09
May
2008
Posted by Robert as Investing
The video echoes my arguments for why index funds are more profitable, less expensive, and less stressful than regular mutual funds.
For instance, it emphasizes that, over the long haul, an index fund allows you to keep more of your returns because it costs less to manage. (Remember, it’s not how much you make; it’s how much you keep.)
It also alludes to the predictability of index funds. Mutual funds might have too many holdings in one specific industry and, thus, produce roller coaster-like returns at times, (i.e., you can make a lot of money, and you can lose a lot of money). Index funds, however, are more broadly diversified across the market and, thus, produce returns that avoid the extreme ups and downs of a less-diversified, actively-managed fund.
The video reconciles the debate at the end by stating that investors can combine both index funds and mutual funds in their portfolio. However, it points out that index funds should form the core of your portfolio.
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Popularity: 1% [?]
08
May
2008
Posted by Robert as Books, Real Estate
However, sometimes those four deductions aren’t enough, and you might have to pay some taxes on your rental income.
But what if you can’t stand taxes? As an employee, you had no choice: you had to give Uncle Sam a cut of your paycheck. But now you’re a real estate investor. This is your business, and you know that, with a business, you can do some creative things to lower your tax burden. And, here, you’re determined not to pay taxes. Are there, perhaps, other deductions you can claim?
You bet!! There are many other deductions you can claim that will probably help you wipe out your tax burden altogether and even claim a loss on the property. In either one of these cases, you would pay zero taxes.
You can find these other deductions in Stephen Fishman’s Every Landlord’s Tax Deduction Guide
In addition to mortgage interest, property taxes, depreciation, and repairs and maintenance, Fishman identifies the following 8 additional tax deductions you can claim for a rental property:
1) Insurance. The premiums you pay for the insurance on your property are tax-deductible. This deduction covers all types of insurance, including fire, theft, flood and landlord liability insurance. Heck, if you employ anyone full-time (like a property manager) and provide health insurance and workers’ compensation insurance, you can even deduct the cost for that, too!
2) Losses. You can deduct any losses your property suffers from a casualty or theft. For example, if a fire, flood, or hurricane damages or destroys your property, you can claim a deduction for all or part of the loss. (You can’t deduct the entire cost of the property that is damaged or destroyed.) However, I believe the losses need to be covered by insurance.
3) Interest. In addition to the mortgage interest deduction, you can deduct interest on credit cards for goods or services you purchase for the rental property. Not a bad deal.
4) Home Office. If you handle and oversee your rental properties from home, you can deduct the expenses associated with the room or space in your home that you use as a “home office.” You can do this whether you own your home or rent.
5) Employees. You can deduct the wages you pay (as a business expense) to anyone you hire to perform services for your property. Employees covered by this deduction include property managers and independent contractors (such as handymen or repairmen, landscapers, engineers, plumbers, etc.).
6) Local Travel. If you drive anywhere, and that trip is related to your rental property, you can deduct the expenses of that trip. For instance, if you drive to one of your apartments to meet with a property manager or a tenant, or if you drive to your lawyer’s office to meet with him or her about the property, you can deduct the travel expenses related to that trip.
You can either (a) deduct the actual expenses (gasoline, maintenance of vehicle, repairs) or (b) deduct a value calculated from the standard mileage rate (approximately 50 cents per mile). Thus, if you travel 15 miles: $0.50 x. 15 miles = $7.50. Obviously, you should choose the number that is greater (total of gasoline, repairs, etc. or the mileage number) in order to claim a bigger deduction.
7) Long Distance Travel. This deduction includes overnight travel that is related to your rental property. Airfare, hotel, meals, rental cars and any other related expenses qualify for this deduction. For example, if you live in New England and travel to Miami to meet with a tenant who lives in a property you own in Miami, you can deduct almost all of the expenses associated with that trip. Of course, you should keep records of these trips and related expenses to back up the deductions you claim.
