Cherie Kerr wants out of her home. The 65-year-old comedian and public speaking coach paid $590,000 for a 1,150-square-foot Los Angeles condo two and a half years ago–only to find the construction so flimsy that her upstairs neighbor woke her up by dropping a coin on the wooden floor.

“A defect hell,” fumes Kerr of her newly built abode. She has moved back into a suburban home she still owns and would love to unload the apartment, but housing values have fallen so far that she figures such a move would lock in a $200,000 loss.

The good news is that Kerr is anything but stuck. A real estate agent recently informed her that the condo can fetch $3,300 a month in rent. That’s enough to cover her mortgage and property taxes. So Kerr has decided to lease out her condo until values rebound. While she no longer harbors visions of becoming rich off the downtown L.A. property, things could be a lot worse.

“It’ll be a tax writeoff,” she says.

Kerr has lots of company these days. No less a financier (and former do-it-yourself tax preparer) than Treasury Secretary Timothy Geithner is leasing out his Mamaroneck, N.Y. home after failing to get for it a bid he was willing to accept. If you’re one of the horde suffering real estate buyer’s remorse, you too may be able to turn a modest profit renting out your albatross of a residence. How can that be? Thank the trove of tax breaks for residential landlords.

The first step in figuring out whether renting makes sense is to find out how much your place is worth. A professional appraisal is best, but written statements from a few Realtors will do as long as they agree on the value and stipulate how much is attributable to land and how much to the building. (The appraisal, as you’ll see later, is essential for two separate tax calculations.)

The next step is to see how much the property will fetch in monthly rent and weigh that against the costs and tax consequences. As a landlord, you can’t claim mortgage interest as an itemized deduction on Schedule A of your tax return. Instead, you deduct interest costs, plus property taxes, monthly condo fees, insurance and anything you pay to a property manager (most charge 10% of rent) against rental income on Schedule E. You can also expense travel and other costs you personally incur to look after the property.

The other big tax deduction for landlords is depreciation. The tax code allows you to divide the value of your building (but not the land) by 27.5 and to claim the result as an annual depreciation expense. Here’s the first place that the current appraisal comes in. When you convert to a rental, your depreciation is based on the cost of the property plus improvements or its market value at the time of conversion–whichever is less.

In Kerr’s case she must use the $390,000 fair market value of her condo, not the $590,000 she paid. Assuming that 10% of the $390,000 is attributable to land under her building, the depreciation expense comes to $12,764 annually (and reduces her cost basis by the same amount). Add in Kerr’s other expenses and the total is likely to exceed her $39,600 gross annual rental revenue. Almost any residential landlord with a mortgage is going to be in that boat.

The amount by which expenses exceed rent is a tax loss that can be used to shelter up to $25,000 in other income–say, from your salary–if your adjusted gross income is $100,000 or less. (The same cutoff applies to both singles and couples.) Above $100,000 the break is phased out, and it disappears completely at $150,000.

“It’s the one and only time you get to use a passive loss to shelter active income,” says Sacramento tax attorney Roni L. Deutch.

If you happen to be a real estate professional–defined as someone spending at least 750 hours a year, and at least 50% of his working time, in the business–then your career managing property becomes an “active” one and your losses are fully deductible against other income. If you fail the income test or to qualify as a pro, your rental losses don’t go entirely to waste. The net loss gets carried forward and deducted if and when you dispose of the loser real estate or you have gains from passive investments. These gains could be from selling the property in question at a capital gain or from owning other passive investments, like oil wells.

Note that “passive” is a term of art in the Internal Revenue Code and does not cover portfolio investing (stocks and bonds). So if you collect $30,000 from stock dividends and have a $30,000 loss on Schedule E, you can’t net one against the other. But you can wise up, sell the stocks and use the proceeds to pay off the mortgage. At that point you’re probably out of the loss column on the rental and pulling real cash out of the property. A good part of the cash return will be sheltered from taxes by your depreciation deduction.

How are gains taxed when you sell a converted property? A lot depends on timing. If you lived in the property for at least two years and then rented it out for less than three, you may be able to use the provision that excludes $500,000 in gains from the sale of a principal residence, per couple, from tax. (You’ll still owe gains tax on the amount claimed as depreciation.) If you sell at a loss, the only deductible portion is the loss occurring after you converted the house from personal to income-producing use. The appraisal is crucial here.

