Saturday, April 21, 2018

My Worst Investment Ever -- Part I

     I've made some bad investments in my life. But the worst? It was one I made in the 1980s, soon after my daughter was born.

     A friend of mine at work had what we now call a side hustle. He invested in condominiums. He owned a rental unit in New York, and he bought and sold a couple of condos in Florida. He purchased one when it was still on the drawing boards, then sold at a profit even before it was built.

     It sounded pretty simple to me. I asked him for advice, and he gave me some tips. He told me to buy a one-bedroom unit, because they are the easiest to rent.

     I found a condominium complex in Connecticut, which to me seemed a better idea than buying in New York. Condos in Connecticut were less expensive. And at the time there was no income tax in Connecticut, so when I sold (at my big profit) I wouldn't have to pay any state tax. I thought: this should be a great investment; it'll pay for my daughter's college education when the time comes.

     So I bought a one-bedroom unit. An older woman rented it from me right away. She paid her rent on time, and aside from calling me up now and then to come and fix something, she was a perfect tenant.

     The year after I'd bought the condo, units like mine were selling for $15,000 or $20,000 more than what I'd paid. This is great, I thought. Easy money. It'll take care of my daughter's tuition, just like I figured.

     The problem was (looking back), the year after I bought my condo was the peak of the local real-estate market. Prices flattened out, then went down, not to fully recover until the late '90s. By then I had the place rented to someone else -- a divorced mom with a young daughter who, it turned out, had trouble collecting her child support, which meant I had trouble collecting the rent.

     I tried to sell the condo in the early 2000s; but with no takers I ended up renting it again -- but not before sinking several thousand dollars into new carpeting, a new dishwasher, and fresh paint.

     My new tenants were Philip and Deborah, a nice married couple. What I didn't know was that she hadn't exactly told me the truth about her job, and they were soon to be getting divorced, and so whenever the rent was late, and I talked to Deborah, she told me to talk to Philip. And whenever I talked to Philip, he told me to talk to Deborah.

     They went three months without paying rent, just making all kinds of excuses. They finally came up with most of the back rent, only to fall behind again. I ended up driving over to the condo every month to collect the rent, sometimes in cash, sometimes a hundred or two short, because I knew if I left it up to them to send me a check, it would never arrive.

     But what was I going to do? It's a long and expensive process to evict a tenant. And besides, I'd feel like a real heel trying to do that to someone.

     To add insult to injury, it was about this time that the condo complex voted through an assessment for a major renovation project. So even as my tenants were stiffing me for rent, I had to raid my savings account to pay the special assessment.

     Meanwhile, Philip had the temerity to complain about the upstairs neighbors making too much noise. There was a dispute that ended up with me having to attend a disciplinary meeting of the condo board. Finally, Deborah moved out. A friend of Philip's moved in. They did better on the rent. But when I told them I wanted to put the condo up for sale, they left in a huff. Which was, actually, a relief.

The heart of my condo
     I had the unit on the market for three months. No sale. By this time, despite the new windows that came with the renovation, the place looked pretty shop-worn. But I was able to rent it again, on a one-year lease. Then the next year, in 2016, B and I moved in. We spent $20,000 fixing up the bathroom and kitchen, and installing a washer/dryer. And then, finally, last year we sold the place.

     It went for $148,000. After I paid the lawyer and real-estate agent and the transfer taxes, and deducted the special assessment I'd paid and the $20,000 I'd just put into it, I ended up with $100,000. I'd paid $90,000 for it back in the 1980s. So I had a $10,000 profit to show for my 30 years of effort.

     And now (this is why it's on my mind) I'm paying $8,000 in Connecticut state tax. (Yes, of course, Connecticut instituted an income tax in the intervening years.) And I also owe a little over $20,000 in Federal tax on the sale. So after taxes, I'm really taking a loss.

     To be honest, when I bought the place I took out a mortgage, which I paid off over the years from the rent I received. And the reason I owe so much tax is because I depreciated the unit over 20 years, saving myself probably about $1,000 a year in taxes.

     Still, $10,000 for 30 years of work? For the time and trouble it took me, I was making less than minimum wage.

