Ten Years After.......I'm Going Home (Live at Woodstock)
Saturday, August 10, 2013
A dichotomy................................................
"Smooth shapes are very rare in the wild but extremely important in the ivory tower and the factory."
-Benoit Mandelbrot
Absence of purpose..................?
"The facts of science, by exposing the absence of purpose in the laws governing the universe, force us to take responsibility for the welfare of ourselves, our species, and our planet."
-Steven Pinker
“Science may be described as the art of systematic oversimplification.”
-Karl Popper
photo via
Fifty years ago...............................
Brenda Lee...........................................Losing You
33 Guidelines for investing in real estate.......
Guideline #25: It's an investment, not a tax shelter.
In my early days of commercial real estate, many of my compatriots were selling "tax shelters." That was a fancy term for an investment that will likely lose money. To be fair, back in 1980, the top marginal tax bracket in the U.S. of A. was 70%, which meant that out of each dollar earned over $215,400, the IRS took 70 cents. (For reference sake, 2013's top bite on earned income was 39.6% on each dollar earned over $400,000). A lot of smart, high income people figured that it was better to lose a little money on real estate, i.e. the tax shelter, and maybe build some equity, than just give the money to Uncle Sam. I was never comfortable with that philosophy. To my young and naive eyes, it seemed unnatural that a certain property might be worth more to one investor just because his tax bracket was higher. The question I never got a satisfactory answer to was, "Why would you buy something you knew was going to lose money on a regular basis?" Seemed wasteful. As you might expect, we did not sell a lot of "investment property" back then.
When Congress passed the Economic Recovery Act of 1981, it amended the Tax Code to allow for really, really, really generous tax treatment for real estate. As a result, real estate development went into overdrive and the value of investment real estate was (temporarily) unnaturally inflated. In a successful attempt to curb tax shelters, peel back some of the benefits of owning investment real estate, and to "simplify the Code," Congress then passed the Tax Reform Act of 1986. The 1986 Act both eliminate special incentives, including accelerated depreciation (ACRS), that investment real estate had briefly enjoyed, and expanded the dreaded Alternative Minimum Tax (AMT). These simple changes instantly erased somewhere between 10% and 20% of the market value of investment real estate. This fall in values, combined with some questionable lending practices, contributed to the savings and loan crisis of the late 1980s.
The lesson I learned from all of this was that when the government giveth, it soon finds a way to taketh away. Basing investment decisions on the Tax Code is fraught with risk.
Today the Code appears to be neutral towards investment real estate. Depreciation is still available as a deduction against income, however, the time periods that assets can be depreciated have been stretched to roughly mirror the actual life span of those assets. The days of investing for tax shelter have passed by. If they come again, remember..........be very careful. Invest for value, not because of the Tax Code.
In my early days of commercial real estate, many of my compatriots were selling "tax shelters." That was a fancy term for an investment that will likely lose money. To be fair, back in 1980, the top marginal tax bracket in the U.S. of A. was 70%, which meant that out of each dollar earned over $215,400, the IRS took 70 cents. (For reference sake, 2013's top bite on earned income was 39.6% on each dollar earned over $400,000). A lot of smart, high income people figured that it was better to lose a little money on real estate, i.e. the tax shelter, and maybe build some equity, than just give the money to Uncle Sam. I was never comfortable with that philosophy. To my young and naive eyes, it seemed unnatural that a certain property might be worth more to one investor just because his tax bracket was higher. The question I never got a satisfactory answer to was, "Why would you buy something you knew was going to lose money on a regular basis?" Seemed wasteful. As you might expect, we did not sell a lot of "investment property" back then.
When Congress passed the Economic Recovery Act of 1981, it amended the Tax Code to allow for really, really, really generous tax treatment for real estate. As a result, real estate development went into overdrive and the value of investment real estate was (temporarily) unnaturally inflated. In a successful attempt to curb tax shelters, peel back some of the benefits of owning investment real estate, and to "simplify the Code," Congress then passed the Tax Reform Act of 1986. The 1986 Act both eliminate special incentives, including accelerated depreciation (ACRS), that investment real estate had briefly enjoyed, and expanded the dreaded Alternative Minimum Tax (AMT). These simple changes instantly erased somewhere between 10% and 20% of the market value of investment real estate. This fall in values, combined with some questionable lending practices, contributed to the savings and loan crisis of the late 1980s.
The lesson I learned from all of this was that when the government giveth, it soon finds a way to taketh away. Basing investment decisions on the Tax Code is fraught with risk.
Today the Code appears to be neutral towards investment real estate. Depreciation is still available as a deduction against income, however, the time periods that assets can be depreciated have been stretched to roughly mirror the actual life span of those assets. The days of investing for tax shelter have passed by. If they come again, remember..........be very careful. Invest for value, not because of the Tax Code.
Friday, August 9, 2013
Crystal visions....................................................
Fleetwood Mac.........................................................Dreams
Opening paragraphs.....................................
