AskDong

I’m sure there are better guides to real estate investing out there, but this is my personal two cents in my series about earning money.   What follows are lessons I’ve learned from my own personal experience. I own a 2 Bedroom Condo in the Boston Area which I purchased in 2002 for about 300k. A t the time I put 10% down, and had to piggy back 2nd mortgage for another 10%. I lived in this condo between 2002 and 2006 and had a roommate the entire time. I also ended up refinancing twice.  Below is the cost structure through each refinance as to give some background on the property.

First mistake I made was refinancing for the first time. I shouldn’t have done that. The rate drop wasn’t significant enough for me enough to actually incur the closing costs of refinancing given the possibility that rates would drop further. Most no-closing cost refinances are not actually free. I did it within 7 months, so at least I didn’t reset my length by any significant amount.

I’ve said this before and I’ll say this again if you’re buying a place for yourself when you’re young, it’s best to get a roommate(s).  Especially in locations like New York, Boston and San Francisco where property is so incredibly expensive.  I like living with people so having a roommate never seemed like inconvenience.

Besides the most obvious benefit of having a roommate, rent payments, having roommate can be a great tax benefit as well. Since I rented out 1 bedroom in my 2 bedroom apartment, I was able to treat 50% of the expenses related to the condo as deductible tax expenses. For this reason it was more cost effective for me to charge my roommate a fixed rent that included all utilities instead then splitting utilities. By paying the entire utility bill, I could then deduct 50% as a rental expense.  Additionally I was able to deduct 50% of the condo fee as well. The deduction from the mortgage interest is a wash since one can’t take the same interest deduction for both the personal mortgage deduction and as a rental expense deduction. In net the deductions I was able to take on the condo fee, utilities, and other misc items, resulted in nearly a $5000 paper losss. Of course had I not chosen to rent out a room, I would’ve been able to deduct more personally on mortgage interest and property taxes, but I wouldn’t have been getting rent either.

Rental expenses are first used to offset rental income, in my case the rent from my roommate. Then if you’re an “Active Participant” you are allowed to deduct additional rental losses against up to 25,000 of income from other sources as long as you make 100,000 or less (which gradually phases out at a Modified Adjusted Gross income of 150,000). An “Active Participant” is anyone who owns at least 10% of a rental property and makes active management decisions such deciding tenants. Since I was choosing my roommate, I qualified and was able to use the rental losses against the income from day job while I was playing slum lord to my roommate.

I moved out of that condo near the end of last year, and this is the first year I’m treating my condo purely as a rental property. While I was living in the condo, it was my home first and then investment second. Now that I don’t live in anymore, it’s an investment first and only. Seeing the property purely as investment is very different.
(more…)

Earlier I had posted that I was planning a vacation. I’m much further along in my vacation planning at this point. I have a destination, the U.S. Virgin Islands - I need to stay in the country because I just sent my passport for renewal and haven’t gotten it back yet. I have the flights. I even have accommodations for 6 out of 9 nights. And so far I’m generally pretty pleased with the prices.   I’m paying $541.69 per person for airfare, not cheap, but I had limited flexibility with dates. The 6 nights of lodging so far total only $817.94. That’s mostly because 4 of the Nights, we’re staying at the Maho Bay Eco-Tents in St. John.  5 Star Hotel it’s not, and I’m personally glad for that.  It’s different.  I like different.

I need to book the other three nights and am very torn about what I should do. Originally I planned on booking a resort type of place for the other three nights since I was “slumming” it for the other 4 nights on St. John. The problem is there are only two hotel/resorts on the St. John, the Westin and Caneel Bay.  The reviews of the Westin aren’t great, and Caneel Bay Starts at $475 a night before tax and other fees.  I’m not very inclined to spend $475 a night nor am I inclined to spend $300 a night for a resort that’s gotten lukewarm reviews.  So I sit at my computer undecided about booking more nights at Maho or nights at another campsite like Cinnamon Bay or suck it up and book a few nights at a resort.

So the current budget looks this:

If I were to spend it at a Caneel, all of sudden the committed expenses would be near $4000 which is about thousand more than I want committed at his point. If I opted for the Westin, I’d be a little over $3200 which is a little more than what I wanted to spend on fixed costs but still manageable.  Now if instead I choose to spend more nights at Maho, we would only be at $2600 for total expenses which would leave close to $1400 to spend on the island and still be in budget.  Left to my own devices, I would opt for a longer tent stay, but left to my own devices I probably wouldn’t even be going on vacation. I’d like to treat my girlfriend to a nicer stay, but I question if it’s worth it.  So I turn the question to you, my loyal readers.

p.s. I’ve cleared it with my girlfriend, and we are willing to abide by the decision of the people. We will take the final tally this friday at 5pm, and whatever the will of the people may be, we’ll do.