     I know other people who have made good money in real estate -- my old friend, for example, who last I heard is living in a luxury condo in Chicago. I have a golfing buddy who bought a house in Florida during the 2009 recession. It's now worth twice what he paid for it -- and more importantly, it's only because he grabbed a bargain back in 2009 that he's now able to afford to spend his winters in Fort Myers.

     But me? Maybe I just don't have the savvy to buy and sell at the right time. Maybe I don't have the temperament to be a landlord. My real-estate adventure was . . . well, it wasn't a complete bust, but it sure wasn't worth the time and aggravation.

     The lesson? Investing in real estate may be for some people -- people who are smart, and perhaps lucky, and who have the mind-set to be a landlord. But it's not for everyone.

     So was my daughter able to go to college? That's a topic for my next post.

Friday, April 13, 2018

The Truth About Taxes

     The deadline for filing taxes is usually April 15. This year April 15 falls on the weekend so the deadline is pushed to the 17th. This coming Tuesday, in case you've forgotten.

     In honor of tax day I thought I'd revisit some thoughts I've had before on the truth behind the tax code -- a look at what kind of behavior the government encourages through the tax system, and what kind of activities it actually penalizes.

     Most people do not do their own taxes. They throw up their hands, decide it's too complicated and run to an accountant or H & R Block. The IRS also offers a Volunteer Income Tax Assistance program, typically through libraries or community centers, that gives free tax help to people making less than $54,000 a year. There's also a Tax Counseling for the Elderly program offering help focused on pensions and retirement-related issues.

     All this is convenient, of course. But when you rely on someone else to do your taxes you get no understanding of how the tax code really works -- and what it can do for you, or to you. Meanwhile, a lot of people use electronic services such as Turbotax. This is kind of like doing it yourself, but the electronic process still does hide some details of the tax system and how they affect you.

     I have always done my own taxes -- except for a couple of years when I tiptoed into an accountant's office and found out they don't necessarily do a better job, and they charge you an arm and a leg for the service.

     While it does take some time, and the process is not entirely painless, doing your own taxes can provide an educational experience. I'm not talking about practicing your arithmetic skills. What I mean is that you find out what the government is really encouraging you to do (despite what it says) and what it really penalizes. In short, you find out how the world works.

     Here are ten lessons I've learned doing my own taxes. 

     1. The Federal tax system penalizes workers. Not only do you pay the highest rates on income you earn, but you also pay Social Security (aka payroll) tax of about 7% on your salary. Your employer pays an additional 7% -- which means, at least theoretically, they could pay you 7% more if they weren't giving that money to the government. But wait . . . the government likes you if you make a lot of money -- after a worker has crossed the salary threshold of $128,400 a year, the government exempts the rest of earnings from the payroll tax.

     2. Invest in the stock market. Some of the money you make from capital gains -- the profit from selling a stock for more more than you bought it for -- doesn't get taxed at all. The rest is taxed at a lower rate than the money you make on your job. Most stock dividends are taxed at a lower rate as well. 

     3. You're a sucker if you have a savings account, or buy a bond. The interest rate you receive from a corporate or government bond, or a regular savings account, is as low as it's been in decades. It's below the rate of inflation, which means you are actually losing money. The IRS doesn't care. It taxes the little bit of interest you earn at its regular rate, meaning you lose even more money.

     4. The IRS can't make up its mind about real estate. Real-estate investors can take advantage of certain tax breaks, such as depreciation; but are excluded from others. Rental income is taxed at the full rate, as opposed to stock dividends which get preferential treatment. Bottom line: Investing in real estate can be a good deal, but it's not for everyone. 

     5. Or owning a business. Again, many tax breaks are available to people who work for themselves, such as deductions for "travel and entertainment." But there are drawbacks as well. For one, you have to pay both the employer's and the employee's part of the Social Security tax. And the tax-filing process can be confusing and complicated, requiring obsessive record keeping, mind-numbing calculations . . . and usually the expense of paying a professional accountant.

     6. But it does want you to save for retirement. The government offers a wide (some would say overly complicated) array of options -- such as the IRA, the Roth IRA, the SEP IRA, the 401(k) plan – which allow you to escape, or at least defer, taxes on your retirement savings.