Charybdis herself must have spat them into the sea. They committed "a Crime so odious and horrid in all it Circumstances, that those who have treated on the Subject have been at a loss for Words and Terms to stamp a sufficient Ignominy upon it." Their contemporaries called them "Sea-monsters," "Hell-Hounds," and "Robbers, Opposers and Violators of all Laws, Humane and Divine." some believed they were "Devils incarnate." Others suspected they were "Children of the Wicked One" himself. "Danger lurked in their very Smiles."
-Peter T. Leeson, The Invisible Hook: The Hidden Economics of Pirates
-Peter T. Leeson, The Invisible Hook: The Hidden Economics of Pirates
Trivia question of the day................
Who, or what, is Charybdis........................................?
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Quiz time..............................................
Think you know your fears? Can you match these ten phobias with the correct description below? Happy guessing.....................
- ANUPTAPHOBIA
- ATHAZAGORAPHOBIA
- BLENNOPHOBIA
- GELOTOPHOBIA
- GERASCOPHOBIA
- GLOSSOPHOBIA
- HELLENOLOGOPHOBIA
- KAKORRHAPHIOPHOBIA
- LOCKIOPHOBIA
- MACROPHOBIA
a) The fear of being or staying single.
b) A fear of long waits.
c) The fear of speaking in public.
d) A fear of slime.
e) The fear of childbirth.
f) The fear of failure or defeat.
g) The fear of being forgotten, ignored, or abandoned.
h) The fear of being laughed at.
i) The fear of growing old.
k) The fear of Greek terms or complex scientific terminology.
Fifty years ago..................................................
Smokey Robinson & the Miracles/You've Really Got A Hold On Me
This song was recorded in October of 1962 and released the next month. Smokey was writer, lead singer, and producer. It peaked at number 8 on the Billboard Top 100 in February of 1963.
This song was recorded in October of 1962 and released the next month. Smokey was writer, lead singer, and producer. It peaked at number 8 on the Billboard Top 100 in February of 1963.
33 Guidelines to investing in real estate........................
Guideline #24: Pay attention to your financing.
A few examples are in order:
In the late 1970's a group of local investors were buying small apartment complexes with the assistance of "owner financing." They would make a small down payment, borrow some from the bank, and then borrow the rest from the seller on a five year note. Their plan was to have built up some equity by the end of the fifth year, which would allow them to refinance with a bank to pay off their loan to the Seller in a timely fashion. They thought of "five years" as being a long time. Add five years to 1978 and your end up in 1983. The history majors amongst us will remember that interest rates spiked in the early 1980s. In 1983, rates for commercial loans were in the 15% range. It is hard to make real estate investments profitable paying 15% interest. It made for some interesting times and real scrambling for those investors.
In 2002 a local investment group refinanced a 250 unit apartment complex. Times were good, values were appreciating, they had significant equity, lenders were eager, interest rates seemed reasonable, and the appraisers were all optimistic. Our investor friends decided to free up as much equity as possible by borrowing as much as they could, which was a lot. Flash forward nine years. The note is coming due in January of 2013. It had to be either paid off or refinanced. Paying it off was not an option. Times were difficult, values had fallen, their equity had disappeared, lenders were scarce, interest rates were very low, and the appraisers were all pessimistic. Failure to secure new financing would have had catastrophic implications for the partners. While the mortgage was non-recourse, the tax consequences of a forced sale was in the seven figure range. It was a bit tense for them for awhile, but this story has a happy ending. Because the investors were paying attention, they consulted early on with a trusted mortgage broker, on his advice they took the necessary steps of spending many hundreds of thousands of dollars to upgrade units. It did not hurt that the market for commercial loans also improved quite a bit in 2012, As a result, the partners were able to secure new financing for another ten years, at a very interest rate.
Just as the economy runs in cycles, so does financing. Between 2002-2006 you could borrow money if you could "fog a mirror." Between 2008-2009, heaven help you if you needed to borrow money. It should be noted that in the 30 some odd years we have been doing this investment real estate thing, financing has only been problematic in four or five of those years. The other 25 or 26 years , borrowing money varied between a reasonable business proposition and way too easy. The important thing is to be prepared for the problematic years.
It should be noted that, if you invest with a plan similar to these guidelines, most business cycles will not be an issue for you. You just weather the storm, and maybe even take advantage of it. A lot of money gets made when markets are in turmoil. This last-go round was no different.
Every investment is different. There are no hard and fast rules, other than "pay attention."
A few examples are in order:
In the late 1970's a group of local investors were buying small apartment complexes with the assistance of "owner financing." They would make a small down payment, borrow some from the bank, and then borrow the rest from the seller on a five year note. Their plan was to have built up some equity by the end of the fifth year, which would allow them to refinance with a bank to pay off their loan to the Seller in a timely fashion. They thought of "five years" as being a long time. Add five years to 1978 and your end up in 1983. The history majors amongst us will remember that interest rates spiked in the early 1980s. In 1983, rates for commercial loans were in the 15% range. It is hard to make real estate investments profitable paying 15% interest. It made for some interesting times and real scrambling for those investors.