8) Professional Services. These are fees that you pay attorneys, accountants, property management companies, advisers, and any other professionals that assist you with your rental property. Remember that these services must be related to your rental property. These fees are classified as operating expenses.
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Popularity: 4% [?]
07
May
2008
Posted by Robert as Real Estate
I previously explained how to generate cash flow from real estate. Once you own a rental property (like a house or an apartment), and once you have passive rental income coming in on a monthly basis, you don’t have to worry about the taxes you’d have to pay on that income because you can probably eliminate most of it.
[Disclaimer: The following is not intended as legal advice or accounting advice. Consult your own attorney or accountant to confirm that you can claim the same deductions on your rental property.]
A Landlord’s Deductions
There are four main tax deductions you can claim as the owner of a rental property. They are classified as rental expenses, and they reduce the amount of your taxable rental income. The four deductions are (1) mortgage interest, (2) property taxes, (3) depreciation, and (4) repairs and maintenance.
1) Mortgage Interest
Obviously, this is the interest on the mortgage you received from the lender to buy the property. It can be a hefty amount on a 90/10 or 80/20 mortgage. The beauty of this, however, is that the tenant is the one paying the interest (via his or her rent payment). But YOU, not the tenant, get to claim the deduction on the interest.
2) Property Taxes
Same goes for property taxes. The taxes assessed by the state on the property you own are paid by the tenant (via his or her rent payment). And YOU get to claim the deduction.
3) Depreciation
This is where it gets juicy. You can deduct a portion of the cost of the property over several years. This depreciation breaks down into two parts:
(a) Depreciation of the property itself (not the land) - This includes the structure (the walls, roof, etc.).
(b) Depreciation of appliances, furnishings, and improvements - This includes refrigerators, ovens, dishwashers, furniture, etc.
This is almost like a guaranteed deduction every year because all of these items depreciate constantly over time.
4) Repairs & Maintenance
You can also deduct the full cost of repairs and maintenance performed on the property as long as they are ordinary, necessary, and reasonable. These repairs include all the things that you normally hate to do as a homeowner: fixing leaks and broken windows, re-painting, fixing floors, plastering, lawn care, pest control, etc.
Once you deduct these expenses, you might be able to wipe out most, if not all, of your taxable rental income and leave just a small amount of income on which you’d have to pay taxes.
It’s important to realize that nowhere else can you earn an income and get to pay almost zero taxes on that income.
You Can Even Report a Loss
At the end of the year, if the rental expenses (the cost of the items above) for a given property exceed the rental income, most landlords can report a loss on their tax returns of up to $25,000.
How Can Uncle Sam Allow You to Get Away With This?
The answer is simple. The tax laws are designed to encourage this type of investment because it provides affordable housing to people who can’t afford to buy. In general, the tax laws encourage investment and entrepreneurship and penalize employees and their earned income.
You’re really not getting away with anything. You’re also not stealing money from anyone. These deductions represent a perfectly legal way to reduce your tax burden as a real estate investor.
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Popularity: 5% [?]
06
May
2008
Posted by Robert as Employee Life, Ramblings/Miscellaneous
But then . . . the 11 o’clock hour hits, and I start to slow down. I lose concentration. The effects of the cup of coffee I had earlier have worn off. I start surfing the Internet. I get tired and yearn for the days when I used to sleep until noon.
When I eat lunch, however, I regain some energy. I take a 15-minute break to eat and relax. Then, when I get back to work, I find myself more productive. I rifle through more research and writing. I read faster. My thinking is sharper. I’m a machine.
But then . . . around 3:30 p.m., I lose it again. I break down. My mind wanders. I lose focus. Heck, I start wishing I could take a nap.
I think that, at best, I generate only about 3 to 4 hours of high productivity each day.
What is wrong with me??