Kerr hopes that sales prices will rebound in two years. Assume instead that they slide and she clears only $340,000, or $50,000 less than what her Realtors said her condo was worth when she converted it to a rental. Her tax basis in the property will be $364,500 (the $390,000 minus $25,500 for two years of depreciation). She’d be left with a $24,500 capital loss she can use to shelter taxable gains on other investments. Also, she could then claim any passive losses she couldn’t use before.

Renting does present problems. You must either maintain a property yourself or pay someone else to do it. Tax and real estate experts warn against hanging on to real estate if rent falls far short of your pretax, out-of-pocket costs. In other words, look to the tax benefits to sweeten the deal, not drive it, says tax accountant William Fleming of PricewaterhouseCoopers.

Rent Out Your Home. Cut Your Taxes.

Robert Kiyosaki

I am often asked, “What advice do you have for the average investor?” My reply is, “Don’t be average.”

Most of us know of the 80/20 rule. That rule is a good rule for averages. And in the world of money, the rule is 90/10. This means 90 percent of the people make 10 percent of the money and 10 percent of the people make 90 percent of the money.

This 90/10 rule holds true in almost anything financial. Take the game of golf, for example. Ten percent of the professional golfers make 90 percent of the money.

Taking the ratio to the next level, the top 10 percent of professional golfers make 90 percent of the money. Just look at Tiger Woods. When you compare his winnings plus endorsements, he is in a league unto himself.

Last year, my wife Kim was invited to play in a pro-am as part of a professional Tour event in New York. (No, they did not invite me…) Kim is pretty good and was the only woman in a field of around 300 golfers. I was a proud husband as she confidently walked alone to the women’s tee. Without hesitation, she placed her ball on the tee, took a clean back swing, and swung her club.

She out-drove two of the men in her five-some. Bruce Vaughn, the professional golfer in the group, rushed up to congratulate her. The men amateurs were also complimentary. I could tell they were relived to have a much better than average “woman golfer” in their group. Kim hits her drives longer than most men, myself included.

Tough Way to Earn a Living

The tournament was the first time I got to see the real life of a professional golfer. It is a tough life. It is not the glamour I thought it was. If a professional did not make the cut, they simply moved on to the next tournament in some faraway city…and teed up again. They do not stay for the tournament. They pay for their own transportation, lodging, food, and fees. They are on the road, away from their families for months at a time. Even those who make the cut and play on the weekend have no guarantee of enough earnings to offset expenses. It’s a tough way to earn a living.

Like professional golfers, who live and die by the ‘money list,’ money is how I keep score. It’s my score card, my report card as an investor. It’s how I tell how well — or how poorly — I’m doing. My rich dad said, ‘Making money is my game.’ It’s my game, too. And that’s why I have so much respect for professional golfers… their livelihood depends upon how well they play the game — as professionals.

In the world of golf there are average and professional golfers. The same is true with investors. The problem with being an average golfer or investor is that average people rarely make any money. Many average investors are in financial trouble today because they are simply that: average. They never turned pro.

When the financial crisis began in 2007, the professional investors were already out (or getting out) of the market. The average investors did as they were told, which is to invest for the long-term, hanging on tight as the Dow plunged from 14,000 to below 7,000, a 50 percent loss in value. Many real estate flippers and homeowners enjoyed the same wild ride.

Tragedy of the Average Investor

The tragedy is that many amateur investors are still clinging to their losses. They hope the market will bounce back. Amateurs are still following the advice of “invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds.” Or they continue to believe “your home is your biggest investment.” That is subprime advice for subprime investors.

It seems to me that more people keep track of their golf scores than keep track of their money… their ‘financial’ scores. That’s why they’re amateurs… in the money game.

Even after the crash, the same subprime financial advice continues to be dished out in magazines, newspapers, and on television. Subprime advice continues to flow from real estate and stock market professionals who are not professional investors. They are professional sales people. They live on commissions — not ROI, the returns on their investments. If they do not sell, they do not eat.

If you’re going to turn pro, you will need to upgrade your financial advice. Why continue to invest for the long term while the market is crashing? Why continue to diversify when diversification did not protect investors from the crash?

