Saturday, April 24, 2010

Read the Basics and Then Get an Expert...

The book of the week was Easy Ways to Lower Your Taxes by Sandra Block and Stephen Fishman. I picked up this book because paying taxes, like many people, is my number one expense. Because I pay so much into taxes currently, it's only reasonable to try and understand everything I can about the tax code to minimize my tax liability as much as possible.

I have a pretty good knack for understanding different aspects of money and also how to organize my financials in an effort to net as much savings as possible. That being said... I don't have a good understanding of the tax code. I've got the basics down, but the tax code is so ridiculously expansive there is no way to know it all. To put it into an understandable context... The King James Bible has 1,472 pages... and the US Tax Code is 13 times larger with a total of 20,000 pages. So, after reading this book I know that this is one area of finance that I do not have the time or patience to fully grasp. I am in the process of interviewing and finding a good CPA for myself and I think most people would be best served doing the same.

However, even if you are taking the route of using a Tax Professional to handle that aspect of your life, you still need a basic understanding of taxes. If you have this you can fill out your W-4s to suit your needs, buy things in an effort to minimize expenses, and even use children as a deduction at the most opportune times. I am going to jump around and touch just a few tax items, because again, the tax code is so huge I don't even know where the beginning is.

First off- You have deductions and credits. People get these confused all the time. A deduction reduces your taxable income, whereas, a tax credit directly reduces your tax liability dollar for dollar. So if you are in the 28% tax bracket and you have a $1000 deduction, you'll end up with a $280 tax reduction. However, if you have a $1000 tax credit you will have a $1000 tax reduction. Credits are great, but they are few and far between. You can get credits for things like: having your first baby, buying a hybrid car, adding new insulation to your house, and cash tuition payments. The most recent credit that ends this month was the $8000 housing tax credit for purchasing a new home. Credits don't offset the cost of what you are purchasing, but if you are buying something, say a hybrid car, do some research and buy one that will get you a credit. In the case of a hybrid car you would get a $1000 tax credit and you can in a round-about-way reduce the cost of the car by that much.

I have helped people fill out W-4s a lot in the jobs I have had and it seems that few people know how to fill one out with complete confidence. I'll help here... If you are filing single you have a standard deduction of $5,700 or if filing married you'll have a standard deduction of $11,400. Additionally, for your personal deduction you will have an additional deduction of $3,650. If you are filing single you will have your single deduction and a deduction for yourself totaling $9,350. If you have 2 children and are filing as married then you will have a $26,000 deduction. It's all more complicated than it needs to be. What you need to know is for the number you put next you your deductions you'll be counting up each deduction you are going to claim at tax time. I recommend using this withholding calculator from the IRS if you have any questions on whether yours W-4 is correct, and if it's not you can always turn in a new one.

A couple of tax credits that aren't used as effectively as they could be and sometimes are overlooked are the Lifetime Learning and Hope Tax Credits. These tax credits are for cash payments for secondary education. Don't overlook them. Additionally, use them correctly. Some people they that it makes the most sense to use their child as a deduction for as long as possible, even the time they are in school. Well, that's not entirely accurate. If you are paying for your child's schooling the credit can be worth more than the deduction of a child. If your adjusted gross income is $116,000 or above for married or $58,000 or above if you are single you are not eligible to claim these credits. So in this case it would make more sense to not claim your child as a deduction and let them claim these credits. However, if the child doesn't have much income there won't be much of a credit, so again it's something to think about and run past your CPA.

As you can tell from this little snippet of knowledge, the tax code is confusing and massive. It's best to let a professional handle it. They will be able to save you a lot of money in the long run, and ultimately, justify the costs of hiring them, trust me. Additionally, Jackson Hewitt's and H&R Block's do not have professionals... Ask a around and get a real CPA. But as always, arm yourself with some basic knowledge, so you can verify you are working with the right person. This book is pretty good to arm yourself with some basic knowledge, it's very dry, but they do their best to alleviate that with examples and diagrams. If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.