8 Consecutive Hours of Work Are Impossible
Nothing is wrong with me. And if this has happened to you, don’t be ashamed. Seriously, how often have you spent 8 consecutive hours working on a business project or side task that involves mental analysis and creativity? I mean 8 consecutive hours without allowing your mind to drift off somewhere else.
If your answer is “never,” then you’re not alone. We humans lose the ability to concentrate or apply 100% focus on something within just a few hours.
Different Cycles of Productivity
We do not maintain a constant level of productivity throughout the day. It’s physically and mentally impossible. Rather, we alternate between periods of high mental productivity and low mental productivity.
Office-Related Jobs
These concepts probably do not apply to jobs involving manual labor because that type of work doesn’t involve or require significant mental analysis or creativity. When I was a stock boy at the local grocery store, I never had a problem stocking grocery shelves for 8 straight hours because the work didn’t require much thinking. (I am not saying these kinds of jobs are easy. They simply require different skill sets.)
In jobs that don’t require physical labor and, instead, emphasize mental acuity, 8 consecutive hours of high productivity are impossible.
Why Employees Hate Their Jobs
This obvious, but rarely discussed, problem is the single greatest reason why the majority of office employees hate their jobs. They are forced to be there from 9 to 5 every day regardless of their level of productivity.
If employers allowed their employees to go home during their low productivity cycles or otherwise engage in alternative activities, people would be a lot happier. Moreover, if employers allowed their employees to work from home, employees would be happier because they would be able to structure their day around their high productivity periods.
For example, they would work from 8 a.m. until 11 a.m. Then they can take a break. Exercise. Eat lunch. Maybe they can resume work around 12:30 p.m. and continue until 2 p.m. Nap time from 2 p.m. until 4 p.m. Then work from 4 p.m. until 6 or 7 p.m.
If employees could structure and balance their days this way, there would be less complaints.
Resistance From Employers
Nevertheless, employers are generally unwilling to acknowledge that the 8-hour work day is antiquated and inefficient. They somehow think that it’s productive to trap tired, unfocused, and unproductive employees in office purgatory for 8 hours every day.
(And they lose money by paying employees for 8 hours of work when, in reality, they only generate about 4 to 5 hours of good, quality work product.)
Motivation to Become an Entrepreneur
This problem is one of the main reasons for becoming an entrepreneur. Financial freedom is obviously a major incentive for starting your own business. But the freedom to structure your day around your individual periods of high productivity is more valuable than you think.
As an entrepreneur, you don’t have the Man telling you that you have to work 8 consecutive hours per day in some depressing office or cubicle. Instead, you can build your own business and structure your day around the times when you work best. You can get the most out of yourself when you’re most productive and focus on energy-recharging activities when you’re least productive.
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Popularity: 7% [?]
05
May
2008
Posted by Robert as Saving Money
If you packed a lunch for work instead of buying lunch, you could save approximately $1,000 per year. I pack a lunch and take it to work every day. I would rather save that money and use it for something more productive….like a business or investing.
I stated in an earlier post that the most significant roadblock to starting a business or maintaining a business in its early stages is the lack of money. Very few people have the money required to start a business. Whatever the case, starting a business can cost anywhere between several hundred dollars and several thousand dollars (and sometimes tens and hundreds of thousands of dollars). This is a problem for many people because they do not have thousands of dollars, or even several hundreds of dollars, lying around.
However, you CAN save a significant sum of money by cutting back in certain areas and saving over time. If you identify several areas in your life where you can save money (such as money spent on clothes, electronics, cars, or eating out), and if you pledge to save the money spent in those areas, you will rapidly accumulate the seed money necessary to start a business.
Packing and bringing lunch to work is a great way to save money. Let’s take a look to see how much money you can save in one year by packing a lunch.
Let’s say that going out to lunch during a typical work day costs about $5 to $7. Let’s average that out to $6 per day. Per week, that amounts to:
$6/day x 5 (work days) = $30.
Thus, it costs $30 per week to buy lunch.
Per month? $30/week x 4 weeks = $120.