     7. It wants you to get health insurance through your business, but not on your own. The IRS doesn't tax income a worker uses to pay for health-insurance premiums -- but ony if the medcal insurance comes through the workplace or through a business. If you buy medical insurance on your own, including Medicare . . . no tax break for you!

     8. The government will cut you a break if you're sick, but only if you're really sick. You can deduct out-of-pocket medical expenses, including dental expenses, that exceed 10% of your income, or 7.5% of your income if you're age 65 or over. 

     9. The government wants people to go to college. The silver lining to the ridiculous cost of higher education is that there are several ways to deduct a portion of college tuition on your Federal tax form. Many states offer tax breaks for educational expenses as well. The 529 College Savings Plan is a relatively simple and easy way to avoid taxes on money you put aside for college . . . for yourself, your grandchildren, or anyone else in the family.

     10. The government doesn't want you to do your own taxes. The Federal tax code reportedly runs 70,000 pages or more (people can't even agree on how long it is), and details all kinds of rules, regulations, tax breaks and penalties. Plus, there are many more pages at your state level. The whole process is way too complicated for the average person. The IRS really wants you to pay an expert, who is more likely to get it right, and who will file electronically, saving the government (but not you) a little bit of money.

Saturday, April 7, 2018

Quotable Retirees

     I've collected some quips and quotes that you might find amusing. Many reflect on retirement. Others take on different subjects, but can only really be appreciated by those of us who have been around on earth for a good long while.

     If one of them seems particularly relevant to your life, pass it along to a friend or family member, or print it out and post it on your refrigerator.

     Which one is your favorite . . .

     "Half our life is spent trying to find something to do with the time we have rushed through life trying to save." -- Will Rogers

     "As I get older, the things I'm sure of become fewer." -- J. A. Jance

     "Humans were built to look back; that's why we have that swivel joint in our necks." -- Stephen King

     "When men reach their sixties and retire they go to pieces. Women go right on cooking." -- Gail Sheehy

     "Don't be overly concerned about your heirs. Usually, unearned funds do them more harm than good." -- Gerald M. Loeb

     "Men do not quit playing because they grow old; they grow old because they quit playing."  -- Oliver Wendell Holmes

    "It's paradoxical that the idea of living a long life appeals to everyone, but the idea of getting old doesn't appeal to anyone."             -- Andy Rooney

     "Life after 50 or 60 is itself another country, as different as adolescence is from childhood, or as adulthood is from adolescence."             -- Gloria Steinem

     "If you are creative, you get busier as you get older." -- Tony Bennett

     "When a man retires, his wife gets twice the husband but only half the income." -- Chi Chi Rodriguez

     "It is better to live rich than to die rich." -- Samuel Johnson

     "Aging seems to be the only available way to live a long life."
  -- Kitty O'Neill Collins

     "Grandchildren are God's way of compensating us for growing old."
  -- Mary H. Waldrip

     "The best time to start thinking about retirement is before the boss does."
  -- Anon.

     "People worry so much about aging, but you look younger if you don't worry about it." -- Jeanne Moreau

     "Nothing is more responsible for the good old days than a bad memory."
  -- Franklin Adams

     "Age is an issue of mind over matter. If you don't mind, it doesn't matter."
  -- Mark Twain

     "At age 20, we worry about what others think of us. At age 40, we don't care what they think of us. At age 60, we discover they haven't been thinking of us at all." -- Ann Landers

     "When you get to my age, you'll see that it is wiser to make your own decisions than let time make decisions for you." -- Charles Finch

     "All men come to resemble their fathers. That isn't a tragedy. But you need a hell of a sense of humor to handle it." -- Philip Kerr

     "Fun is like life insurance: the older you get, the more it costs."
  -- Ken Hubbard

     "Others will keep working because the 'gold' in our so-called 'golden years' doesn't have to come from watching sunsets." -- Arianna Huffington

     "If I were to say, 'God, why me?' about the bad things, then I should have said, 'God, why me?' about the good things that happened in my life."
  -- Arthur Ashe

     "Modern man was not meant to do his best work before forty but is by nature, and is becoming more so, an afternoon and evening worker."
  -- G. Stanley Hall

     "Before you speak, listen. Before you spend, earn. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give." -- William A. Ward