In 2002 a local investment group refinanced a 250 unit apartment complex. Times were good, values were appreciating, they had significant equity, lenders were eager, interest rates seemed reasonable, and the appraisers were all optimistic. Our investor friends decided to free up as much equity as possible by borrowing as much as they could, which was a lot. Flash forward nine years. The note is coming due in January of 2013. It had to be either paid off or refinanced. Paying it off was not an option. Times were difficult, values had fallen, their equity had disappeared, lenders were scarce, interest rates were very low, and the appraisers were all pessimistic. Failure to secure new financing would have had catastrophic implications for the partners. While the mortgage was non-recourse, the tax consequences of a forced sale was in the seven figure range. It was a bit tense for them for awhile, but this story has a happy ending. Because the investors were paying attention, they consulted early on with a trusted mortgage broker, on his advice they took the necessary steps of spending many hundreds of thousands of dollars to upgrade units. It did not hurt that the market for commercial loans also improved quite a bit in 2012, As a result, the partners were able to secure new financing for another ten years, at a very interest rate.
Just as the economy runs in cycles, so does financing. Between 2002-2006 you could borrow money if you could "fog a mirror." Between 2008-2009, heaven help you if you needed to borrow money. It should be noted that in the 30 some odd years we have been doing this investment real estate thing, financing has only been problematic in four or five of those years. The other 25 or 26 years , borrowing money varied between a reasonable business proposition and way too easy. The important thing is to be prepared for the problematic years.
It should be noted that, if you invest with a plan similar to these guidelines, most business cycles will not be an issue for you. You just weather the storm, and maybe even take advantage of it. A lot of money gets made when markets are in turmoil. This last-go round was no different.
Every investment is different. There are no hard and fast rules, other than "pay attention."
Thursday, August 8, 2013
An abundance of talent......................
Eric, Ringo, Paul, Billie, Dhani, etc./While My Guitar Gently Weeps
About that budget....................................
The infographic above can be more easily read and better used
by going here. Once there, allow your cursor to roam over the
graphic. Magically, stuff will be enlarged. Enjoy. Let me know
if you figure out what it all means, other than government in the
2014 era is very expensive.
thanks Seth
opening chart via/cartoon via
Opening two paragraphs........................
Robert Moses was born on December 18, 1888. He was not given a middle name - because his mother saw no reason for one.
Bella Moses was a strong-willed woman, so strong-willed, in fact, that some of her relatives said she was too much like her mother - and not enough like her father. Bella's parents, Robert's grandparents, were first cousins. Both had been born - Bernhard Cohen in 1821, Rosalie Silverman five years later - in the small Bavarian village of Reckendorf to struggling merchant families, two of the tens of thousands of German-Jewish families made highly susceptible to "America fever" by laws that segregated them in crowded Judengassen and forced them to pay the humiliating "Jew toll" whenever they made a trip away from the ghetto. The statutes also prohibited Jews from owning any land except that on which their houses stood or from dealing in any goods that could not be carried with them. Bavaria, where German anti-Semitism was most virulent, had even set a limit on the number of Jewish marriages in an attempt to keep the Jewish population down. The Silvermans left Reckendorf for New York while Rosalie was in her teens. Bernhard Cohen had been taken to Frankfurt am Main as a child by parents who hoped that life for Jews in Germany would be better outside Bavaria; when this hope was dashed, they waited until Bernhard was twenty-one, and then sent him and a younger brother, Samuel, to America, where the brothers opened a small dry-goods store in Mobile, Alabama. In 1848, they moved to New York, rented a small office and became dry-goods importers. Bernhard met his cousin and in 1849 they were married.
-Robert A. Caro, The Power Broker: Robert Moses and the Fall of New York
Bella Moses was a strong-willed woman, so strong-willed, in fact, that some of her relatives said she was too much like her mother - and not enough like her father. Bella's parents, Robert's grandparents, were first cousins. Both had been born - Bernhard Cohen in 1821, Rosalie Silverman five years later - in the small Bavarian village of Reckendorf to struggling merchant families, two of the tens of thousands of German-Jewish families made highly susceptible to "America fever" by laws that segregated them in crowded Judengassen and forced them to pay the humiliating "Jew toll" whenever they made a trip away from the ghetto. The statutes also prohibited Jews from owning any land except that on which their houses stood or from dealing in any goods that could not be carried with them. Bavaria, where German anti-Semitism was most virulent, had even set a limit on the number of Jewish marriages in an attempt to keep the Jewish population down. The Silvermans left Reckendorf for New York while Rosalie was in her teens. Bernhard Cohen had been taken to Frankfurt am Main as a child by parents who hoped that life for Jews in Germany would be better outside Bavaria; when this hope was dashed, they waited until Bernhard was twenty-one, and then sent him and a younger brother, Samuel, to America, where the brothers opened a small dry-goods store in Mobile, Alabama. In 1848, they moved to New York, rented a small office and became dry-goods importers. Bernhard met his cousin and in 1849 they were married.
-Robert A. Caro, The Power Broker: Robert Moses and the Fall of New York
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