It costs $120 per month to buy lunch. (That’s a cable bill for some people and a little less than a car payment for others.) 
How about per year? $120/month x 12 months = $1,440.
It costs approximately $1,440 per year to buy lunch. Whether that seems like a lot or a little, it nevertheless is a significantly useful sum of money.
Now let’s figure out how much it costs to pack a lunch.
To analyze this, I will use the traditional turkey sandwich as the lunch staple. Let’s also throw in a fruit (apple? banana?) and a soda to round out the meal.
Let’s calculate how many days of packed lunches we need. There are 5 work days per week. For numbers’ sake, let’s go with 4 weeks per month and 12 months per year (without taking holidays and days off into account).
Thus, there are 20 work days per month (5 work days x 4 weeks), and 240 work days per year (20 work days x 12 months). Thus, we need 240 days of packed lunches.
As I mentioned above, we were going to have a turkey sandwich, an apple/banana, and a soda for our packed lunch. For the turkey sandwich, we need bread, turkey, mustard (I can’t stand mayonaisse), and cheese. Thus, the items we need are:
(1) bread, (2) turkey, (3) mustard, (4) cheese, (5) apples/bananas, and (6) soda.
Per day, we need 2 slices of bread, 3 slices of turkey, 1 serving of mustard, 1 slice of cheese, 1 apple/banana, and 1 soda.
Per year, we need 480 slices of bread, 720 slices of turkey, 240 servings of mustard, 240 slices of cheese, 240 apples/bananas, and 240 sodas.
Bread: A pack of sliced bread costs, on average, about $1.50 and contains 20 slices. For the year, you will need about 24 packs of bread. The cost is 24 packs x $1.50 = $36.
Turkey: A pound of reasonably priced deli turkey costs about $5.00 and contains approximately 25 slices. For the year, you will need about 29 pounds of sliced turkey. The cost is 29 pounds x $5.00 = $145.
Mustard: A container of mustard costs about $2.00 and contains approximately 90 servings. For the year, you will need about 2.5 containers of mustard. The cost is 2.5 containers x $2.00 = $4.50.
Cheese: A pound of reasonably priced Swiss cheese costs about $6.00 and contains approximately 16 slices. For the year, you will need about 15 pounds of sliced cheese. The cost is 15 pounds x $6.00 = $90.
Apples/Bananas: An apple costs $0.59, and a banana costs $0.29. Assuming you bring an equal number of apples and bananas throughout the year, averaging the price of both equals a cost of $0.44. For the year, you will need 240 apples/bananas. The cost is 240 x $0.44 = $105.60.
Soda: A 12-pack of Coke costs about $3.00. For the year, you will need 20 packs of Coke. The cost is 20 packs x $3.00 = $60.
Alright, let’s recap. Our total cost for packing lunch is as follows:
$36 (bread) + $145 (turkey) + $4.50 (mustard) + $90 (cheese) + $105.60 (apples/bananas) + $60 (soda) = $441.10.
Thus, it costs $441.10 per year to pack a lunch and bring it to work. Recall that it costs approximately $1,440 per year to buy lunch. Do the math, and you will see that you are saving a significant amount of money:
$1,440 - $441.10 = $998.90.
By packing your own lunch and bringing it to work, you will save $998.90 per year, or about $1000 annually!
With $998.90 in hand, you can drastically improve your business. For instance, you can pay a web designer $500 to design a professional website. You could spend about $100 on business cards and targeted mailings to promote your business. You could spend part of the money on a professional to help you with search engine optimization. In essence, it is money that you saved and can use in any number of ways to start, maintain, improve, or grow your business.
Imagine if you picked 4 or 5 other areas in which you could save around $1,000 per year. If you did that, you could save around $4,000 or $5,000 per year! Rather than spend that money on assets that do not produce income, you would be investing it in a business that could produce high returns for you in the future.
