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Sunday, February 26, 2017

Paid Lots of Mortgage Interest This Year? Too Bad.

Tax season is upon us.  Last week, I sat with my Enrolled Agent at her office (I was there to submit all of my pertinent documentation for her to prepare our tax return) and had an interesting conversation about mortgage interest.  She described how unfortunate it is (for tax purposes) to have lots of mortgage interest to report for your tax return.  It basically means you paid a lot of money to the bank for little in return.  Let me explain.

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Many people new to being a homeowner have this misconception about mortgage interest.  They believe all of it is deductible.  They were sold on being able to deduct mortgage interest from their taxes as one of the benefits of owning a home.  And while that isn't a lie per se, it isn't the entire truth either.

First of all, not every home owner is eligible for a tax break from their mortgage interest.  If you don't itemize, you can forget about reporting your mortgage interest.  Why wouldn't people want to itemize if they own a home?  Well, the math may not make sense to do so.  Your tax preparer (that may be you) should know if you have enough deductions that add up past the standard deduction you could otherwise take as part of your filing status.  For example, for married couples who file a joint return, the standard deduction is $11,600.  If all you have is a home with no other personal businesses, your deductions may not add up to this amount.  Therefore, you don't get to itemize.  All that mortgage interest you paid...useless and costly.

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Now to address the other bad news.  Say you do have enough deductions, well, do you honestly think the IRS would want to give you a dollar-for-dollar break on your personal home mortgage interest?  Think about it, you live in that home, why should all of your mortgage interest be deductible?  When you go on a trip as a business owner, you only get to deduct 50% of your food expenses.  You have to eat anyway!  The IRS is a slick machine, logically taking as much of their cut as possible.  So in the case of your mortgage interest, the tax deduction you qualify for is dependent on your tax bracket.

Here's an example.  Say you're in the 35% tax bracket, and you have reported $12000 in mortgage interest.  Well, you only get to exclude $4,200 (35%) from taxation.  That's pennies on the dollar if you're paying attention.  Pretty sad, huh?  Can you imagine those poor bastards who buy up huge properties and are at the beginning of their amortization schedule, paying almost everything to interest.  This is a sucker's game!  In the case above, you may be better off taking the standard deduction, again, depending on your tax filing status.  Look it up!

If you're in a lower tax bracket, your benefit is even less.  For the same amount of mortgage interest from above ($12000), a filer in the 25% tax bracket would only get to exclude $3K from taxation.  Boo!  What does all of this mean?  Well, if you're considering buying a home, you may be better off renting, especially if all you'll have to itemize is your mortgage interest.  If you're a professional working for the Man, owning sounds great, but you better have a lot of other assets.  Like me!

I have three rental homes, and an Internet business along with my day job.  I itemize yearly.  So although I too am paying a butt load of mortgage interest to the bank on my personal residence, at least I get a dollar for dollar deduction on rental income versus my expenses as a landlord.  Moral of the story...buy assets.

If you can afford it, get into a 15-year loan so you pay far less interest to the bank for the life of the loan.  Or better yet, pay your home outright from the start.  If you're not a shrewd and successful investor, putting your spare cash to pay off the mortgage sooner may be the best course of action for you.  Thanks for reading!  If you liked this informative post and want to get more like them, please subscribe below:


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Tuesday, February 21, 2017

Why You're Not Saving Money Even With A Budget

I tried finding the latest figures on the percentage of households that prepare a detailed budget and could only find Gallup's 2013 Poll.  Gallup reported back then that 1 in 3 families actually take the time to write or type up (on computer) a detailed budget.  There are also a large percentage of people that report to keeping their budget in their head (yeah...like this works), and some who scribble some things down on paper, but never get around to finishing.  Let's focus on the households that take budgeting seriously.  How, I ask you, is it possible that even with a detailed budget, most people aren't saving money at the end of each month?
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Today's post is all about the common mistakes people make budgeting.  Sometimes the problem is in the plan:

1.  Unrealistic budget.  Your budget should reflect your lifestyle.  Too many people set crazy parameters that they have no way of maintaining.  Say you've spent about $500 on groceries the past three months. Is it reasonable to budget $300 for groceries all of a sudden?  Not unless you're willing to starve yourself.  $450-$475 is a better goal.  Be mindful of changes to your situation as well.  A budget needs to be pliable.

