I just had fewer opportunities to be stupid. (Note: You are not stupid, Melanie!)

Net worth reports are great for illustrating how fast a nest egg can grow. When you start it looks so small at first. Debt is gone and you amassed a whopping $10,000. Big deal. Well, it is a big deal! Financial independence is gained one dollar at a time. Watching others further along in the process is motivating for some. Here is another young woman well on her way to financial independence at the ripe old age of 26. She will reach FI sooner than she plans. It’s how it works. And here is a blogger who planned on reaching FI in 1500 days and showed up early. How rude! They should have made an appointment first.




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