It might seem like a drag to make your own lunch every day, but, in the end, it will pay off handsomely. And your heavy pockets will help you feel better about it.
Well, it’s almost lunch time for me. I’m going to go eat my turkey sandwich.
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Popularity: 16% [?]
04
May
2008
Posted by Robert as Recaps
The items I’ll be recapping and documenting today are (1) the previous week’s posts on this blog, (2) any guest posts, if any, that I submit on other blogs, (3) the most interesting posts from the blogs of my top commentators, and (4) any other blogs that linked to this blog or featured one of my posts.
This Week’s Posts
On Monday, I explained how you can make money by investing in real estate tax liens.
On Tuesday, I debunked the theory that money is the root of all evil and is, instead, a means to an end.
On Wednesday, I published an interview with The Social Millionaire.
On Thursday, I wrote about how you can become a seasoned real estate investor and make a lot of money by attending the Nouveau Riche University.
On Friday, I talked about why greed can be a good thing.
Finally, on Saturday, I looked at why the concept of working your whole life and then retiring ultimately does not work.
Posts From Top Commentators
Anca just started a new blog called Flip-Flop Money. It has a great design, and her first post analyzes the top ten Technorati blogs.
Flimjo Love (Blogs That Link To This Blog)
Chris over at Domenica Weekly linked to my guest post at Alex Shalman’s blog about 10 inspiring quotes from Ernest Hemingway’s novels.
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Popularity: 7% [?]
03
May
2008
Posted by Robert as Employee Life
I spoke to Beatrice and got to know her, and her story illustrates why the traditional process of working until you’re 65 and then retiring just doesn’t work.
The Career
Beatrice worked here at this firm for years. She was best known for bringing around Cuban coffee to whoever wanted a cup. She followed through on this routine every day, and I don’t remember a morning when she didn’t stop into my office and offered me Cuban coffee.
This is how our work lives progress. (Well, the verb “progress” isn’t quite right because there really is no “progress” unless you include the countdown towards the arbitrary retirement age of 65.) We wake up every morning, go to work, and perform the same tasks over and over again.
It’s like Groundhog Day. You lose your identity, and your “work” becomes you. You lose yourself in mindless, repetitive tasks that mean less and less the more they are performed.
Retirement Day
Then comes retirement. Beatrice retired, and on her last day, everyone at work threw her a going-away party. There was cake and food. There were speeches. There were acknowledgments. There was crying. Beatrice exited on a wave of emotion. It was a great day for her.
The life of an employee is supposed to culminate in this event. Everything you have worked for your whole life is for this moment: retirement. Now, at 65 (or 66, or 67, etc.), you can enjoy the rest of your life (as humorous as that might sound). Beatrice was in her mid-60s, and she said she was looking forward to all the free time she was going to have.
Retirement
The week after her final day at the firm, Beatrice and her husband decided to jump-start her retirement by traveling to Europe for a couple of months. They toured every country they could. France, Spain, England, Portugal, Greece, Italy, etc. They had the time of their lives.
They saw every important site. They ate until they stuffed themselves. They drank wine. They stayed in great hotels.
And then . . . they returned home.
The Vacuum
Beatrice found herself at home one day a couple of months after their return from Europe. It was now 4 months since her retirement. She had trouble sleeping past 5 a.m. It was difficult not to make a huge pot of coffee like she had for 30-35 employees per floor all those years. She couldn’t sit still and watch television or read a book.
Her husband was at home with her, but she couldn’t get used to talking to him for long periods of time. Beatrice didn’t know what to do for lunch. For years, she would bring a sandwich for herself. Now, however, the refrigerator had too many opportunities from which to choose. It was confusing for her. It was also too quiet during the day. Nothing like the hustle and bustle of a busy work environment.
By about 1 p.m. in the afternoon that day, she was so antsy that she couldn’t stay inside the house. She went outside for a breath of fresh air. Her mind was cluttered. She couldn’t think clearly and understand why she couldn’t just relax. Finding things to do was a never-ending problem. She couldn’t focus on one activity or a variety of activities to engage in to pass the time.