2.  Complex budget.  Last month I wrote a post on why you should only use three categories for your expenses.  It simplifies budgeting and makes where you can save completely obvious.  This post was so popular it was published at Beatingbroke.com  and apparently brought Shane (the blog's owner) "more traffic in one day that I usually see in an entire month!"  The post was also picked up by RockstarFinance.com and Lifehacker.com.  So should you read it?  Of course!
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Sometimes the problem is not in the plan, but the execution.

1.  Not reviewing the budget weekly.  Yes, you should review your budget every week.  That's four times a month where you are plugging into your head as a result of seeing things more than once, numbers you should not be surpassing.  If you set it, you'll forget it.  If you return to the budget to finalize your expenses at the end of the month, you'll see that you may have gone over multiple limits in various categories.  All because you didn't have a working memory of your limitations on each category.  So review, review, review!

2.  Not updating the budget weekly.  You must set time each Saturday or Sunday to update what you've encumbered already.  This means logging onto your bank account and going through each expense.  Obviously you need to note on your budget how much you got left to spend on things after each week.  If you have a grocery budget of $600 for the month, e.g., this means $150 per week to not go over.  How do you respond if you're at $175 at the start of week 2?  You're $25 over!  So cut back $25 on week 2 to stay on target.

3.  Not adjusting the budget when things happen.  Okay, so you have a set budget but you get a flat tire that cannot be repaired; now you need a new $85 tire.  If you didn't plan for incidentals in your budget, you'll need to adjust your budget to absorb this unexpected expense.  Most people spend the $85, say, "oh well," and go over their budget for the month. What should you do?  Eliminate $85 worth of expenses starting with the easiest place you can trim, like eating out.  Sorry, eat at home twice more (two less night outs), and this should cover the cost of the tire.

There you have it.  There is absolutely no point to doing a thorough budget if the plan is faulty or if your execution is poor.  Budgeting gets abandoned because most people don't have the discipline, conviction, or patience to adhere to parameters in their lives.  It's a whole lot easier to be in debt, then to get out of debt.  Lifestyle habits are hard to change so I suggest you budget wisely and above all keep it simple.  Thanks for reading!  If you liked this post and want to get more like them in your inbox, please subscribe to this blog by entering your email below.
    
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Thursday, February 16, 2017

5 Natural Ways to Teach Your Child About Money

Play is the most natural state a child can be in.  Teaching them anything before 1st grade forcefully or unnaturally will be like herding cats.  Now, I'm not an elementary teacher, but I've taught middle school long enough to know toys are great for introducing concepts and sparking interest in the minds of students.  When I bring out toys for props in my science class, my students' eyes light up.  Many of them (mostly the boys) still like playing with toys despite not wanting to look immature.

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In raising my two children, Rehani (5) and Ajani (3.5), I've used their natural curiosity and love of toys to teach them about money.  As they age, I'll be more obvious and direct in my communication and approach.  If you want to ensure your kids are exposed to money concepts as early as possible, it's best to plant items around the house that they can grab, touch, and perceive as something for grown-ups; an experience with the "forbidden" makes it that much more fun for them.

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So here's what I've done:

1) I've left spare change around the house.  Note, you want to make sure your child is at an age where they're no longer putting toys or foreign objects in their mouth.  While Rehani and Ajani are playing with the coins, I'll join them and ask them to tell me what they're doing.  After saying something like, "We're playing with money," they'll get to asking me what each coin is.  Start with three coins, like pennies, nickels, and dimes.  Have them contrast the colors and sizes.  Have them make careful observations of each coin.  In due time, they'll be able to identify each coin correctly.