Saturday, April 17, 2010

Conspiracy or Not... Something is Wrong!

The book of the week was Conspiracy of the Rich by Robert Kiyosaki. Yet another book from the Rich Dad series. I am a big fan of all of them, even though some seem to be over idealogical. But sometimes that perspective is exactly what we need.

This book is great and ever since I finished it I have been really fired up. The word 'conspiracy' is really strong, but looking at the way the world works today, it might not be far from correct. I feel that money is silently stolen from me everywhere I look. The two major components of this are: taxes and inflation.

I do not like taxes. I don't think anyone says "I love taxes," but I really really don't like taxes. They hit you every which way... income, sales, property... the list goes on. After you factor in the taxes (not just income) our actual spending money is limited to less than 50%. And that number is increasing every single day. The thing that kills me lately, is the idea of taxing, with an obscene tax, those that make over $250k because they make more money. There are two types of rich people in the US. The hardworking people like doctors, lawyers, VPs, Pilots and so on... These people are working class, they receive a paycheck, they work hard for it. They put in years worth of education to learn to perfect their trade. These are the people that are taxed the crazy high tax-rates. The other type of rich is the person that owns a large company. The large company can specialize in anything from real estate to making bumper stickers. These people pay very little tax because they have the ability to depreciate, use shelters, and deduct everything. The owners of these large companies pay less in taxes than anyone actually working within the company. So we have two sets of rich... the working rich and the company owning rich. Who do you think has the politicians on speed dial. Probably not the doctor or pilot. So while the government issues tax incentives for the company owner they issue tax increases for the working rich. Sounds pretty underhanded to me...

Then you have the US banking system. A system that George Washington and Thomas Jefferson opposed. And that's because the system is seriously flawed and has terrible ramifications (some of which we have seen recently.) Quote from the book- "In 1971, President Richard Nixon changed the rules of money, without US Congress approval he severed the US dollar's relationship with gold." When Nixon did this we were no longer backed by gold, but instead... debt. We started operating our country in terms of derivatives. Our banking system is so off-kilter. Fractional Reserve Banking... When we go to the bank an deposit money, they can use 10 times that much money to loan out. They loan out money they don't even have! And this is why banks have collapsed recently... It only takes a handful of people not able to pay back the invisible money you lent them in order to make the stack of cards collapse. Now,you want to talk about some great government oversight...  We have heard a lot about Bailouts lately. Bailouts are so ridiculous. Only big banks get bailouts... because someone decided they are "too big to fail".. And while the people that have money invested in these banks that are "too big too fail" get bailed out and get every penny of their money back, the people that invested in a smaller bank that collapsed are limited to getting the FDIC payout of $250k. If anyone had more money than $250k in that account... well it's gone. So where do you think these congressmen have money... the ones that decide what banks are "too big to fail"... probably not at the local small town branch. Additionally, The Federal Reserve is not a Reserve and it is not run by the government. In recent years, the Fed is just a printing press. Lately, the Fed is so afraid of deflation they have been trying to fight it with inflation... and so they print.. and print... and print. One day soon it will catch up to us... and I hope everyone is prepared when it does.

Lastly... Education. Why is it that nearly no one just out of high school in the US knows anything about finances. I would venture a guess that only .001% of the US could fill out a balance sheet and an income statement. I think the US school system is severely flawed. It teaches nothing about financial education. In fact, it teaches math, science, art, but not cash flow, capital-gain, and cost-accounting. I leaned a lot about calculus and fetal pigs, but I wish I would have learned about something that would make me money. I am a product of the public school system... with a curriculum approved by government officials. If I went to a upper-end private school system I would have learned about cash flows and capital-gains. I would have had entrepreneurship classes and a specific financial education class. Kiyosaki believes that the public school system is designed to teach people to be workers and ignorant toward financial education. I'm inclined to believe him. We are taught to invest in 401(k)s and go to school to get an advanced degree to specialize our education. Well, it seems if I do that I'll become a doctor and I'll be taxed at a higher rate than anyone in the world.

