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Archive for March, 2007

Mia Talking

My daughter Mia just turned 3 in February.  She is hillarious.  This is a video of her acting silly in the car on a family trip to Pismo Beach in November 2006.

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policedogshadow.jpglucky-and-flo.jpg

For those who think that buying illegal pirated DVD’s is a victimless crime, here is a story that might change your mind.  These are two black Labradors, Lucky and Flo who have been trained to smell the special plastic used in DVDs.  Lucky and Flo are very good at what they do.  So good in fact that this week, Lucky and Flo lead Malaysian authorities to shipment of 1 million pirated DVDs worth about $3 million dollars.

This has made Lucky and Flo instant enemies with the bad guys.  The crime bosses have issued a bounty to anyone who eliminates the dogs.  Authorities are taking the threats seriously.  The dogs are now being kept in a secret location, with tight security, a dog witness protection program.  They may be living in your neighborhood.  I’ve seen a few black labradors in my neighborhood who could be Lucky and Flo.  I just hope that some innocent bystander black labradors don’t have to suffer from a case of mistaken identity.

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I am now a full time real estate professional.  The IRS defines “real estate professional” as someone who spends who spends more than half of his working hours in real estate and more than 750 hours a year tending to real-estate activities.  This distinction is important because as a real estate professional you can fully deduct losses — including depreciation, interest expense on loans and property taxes.  If you are not a real estate professional,  you are considered a “passive investor”, and can only deduct a limited part of your losses.  This is no small difference in status, as the IRS has identified income from rent and royalties as well as capital gains as areas of large under tax reporting.  As a result, the tax returns of real estate professionals are being looked at more closely by the IRS and audited.

To the real estate professional, the criteria for professional status seems easy to meet.  I along with other real estate professionals spend all our time on active real estate activities such as buying, selling, and developing investment properties.  It is what I do for a living.  I have no other job.  For others such as real estate agents, or loan brokers, it would seem obvious that they are real estate professionals as well.  However, this Wall Street Journal article points out that the IRS is targeting real estate professionals, and the burden of proof is on the real estate professional to prove their status.  The article tells of a real estate broker and investor who is in an ongoing battle with the IRS to prove his status.  Even though, this broker has been in the business for 20 years, and has a real estate portfolio of over $20 million dollars, the IRS is questioning his status.  He has spent to date $20,000 in lawyer and accountant fees defending his status, and could spend as much as $100,000 before the battle with the IRS is over.  At stake is several hundred thousand dollars in tax liabilities, fines, and interest, if it is determined that he is not a real estate professional, and prior year tax returns have to be adjusted.

Even if you have no doubt that your are a real estate professional, and you have been in the real estate business for many years, it is not a given that the IRS will see it that way.  To protect your status, I suggest you do as I have started doing.

  • Keep a daily log of your daily business activities such as meetings, phone calls, and research time.  Make notes as how these activities relate to your business, such as networking function for business development.
  • Keep records of projects that you are involved in.  Detail your role in the project, the work you do, and the people you talk to regarding the project.  If you travel for business, keep travel records and logs of your activities.  Identify the purpose of your trip, and who you met with.
  • If you take continuing education classes or seminars, record those and note the time spent and how it relates to your business.

It seems like a lot of additional documentation to prove something that seems obvious to us, but like everything with the IRS, the burden of proof is on us.  If you are audited, you will be asked to provide this information anyways, so it is better to be prepared, or you could jeopardize the huge tax savings you have been enjoying as a real estate professional.

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Exercise ball Chairs

Exercise Ball Chair

Here is an article from the Wall Street Journal about the rise in many offices of using exercise balls instead of chairs.  The ergonomic benefits of these balls as chairs are debatable.  Some claim that sitting on the balls improves posture and concentration, while some erogonomists say it is difficult to sit on for long periods of time.

I am familiar with the exercise balls because we have one at home.  We used it when our kids were babies, and sitting and bouncing with the baby on the ball was a great way to get them to sleep.  As an office chair, however, I would take a pass on it.  To each its own, but I would’nt want to sit on one for 8 hours.  Give me a plush leather highback chair, which reclines any day.  If you doze off on an exercise ball, you are flat on the ground or causing a chain reaction of balls rolling down the hall.  

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Making a plan

Kenric at Live, Learn, and Invest, recently wrote a good post on the need for a real estate investor to formulate a plan.  Kenric had a plan, but as changes in the market occurred, he deviated from his plan, and lost his focus on the “big picture”  As a real estate investor, I can see how that can easily happen.  As a real estate investor, you have to attend to so many short term issues such as vacancies, taxes, and repairs, that after awhile it is easy to lose track of your plan.  You forget why you bought these properties in the first place, and may even make bad decisions in the short run.