2)  I've left my two-gallon plastic spare change container on the floor, and have dropped spare change into it in the presence of my kids.  Yeah, there's been a few times where they've emptied it out on the floor, and I've had to supervise their putting all of the change back inside, but from this the kids have requested their own piggy banks.  They want what daddy has!  Now I had to explain to them why I put my spare change in the container (saving) and this has taught them the importance of putting money away to buy or pay for things in the future.

3)  I've paid my bills at the kitchen table while the kids ate.  They see me writing checks out, and want to do the same.  I've ripped out a few blank checks and have let them go to town doodling on theirs with pens.  I've, of course, explained to them what checks are for, and why daddy must pay his bills.  Whatever you do, don't complain while paying bills near your kids.  They may associate reading (from your statements) as a frustrating and painful act.

4.  I've bought them a toy cash register with accompanying paper money and credit card.  The card can be swiped to cause a "sale" button to pop up.  We go on make believe shopping trips and they fake buy toys they already own.  I act as the cashier and take their money as well as give them their change (plastic coins).  Sometimes I tell them they don't have enough money to make a purchase.  I suggest to them that they put certain things back so they can complete their transaction.  The lesson here: You can't just buy all of the merchandise; you have to be selective and buy things you can afford.

5.  My wife Jessica has "hired" the kids to help her clean around the house.  (I've had the kids help me clean too, but have not paid them for their services).  The kids will want to be around us when we're hard at work completing chores.  We tell them to leave and go play, but they just won't.  So this is when we put them to work with us.  We give them little tasks like wiping the table or countertops.  I have them help me take the recyclables to the bin outside, do laundry, and put folded clothes back.  By paying them a quarter to do these spontaneous tasks, they learn to work for money.  When they get older, we'll give them specific chores to do regularly for an allowance.

Having your kids experience money at an early age is important.  Talk to them as much as possible about money, and don't be afraid to tell them why they can't get a certain toy or why they can't have pizza everyday (too expensive, not in the budget, etc.).  Even if they don't fully understand each concept, you'll have at least introduced them to the vocabulary of money.  The more words they know the better they'll be when starting elementary!  Thanks for reading.  If you liked this post and want to get more like them in your mailbox, please subscribe before you leave.
           
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Saturday, February 11, 2017

9 Tips On How to Buy Land Correctly As An Investment

Have you thought about buying land as an investment?  The saying, "Buy land, they're not making it anymore," has led many people to make huge and costly investing mistakes.  There's plenty of land on this planet, and only a little bit of it is investable at any point in time.  The idea that the U.S. population is growing and there will be a need for empty land in the near future for housing isn't entirely wrong.  But unfortunately, the average American has no clue as to what makes a lot or a parcel a money pit versus paydirt.

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My father-in-law is a builder.  He's built single million dollar homes and developments, and sold them of course, for profit.  Being a successful builder begins with buying the right lot or parcel.  The price of the lot or plot is important, but there are so many more things to consider that aren't so obvious.  And if you don't do your homework, you'll have made one sorry decision, for you'll end up paying taxes on your purchased liability (not asset) for decades!
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Okay so if you're interested in buying land as an investment, you should do so because you're intending to flip it before you die or to build on it immediately and sell the designer home(s).  It makes absolutely no sense whatsoever to buy land if your primary intention or motivation is to one day pass it to your children.  Why would they want to inherit a liability?  Below are things to consider before you purchase any land:

1) Are there established homes or developments in the vicinity (neighbors)?  If you're being sold a parcel out in the desert with nothing but cacti as neighbors, you're either a gambler or a dope.

2) If the lot is in an established community, what are the homes selling for?  Remember, everyone has to make money.  Is there enough there for a builder to make a profit once they take the lot off your hands?  Example: Lot is priced at $150K in a neighborhood with $700K to $900K homes.  The higher the property values the more you can flip your lot for so review the property value trends of the established homes before buying the lot.

3)  If conditions 1 and 2 from above are met, the lot with a view always trumps one without a view.  A city view or a view of a hole on a golf course will always be more desirable than a plot with nothing to entice a buyer.