The book mentions an interview Jon Stewart has with Mad Money's Jim Cramer. Stewart is usually sarcastic and funny, but when Jim Cramer comes on the show he stopped joking around and starting speaking for the working class. Watch the full clip, very entertaining:

Jon Stewart Interviews Jim Cramer
Uploaded by gaijinhito. - News videos hot off the press.

There are two teams.. the super-rich that pay no taxes and have complete understanding of financial systems and the working class America that suffer from the underhanded doings of the first group. And now...I will step off my soapbox. I just wanted to bring these items to light because it is important you understand the other teams offense in order to implement a solid financial defense for yourself. Invest in cash flow properties, sell options of paper assets, own portions of companies and more than anything invest in your own financial education by reading and going to seminars. It doesn't matter how old you are... Harland Sanders started franchising KFC restaurants at the age of 65!

The book has a lot of information. On top of what I discussed here, Kiyosaki discusses what areas you should invest in and other areas of financial education that everyone should be well versed in. If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.

Saturday, April 10, 2010

You Don't Need to Read This Book to Mingle

The book of the week was The Art of Mingling by Jeanne Martinet. I had a first this week... the book I read for this blog was awful. Each page I read made me a little less smart and more and more perturbed. I will explain this very quickly because I feel the need to guard you from prolonged exposure to this book (You may need sunscreen if you decide to read the whole book to avoid getting burned.)

In summation, this book is misleading. I read it under the assumption that it was geared toward helping people master communication within social settings. I felt that if I could grab some good tidbits from this book I could use them to help me (and you) professionally. However, I would put this book in the same category as a Nora Robert's novel or a Lifetime Original Movie. I don't have any problem with Nora or the Lifetime channel, but both have little to add toward a professional repertoire and neither does this book. The book had two main philosophies I disagree with as a business person: Lying and Flattery.

I do not think that lying is ever a good thing. I think integrity is the most important part of being a good business person today. All too often you hear about the Bernie Madoffs and Ted Stevens... and even telling little lies is no way to make it in business. The book says it's a good way to open up communication when you don't know someone or a good way to "get out of talking to someone." Why would you want to have a new relationship that was founded off the basis of a lie? Doesn't make much sense. The whole concept sounds very juvenile...

And flattery... Flattery is basically using lies to compliment someone. Dale Carnegie is a big advocate of avoiding flattery and I am most definitely on his side. If you want to compliment someone because you genuinely like something about them, then I would say go for it. But, if your compliment is insincere and you are using it as a fabled leverage to create a new acquaintance, think twice... we all graduated high school a long time ago...

Many parts of the book were written for a female reader, although the author tries (and fails) to make it for both sexes. If I went up into a crowd of people and say "Excuse me, no one had informed me we had become intimate" (and giggle)... I would probably be shunned. Or... "You look bored, so bored you must be smart, are you smart?"... I'm embarrassed for anyone that would say that.

Here is my tip on mingling with new people... Be sincere with what you say, ask them questions, and be friendly...

Don't buy this book..  I am willing to give away my copy if anyone wants it. And I'll jot a note down to myself, not to trust all the recommendations gives me. If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.

Saturday, April 3, 2010

Creative Thinking Adds Cash Flow!!!

The book of the week was Real Estate 101 by Gary Eldred. The book comes from the Trump University series of books. I love real estate investing because it makes sense in so many ways. There is nothing new about real estate investing. It has made numerous people very wealthy and still is making people rich today. Okay... sure... there has been a lot of people broken by real estate investing too. But it's because they did it wrong. It's people like Eldred and Trump that teach beginners how to invest the right way and how to not lose their shirt.

Eldred likes to look at real estate from an entrepreneurial mind-set. And when I say entrepreneurial I mean being creative in an effort to make profit. So in terms of real estate, you would use that creativity to add value. You can use creativity to market your property using segments, find where your real estate area is headed, and add value to maximize cash flow of your property.