When I was a financial analyst in public finance, one of my main duties was to formulate a 10 year financial plan.  It is very difficult to make financial and economic forecasts 10 year in the future, which is why the 10 year plan needed to be updated every year, when additional information was gathered.  So, the 10 year plan was always a work in progress.

For the real estate investor, I also suggest making a 10 year plan, which I call the “big picture” plan.   It should detail where your real estate business will be in 10 years, and how it will get to that point in 10 years.  I would also suggest making a 1 year and 5 year plan.  This is the short term, and intermediate plan.  Each of these plans should be reviewed every year, and updated as necessary.

The 10 year plan should not change much from year to year as the goals remain the same.  However, the 5 year, and especially the 1 year plan will need to be adjusted more frequently with changes in the market.  I have written about the need to adapt to changing market conditions, and this is usually in the short to intermediate time frame.

The advantage of reviewing each of these plans every year is that it keeps us focused on the “big picture”, and our goals.  We can deal with short term issues while not losing sight of our overall plan.  So, we do not panic when short term issues come up, and make poor decisions such as bad financing choices, or panic selling.  We don’t forget why we bought these properties.  We see how it supports our long term goals.  These plans can also be used in evaluating new investment opportunities.  If these new investments causes us to lose focus with our plan, than we don’t pursue it.  We don’t panic, because we see how each piece fits in the big puzzle.

Planning for the future is essential for any business owner, and as I have pointed out, a real estate investor is a business owner.  Taking the time to plan, will keep on focused and on track.  If you have been bogged down with all the day to day issues of your business, now is the time to take a step back, and review your plans and goals for the short and long term future.

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 I introduced Ticketreserve, a market where the sports fans can purchase options on sporting event tickets, and buy tickets at face value if their team makes it to the big game.  Its a great way, and often the only way for the average sports fan to gain access to the major sporting events at a fair price.  Not only is ticketreserve a great way to obtain hard to get sporting event tickets, I pointed out that one can also make a great deal of money trading these options on the ticketreserve market.  I offered some basic strategies to make a profit on thse markets. 

Now that its March, March Madness is upon us with the NCAA basketball tournament underway this week.  Almost every office in America has their own NCAA basketball pool, and the brackets are being filled out across the nation.  The NCAA basketball tournament is certainly one of the most popular sporting event to bet on.  Can we also make a profit trading NCAA basketball options on ticketreserve?  I’ve never traded in the NCAA basketball market on ticketreserve, but lets take a look and see if an opportunity to make money on March Madness.

On ticketreserve, there are two markets for the NCAA basketball tournament, the final four market, and the national championship market.  If you buy an option for your team in the final four maket, and your team makes it to the final four, you get to purchase tickets at face value, but not to the championship game should they make it.  If you buy an option on your team, in the national championship market, you get to purchase a ticket at face value to the national championship game only if your team advances.

Using the trading guidelines I suggested, is this a good market to trade in?  Not really.  While the NCAA basketball tournament is very popular as a betting and viewing event, it is not nearly as popular as an event for ticket demand as the Super Bowl or BCS championship bowl games.  In other words, while everyone will watch and follow the NCAA basketball tournament, it is not an event where everyone wants to attend like the Super Bowl.  This makes the trading market for the NCAA basketball tournament much less active.  I’ve been looking at the markets, and with March Madness just days away the market is very slow even for the top teams.  This would not be the case in football.

The other factor making it difficult to make a profit is the large amount of upsets in the NCAA basketball tournament.  I advised buying options on the favored team as early as possible to take advantage of a long season in football with interest and emotions growing as the season progresses.  However, in the NCAA basketball market, there is much less interest and the prices move very little.  Also, with the large amount of upsets, it is much more risky, with no clear favorites to ride.

While March Madness is a great event for the sports fan, it is not an ideal event to make money on ticketreserve.  Unless, you really want to attend the Final Four, I would pass on these markets, and concentrate on looking for opportunities in the Super Bowl market, or the BCS Championship game market.  Also, the market for BCS bowl games will debut shortly, and there may be opportunities there as well. 

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Spring TrainingSpring Training 2007

 I spent 4 days last week in Phoenix Arizona with my 4 year old son at spring training.  This is the second year we have gone, and it is our annual father-son bonding trip.  Its a lot of work travelling with kids this young, but I think its worth it.  Spring training is mostly a time to relax in the warm sun watching baseball.  If you like taking pictures and getting autographs of you favorite player, spring training is the place to be.  Since my son is not totally obsessed with baseball, we also had several trips to the Phoenix zoo, and to the Challenger Space center.  Looking forward to next year’s spring training.

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