On the internet, I feel like I come across quite a few people who seem enamored by gold. Not so much the gold itself, but gold as an investment. I personally don’t understand the appeal. I understand the desire to hedge against inflation risk. But is gold really a great inflation hedge? Is it a good investment at all? Other than the fact that Gold has intrinsic value as opposed to fiat money, there’s no reason for gold to appreciate aside from supply and demand issues faster than inflation. Sure, it’s better to hold gold vs cash during an inflationary period, but is it better to hold gold vs. equities as well? My initial gut feeling is no.

First, let’s talk about inflation. I personally think that some people react a bit irrationally towards inflation. Is inflation a bad thing? Yes no doubt about it, inflation is costly and reduces the efficiency of the economy. It’s something the Fed needs to be ever vigilant towards. Beyond just the most obvious “menu” costs (price of printing new price labels), inflation tends disrupt spending decisions in the economy.  The economy functions better when there is price certainty, economic participants are more willing to engage in business dealings knowing that a deal they do today will be priced the same as if it were done tomorrow. It could be argued that steady expected inflation is in itself not bad because if we know it’s 20% every year decisions can be made accordingly. The problem is generally speaking higher inflation rates imply higher inflation volatility. It could be 20% one month and 10% another. When inflation is low (but not deflationary), it stays in a narrow range that is bounded by 0 at one end, and a low percentage like 3% on the other. Inflation also makes holding cash more costly which can further disrupt spending decisions. If a $1 today will be only worth $.50 tomorrow, then I might be inclined to spend that dollar today rather than tomorrow even if I rather spend it tomorrow. This last effect tends to affect the savings rate which has important long term economic consequences. Inflation is also bad because people have negative reaction towards inflation, and they assume the worst, lowering consumer confidence, in turn souring the economy. (more…)

I wrote last week about putting in an order to Berkshire B Shares.  I finally executed that order.  I brought two shares at 3555, it down to 3542.   Not cheap, and I’m not really a big fan of owning odd lots, but given the share price there’s not much I could do to avoid owning an odd lot. 

However, I’m disappointed that I won’t be able to execute this year my whole reason for buying shares of Berkshire- attending the annual meeting on May 7th.  That’s the week I’ve scheduled my vacation.  I have faith that Warren will be around for another year, so my attendance will have to wait till then.

Speaking of shares, I have a question from JF

I recently received shares of a privately held company with which my own employer works closely.  What are the tax implications of this?  Do I pay tax at the valuation given to them at the time, or when I sell them, (if they ever go public or something).  I certainly do not trust my employer or the company to issue me a 1099 or include it on my W-2, so I think I’m on my own, and want to be sure I stay legal, especially with audits on the rise.

In all honesty this question is beyond me.  I’m not particularly familiar with many of the issues here; employer income tax laws and private corporation shares. 

If other readers are more knowledgeable on this matter, please chime in.  That said, this question may better answered by a visit to a good CPA.

Yesterday, I received a letter from the City Boston’s Department of Assessing.  It was thin and non-descript.  I expected the worst as I had gotten many a thin non-descript letter the spring of my senior year in high school.  Still, I eagerly tore open the letter, and was very pleasantly surprised. The city approved my abatement request on my condo.  I was able to lower my property taxes $158 via the 14,000 abatement.  However, net my property taxes are still going up by much more given that they increased my assessment by more than that and I’m no longer eligible for Boston’s residential exemption. I moved out of the condo last September, and notified the city therefore making myself ineligible for the residential exemption that Boston gives home owners who live in their home. Still the abatement helps a little with the profitability (or lack there of) of my one rental property in my real estate portfolio (which is a portfolio of one).  A lower assessment is gift that keeps on giving every year.

I had also applied for the abatement last year and was denied.  This year I was much more thorough. I researched recent sales; obtained photos of comparable condos, and argued my case in much greater detail. I guess it worked and as a result have some reprieve from my total tax bill that would’ve been almost $4000. I have a hard time believing that I pay close to $800 in taxes and condo fees before even factoring the mortgage.   Thanks goes to all my roommates who helped with the burden while I was living in the condo.  It’s easy to gloss over the cost of taxes, condo fees, and maintenance when you first buy a place, but after couple years of paying those costs, they become hard to forget. Renting my current apartment right now seems so pain free. Jack Hough over at Smartmoney makes a strong case for renting which is hard to ignore when bills associated with owning are due.

p.s. If you get a chance, check out my guest column over at LayManAndMoney.