Marketing your property is very important to attract the 'right' type of tenants. There is nothing worse for your real estate career than allowing the 'wrong' people to lease your properties. So how do you get the 'right' person? Well first you have to decide who you want as a tenant. Do you want a college student, a young professional, a retiree, smoker, non-smoker, married, male or female. Once you decide you can start flushing out your strategy for marketing. Being specific is very important. All too often VALS (Values and Lifestyles) are broken into too broad of categories. For instance, there is an obvious difference between different types of college students, but more often than not, an investor will say they avoid renting to "college-students." Well I know from experience that not all college students are the same. In college I treated a property much differently than the cast of "Animal House."

So... for our marketing and property purchasing let's pick a quiet, non-smoking, female, college student with good grades.... What does she want? Since she is quiet, she will appreciate a place that doesn't have noisy neighbors or paper-thin walls, so buy a place that is nicely isolated and has a strictly enforced quiet hours policy.  She doesn't smoke, so we can dictate our leases have a no smoking policy. Being female, she will appreciate security, so you should buy in a safe area, have lots of great lighting and market the proximity to a police station. And you want a college student, so you should purchase a property near a college (duh) and she has above average grades, so (coupled with the fact she is quiet) she probably doesn't need to live next to all the bars in town. These are all stereotypes, but if you use them, you are more likely to attract the tenant you are searching for and the types you aren't looking for will search elsewhere. The "Animal House" crowd isn't real big on living in a place the evicts tenants for getting too loud after 11pm, so they won't even consider living in your complex.

When looking for a property it's not always a great idea to look where there is hype. When you go to the place of speculation, you lose sight of the goal (cash flow) and are more focused on the hype and competition. Investors in these areas will purchase a property that will give them negative cash flows with the expectation the market will turn around and make them boat loads because "they heard so."  If you want to cash flow a property, just look in your own backyard. You know the city you are live and you know where the nice areas are. Right now there are tons of properties for sale. It is a buy's market! Everything is hugely discounted so you have your pick of the liter.

When you are looking in your city for the best property you should look at where the different neighborhoods are going. You may find a great deal on a house because that neighborhood is dying and not being kept up. That neighborhood could suffer in the future years and your rental rates will have to decrease to keep tenants. It is not good to lose money on a property after you have been cash flowing the 5 years previous. However, the converse can also happen. You can analyze an area that is being heavily developed with nice shopping and restaurants. In that case you might see a cash flowing property increase it's return greatly after 5 years because the area has developed into what might be considered "high-end". If you are investing in your own city you should be able to see the trends. Keep your eyes and ears open for what areas are growing and take advantage. Of course investigate all claims and add common sense. Don't turn into a speculated investor that thinks that if you take a cash flow loss for 5 years, you will be making oodles in the 5 years after.... Just keep the goal of positive cash flowing in mind.

The best way to use your entrepreneurial creativity is to add solid cash flowing concepts to your property. There are a many ways to do this, but a couple popular ones include: adding coin-operated laundry, for-rent furniture, and for-rent storage areas. This is a great opportunity to bring dead space to life within a property. Take that larger extra maintenance room and transform it with several two by fours and ply wood into about 20 storage units that you can charge tenants an extra $20 a month to rent out (that would be an extra $4,800 a year in cash flow). If you have a large population of young professionals, add a pick-up and drop-off dry-cleaning service (using a local dry cleaner... a lot of dry cleaners will even do the pick-up and drop-off for you) and add an extra $5 service fee (if you are able to get 20 tenants a month to take advantage of the offer you add an additional $1,200 in cash flow). Both of these ideas didn't take hardly any effort on your end and both have potential for great EXTRA cash flows. The great thing about real estate is that everything that can be done to initiate extra cash flow has been done already. Just do a little research on what other places are doing and replicate it.

This book has a lot of additional concepts that are a little too dull to address tonight, but if you like what I have written so far, I suggest you pick it up. I don't think you would be ready to invest in your first investment property with just reading this book, but I do think it's a valuable addition to your investment arsenal. If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.