She was becoming annoyed with her husband. But Beatrice couldn’t figure out why. The more she thought it through, she realized that only one thing could fix this problem. Only one decision would quell her anxiety, alleviate her boredom, and help her be more tolerant of her husband.
She decided she needed to go back to work.
Return to Work
I remember seeing Beatrice her first day back. She popped into my office and offered me Cuban coffee. She explained why she had returned to work. “Boredom,” as she described it, forced her to come back.
But she was glowing. She looked relaxed, and she spoke with purpose. It was as if she was finally home.
I can’t explain in two sentences why Beatrice had to return to work. I’ll leave a more extensive explanation for a future post.
But for now, it’s best to say that she felt empty upon retiring. All she had known her whole life was her job. Performing at work was her purpose each and every day. When retirement removed that routine from her daily life, she felt lost and didn’t know what to do. She became like Brooks from The Shawshank Redemption. Returning to work–the most significant identity she had known for the past 40 years–was the only medicine that would cure her.
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Popularity: 7% [?]
02
May
2008
Posted by Robert as Investing, Ramblings/Miscellaneous
After writing that post, I thought about movies and where I could find a vivid illustration that would turn these familiar “money is evil” concepts upside down. After some searching, I found the perfect scene from a classic movie.
The scene, of course, is Michael Douglas’s famous “greed is good” speech at a shareholder meeting in Wall Street
Bud is caught in the middle of this tension, but he pitches his dad’s company to Gekko with a plan to save it and help all of themselves get rich. Things get hairy from there in a series of double-crosses best left for watching the movie.
But the real juicy part of the film is Gekko’s speech before a group of shareholders where Gekko utters the now-famous line, “greed, for lack of a better word, is good.” The speech offers a glimpse into the philosophy and mindset that drive people like Gekko.
Greed can certainly be bad, particularly in business. When greed leads to embellished balance sheets and engineering an inflated stock price, it’s not very good. (In fact, it’s just not bad. It’s illegal in those circumstances!) However, greed takes on this bad form when the sole focus of it becomes money. But if you view money as simply a means to an end, and that end result is something that benefits society, greed becomes a good, healthy euphemism for wealth and success.
This is why Gekko’s speech is so enticing. Gekko suggests that greed–even a very ruthless form of greed–can drive inefficiencies out of corporations and the market. According to Gekko, when greed cuts fat from corporations, it increases profits and creates overall market success.
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Popularity: 10% [?]
01
May
2008
Posted by Robert as Real Estate, Resources
People often wonder how they can learn to invest in real estate and make money from it. It’s not like they teach this stuff in school. Other than a multitude of books on the subject, there really never was a great centralized resource for an education in real estate investing.
Online Real Estate School
Recently, however, I came across Nouveau Riche University, an online real estate school. Nouveau Riche educates its students on how to achieve wealth through real estate investing. It offers an array of options that help ordinary individuals become seasoned real estate investors. In particular, Nouveau Riche has three very valuable features.
Colleges
First, Nouveau Riche offers its very own “Colleges,” which are week-long instructional sessions held in different locations across the country. The next College, for example, is in June, and Nouveau Riche offers a College session every other month.
Two important features of these Colleges are (1) you can choose from different tuiton packages; and (2) you can select the courses you want to take and when you want to take them. In other words, you’re in control of what you want to learn and can customize your education. (Contrast that with traditional schools, where you generally have no control over what a teacher inculcates you with.)
Home Study
Second, if you don’t have time to attend a Nouveau Riche College, you can study on your own schedule using Nouveau Riche’s Residential Real Estate Encyclopedia (the R2E2). The R2E2 is a comprehensive resource that contains 15 volumes of information regarding real estate investing.
It covers everything and anything you can think of, including incorporating your real estate venture, buying and fixing up properties, ra