In 1974, as I was leaving the Marine Corps, I decided I wanted to become an entrepreneur and investor. In other words, I did not want a job with a 401(k). That meant I had to become street smart, rather than school smart. It meant I needed a different set of life skills and better financial mentors if I were to survive on the street.
Just like the life of the pro golfers, there were long stretches of losses, no wins, no money or security.

In early 1985, things got so bad that Kim and I were temporarily homeless. I still remember leaving her in San Diego with only $2 for the week, while I traveled to Australia to put a deal together. Somehow we survived the year. In December of 1985 we finally made $1,500 after a year’s worth of losses. That year was a great qualifying school. Today, even in this tough economy, our investments continue to grow. This crisis is a good time for professionals and a bad time for amateurs.

Not Good Enough

Years ago, I asked my rich dad, “What is the difference between a professional and an amateur?” His reply was, “Professionals know their best is not good enough. They always want to do better.” He paused before continuing and said, “When someone says, ‘I’ll do my best’ or ‘I’ll give it my best shot’ or ‘I’ll try,’ they’ve already lost. Those are not words of a winner.”

In the world of ‘the best,’ your best is never good enough. If you’re going to be a winner in life, you have to constantly go beyond your best. Most people are happy being average. Most are happy being faceless in a sea of faces. That’s why 10 percent always win 90 percent of the rewards. I get up every day, grateful for what I have accomplished, yet looking forward to doing better. I want do better than my (previous) best everyday. It’s not about the money anymore. I have enough money. I just love the game of making money.

Today I give most of my money away…but I will not give up the game of money. I play the game because the game is always better than me…and my best will never be good enough. I continue to work hard to become better at a game I love.

I once read a book on golf that said, “People say amateurs play for the love of the game and professionals play for money. That is not true. Amateurs are amateurs because they do not love the game enough. When it is cold and rainy, a professional golfer will play. The amateur will not. When they are sick, the professional will play. The amateur stays in bed. When they are losing, the professional will practice harder and enter more tournaments. The amateur will quit and take up tennis.”

It matters little if the game is golf, tennis, or money. Ten percent of the people will always make 90 percent of the money. When the markets began crashing in 2007, the money did not disappear. Ninety percent of the money went to 10 percent of the investors.

A financial crisis is a great time for professional investors and a horrible time for average ones. If you’re going to invest, don’t be average. It’s time to turn pro… or take up tennis.

The second wealthiest man in America, and the most famous investor in America, Warren Buffett, did an interview with ABC in which we was asked what were his top 3 piece of investment advice he had for average Americans. 

Let’s first start off with what he did NOT say.  He did not say “Buy And Hold”, he did not say “Invest for the Long Term”, he did not say “Diversify”, he did not say “Dollar Cost Averaging”, he did not say “Be Patient – Don’t Panic”, he did not say “Stocks Are on Sale”, and he didn’t mention anything about a 401k. 

But why not?  Every professionally certified ”Investment Advisor” out there says those things, why wouldn’t the most successful investor in America say at least one or two of those?  The fact that none of those pieces of “advice” made Buffett’s top 3 pieces of investment advice further shows that those mantras are not advice, they are sales slogans and advertising slogans for the financial advisory industry.

So let’s get to what Buffett did say.  #1 – “If it seems too good to be true, it probably is”. 

Think Bernard Madoff’s and Allen Stanford’s victims wish they had followed that advice?  I sure wish I had followed that advice with Auction Rate Securities.  I think Buffett is saying here to always have a healthy amount of skepticism when considering an investment opportunity.  This is especially the case right now, as we are moving into a very uncertain, unknown economic period in which we are sailing through uncharted waters on many different fronts. 

The period of 1983 – 2007 was one of the greatest 25-year economic booms in American history, if not the greatest, and the period of 1988-2000 was likely the greatest bull market the U.S. stock market has ever seen.  We may not see things like that for many, many years to come.  This goes for stocks, bonds, real estate, just about everything.  Be skeptical, do your homework, get second and third opinions, and remember it is always much better to miss out on gains than to lose money.

Buffett’s # 2 piece of advice – “Always look at how much the other guy’s making when he is trying to sell you something”. 