4) Check the fees to build!  Even if you're not planning on building anything, you have to know how much out of pocket a builder would be to get their permits from the planning department.  Are the fees discouraging, meaning, exorbitant compared to other neighboring cities or counties?

5) Can you even build on the site?  I kid you not, we were lured into physically checking out a residential lot in San Diego city that was priced well below what other lots were going for nearby.  Luckily, we smelled a rat.  We went to the city planning department and discovered you couldn't build anything there.  The realtor had left this information out.  Probably fraud.  Check what the lot is zoned for, and if you can build on it!

6) Is there a well or a water hook-up already there?  Do you know how costly it is for a builder to get water to the property he or she will build?  Very $$$.  So do the builder who will buy your lot (for more) in the near future a huge favor, and buy the lot with water in place.

7) While you're at it, buy a lot with as many public utilities already in place as you possibly can have.  Sewer, electric, gas, and you're on a roll!  Nice job, land investor.

8)  How's the access?  Will a builder need to pave a mile of road to get to the property?  If so, skip it.  By the way, grading is okay so long as you won't have to level off half a mountain.

9) Is there enough space for a home with similar square footage to the established homes in the area.  Tiny homes don't make money for builders!  So check the required setbacks on any property that would potentially be built there.

Alright so the moral of this story is to think like a builder whenever you're considering purchasing land as an investment.  I suggest you create a checklist using these 9 tips and cross them off one by one before pulling the trigger on a purchase.  Thanks for reading!  If you liked this post and want to get more like them on automatic, please subscribe to this blog by entering your email below:
       
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Wednesday, February 8, 2017

Breaking the Rules: A Self-Help Book That Doesn't Get The Credit It Deserves

As a bibliophile, I live to find truly great books to read.  Before purchasing books, usually on Amazon, I read several of the top reviews along with the bad ones.  I know people have tastes that are obviously different than my own so what I look for in the reviews is information about the book's content not already presented by the book's author as part of their description.  If the reviewer provides insight into concepts I've yet to read about, i.e., novelty ideas, then I commit to buying the book.  Nobody likes to read something they've already read somewhere else, right?

I recently discovered Kurt Wright's,  Breaking the Rules, Removing the Obstacles to Effortless High Performance.  When I say, "discovered," I mean it.  This book came out in 1998, and as far as I can remember, I had never heard about it.  If you recall, Jim Collins', Good to Great, came out in 2001 and basically wrapped up all of the book hype for the early part of the new century.  I'm going out on a limb here and say that Wright's, Breaking the Rules, is just as innovative for both individual and organizational improvement.  It may have been ahead of its time and not truly appreciated for the genius that is in these pages.

I mean, c'mon, who would think to say that no human being has inherent weaknesses?  That we all possess strengths, except that some of our strengths are tiny compared to our most notable positives.  That we should focus on building upon our big strengths first, before working on our smaller ones if we are to become high performers.  Mr. Wright doesn't operate whatsoever within the deficiency camp, and when he worked with companies as a consultant as well as with individuals as a mentor, he'd challenge himself to find "what's right" questions, instead of "what's wrong" ones.

What we have here in Breaking Rules...is a paradigm shift and a manual in a single package.  With writing that is more like speaking, the reader feels like the author is coaching him/her throughout the book!  Ever since reading this book, I've learned to find the strengths in my students.  I used to see weaknesses in them, but now I find nothing but strengths.  I've also learned to praise people more often, because what you see in someone works to strengthen what you have within you as well.

There is so much to this book, and I don't want to spoil it.  If you're into looking for ways to improve your life, this is without a shadow of a doubt one book you need to read and have in your library.  The value of this book, now almost 20 years old, is just as much (if not more) as anything coming out the "success" camp these days.  What's sad is that Mr. Wright didn't make the teachings of this book into a brand.  I typed, www.breakingtherules.com, on my web browser, and found a music guy wearing a suit, no socks, and stepping on the keys of a piano.  Definitely not a site about the book.  I also typed, www.kurtwright.com, and landed on Kurt Wright's page alright, just not the Kurt Wright I was looking for.