WOW, is Buffett taking a shot here against the financial advisory industry?  It kind of sounds like it to me.  Maybe not, but when I hear this, the first thing I think of is Certified Financial Planners, Investment Advisors, and stock brokers. 

As we have discussed here many times before, today’s Investment Advisors/Financial Planners are really just mutual fund sales representatives.  They are simply sales representatives that make money off selling mutual funds, bond funds, and money market funds. 

 Because of this, their investment “advice” really isn’t advice at all and is extremely biased towards the stock market, because that’s really the only investment type they can sell you that they can make money on.  This is why they are always negative on CD’s, savings accounts, physical real estate, physical commodities, and foreign currencies, because they can’t make any money selling those. 

They all have more sales training than they do investment and financial training.  So, as Buffett says, always remember what your Financial Planner makes money on when he gives you investment “advice”.

Finally, # 3 – “Stay away from leverage.  Nobody ever goes broke that doesn’t owe money.” 

AMEN Warren!  THANK YOU for saying this and I hope Wall Street, and the U.S. Government, is listening.  He goes farther in the video interview and says that a friend of his once told him regarding leverage “If you’re smart you don’t need it, and if you’re dumb, you’ve got no business using it”.  Again – AMEN sir! 

Our economy has been built on debt and leverage, at every level, over the last 15-20 years.  Individual consumer, household, corporation, federal government.  Every level of our economy is based on and dependent upon debt.  Unfortunately, as Buffett just said, many of the people (at every level) using leverage had no business using it, which is why we’re in the mess we are today. 

This is a lot of why there is such a Commercial Real Estate mess right now, as we discussed yesterday.  So, stay out of debt, save money like there’s no tomorrow, and stay away from investing with borrowed money (leverage).  That is true, credible, solid financial and investment advice from the country’s greatest investor.  Thank you Warren for sharing this advice with us and I hope America is listening!

One more thing that Buffett mentioned, in passing, is that he feels that the value of the U.S. Dollar may well decline, and “could become worth far less” over time.  This is due to the “huge deficits” that the U.S. government has run up, as Buffett said in passing talking about investing in yourself. 

We all need to seriously, seriously listen to this and consider the implications for this.  If Warren Buffett truly feels we may be headed for inflation, even hyperinflation, we better listen and start preparing for that possibility.  We will keep a very close eye on this topic here at Investor Rebellion and make the safest possible investment recommendations accordingly.

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In a survey I conducted of 200 individuals, who stated they wanted to make the transition from corporate to business owner, the top two things they indicated stopped them were:

• Inability to replace current income
• Not having a stable income

What can you do to counter these top two fears? How can you make it possible to have a stable income that replaces your current corporate salary? Below are the four areas to focus on in order to set these fears aside:

1. What do you really want to do with your income: replace, upgrade or down grade? There are many people who would be content earning less if it meant they could do what they loved. Others may want to keep their current level of income or even gain more. Getting specific with what you truly want and need is essential to be able to create your customized financial plan.
2. Based on what you want to do, how much money can you make? This includes considering tax breaks that may yield you more income than you thought. Even if you can generate enough money to give you what you need, I highly suggest you find other ways to supplement your income. There are many ways of increasing your income streams, the key here is to increase your financial IQ and then find the investment(s) that will work for you.
3. Put together your personal financial plan. Consider things like the consistency of your business and make sure that you are accounting for any fluctuation. What are your short and long term expenses? Talk to someone who’s got a similar business to determine what these might be for you. Once you’ve got this figured out it will help you see what changes need to be made to your business plan in order to pay yourself the salary you desire while investing in your business. This is also an area that supplemental income streams can come in handy.
4. Invest in your nest egg. As your business grows, and other income streams grow, the more money you can put away as a nest egg and the more income you can be generating. The number one piece of advice the most successful entrepreneurs suggest, think Donald Trump, Sir Richard Branson and Robert Kiyosaki, make your money work for you. Build up your nest egg and then have it work for you by providing you the passive income you need to live.

The financial fears you may have now, will dissipate once you develop and execute on a plan to create the income you need. The important thing is to think through what you really need and then get creative on how to make it happen.

Read more from the original source:
Top two fears for people wanting to become entrepreneurs