This book needs to be brought back to life because it's life giving when read.  If this blog post should get to the author, I'd want him to know that he should consider doing a second edition or maybe even seeking the services of Steve Harrison, the man who helped Jack Canfield with the Chicken Soup for the Soul book series.  It's all about the right type of marketing.  I end this post with my score on this book: A perfect 10.  Thanks for reading!  If you liked this post and want more like them in your inbox, please subscribe to this blog by entering your email below:

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Wednesday, February 1, 2017

Why You Shouldn't Be A Contingent Home Buyer Needing To Sell Your Home First

There are many young couples who have been fortunate enough to have bought a starter home, had that home go up in value, and paid down the mortgage for at least 6-8 years.  These couples are ready to step up to a permanent home because maybe they had one or two children and need the extra space.  Or perhaps they want to move to be closer to family, their jobs, etc.  This was my case back in 2005.
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My ex-wife and I had bought a 2 bed, 2 bath townhouse near downtown San Jose.  After only a couple of years, we decided to move to Southern CA (she wanted to be closer to family).  Well, there are some markets where it is possible to gain over $100K in equity with just two years of home ownership: San Jose (Silicon Valley) during a housing bubble.  We sold our townhouse in late May, and moved into a one bedroom apartment in west San Jose.  Though we had to go through the inconvenience of storing our stuff, and moving, it was still a smart financial move.

Knowing we would be needing the cash we got from the sale of our home to purchase our next home, we placed the $80K we got after realtor fees, etc., in a Money Market account.  1031 exchange rules allow you to park your money up to 45 days before you have to identify the property (up to 3 total) you'll be trying to buy next.  You have up to 180 days to actually purchase the property.  So if you don't win a bid, you can keep going simply by identifying the next acquisition target property.

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My ex-wife and I took a trip to So Cal, staying with her family, and shopped around for new homes.  In late July of 2005, we bought the home I'm (she's been long gone) currently still living in.  Now why was it important to have first sold our starter home before making an offer on our second home?  In a hot market, being a contingent buyer makes you very undesirable to home sellers.

1.  Too much risk is involved for the home seller.  The seller has to stress about selling their own home.  Why would they also want to stress about you, the buyer, selling your own home?

2.  Marketing restrictions.  When a seller accepts an offer, they have their realtor list the home as "pending" or "contingent."  Once this change is made, the home listing will no longer show up on many home search sites; this is bad because the seller won't be able to line up back-up buyers who can step up if things fall through.

But even in a regular market, sellers would rather go with non-contingent buyers to get their homes sold faster.  The money is there, and yours as a contingent buyer, isn't!  If you're going to go the route of being a contingent buyer, there are two things you can do to make your offer to the seller a little sweeter and to show you mean business.

1.  Remove the sale contingency on the earnest money deposit and extend your escrow.  Pro: You'll have more time to sell your property.  Con: You give up your earnest money to the seller if you don't sell your property within the new escrow timeframe.  So, to compensate for lost marketing time if you, the contingent buyer, aren't able to sell your house, the seller gets to keep your earnest deposit.

2.  Offer more money than the asking price.  Honestly, if you offer the asking price, and a non-contingent offer comes in also at the asking price, who's offer do you think the seller is going to accept?  Not yours!  Add an additional $2-5K to your offer in a regular market, and even more (talk to your realtor) in a hot market to get the seller to even mind you.

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Yet another thing you can do is begin the selling process of your own home and get near the late stages of escrow.  Make sure your realtor communicates this to the selling agent.  The seller may be more willing to accept your offer knowing your process is almost complete.  It still doesn't hurt to sweeten the deal for them if you truly want the home you're after.  Ultimately, however, you are in the best position to make offers to a seller when you have the cash in hand.  So seriously consider renting an apartment before making offers for your step-up home.  You'll have fewer declined offers and emotional letdowns this way.  A little sacrifice goes a long way.

I hope this has helped you young couples out there.  Thanks for reading!  If you liked this post and want to automate getting more like them in your inbox, please subscribe to this blog by entering your email above or here:
       
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