All Forum Posts by: Lucas S.

Hi everyone. I joined BP a little over a week ago and have been posting some and reading lots since then. But I figured I should formally introduce myself.

I live in Fairfax County VA (just outside of DC). I am not as young as I once was (will turn 30 this year), and have little concrete experience with REI although I have been paying attention to it for the last 5 years or so. I think by BP standards I am fairly risk adverse, but as I have a great job, understand the numbers side of finance pretty well, and am very good at managing my expenses (and still doing tons of cool things), I couldn't pass up the opportunity to be completely debt free before starting REI. I will have my house paid off in about 9 months and then plan on building up an REI investment cash fund. My goal is $2500 in cash flow from completely paid off properties within 5 years (with my current job/cash flow it looks possible), which would more than cover all my living expenses. I am pretty certain I would have to look outside of Fairfax though as all the properties I see for sale would not work for buy and hold investing (cost to rent ratio is way out of whack). After this I would be more open to leverage on other investment properties.

My next big hurtle however is to decide on where I am going to be living/working. I like my job a lot, but would prefer to be out of the Northern VA /DC Metro area, so I am keeping my eyes open for other opportunities within my company. Moving to a lower cost area and selling my house in DC would afford me a good bit of investment cash as well, or I can keep it and rent it out (did that before while on 2 1/2 year assignment to Hawaii ;-) ). Until I make a decision however I plan on learning all I can about REI and other investments, and maybe I can share a thing or two about managing expenses and personal finances - especially to all those young guns who think they can get rich instantly with no cash down ;-). Although I can see that a number of the moderators followed a similar path to what I am on, so they mostly have it covered already. ?

By the way I am a big ERE and MMM fan, so if I ever point anyone that way it is just because they are better writers then I. I haven’t met Jacob from ERE yet (maybe someday), but I did get to take Mr. MMM free diving in HI :-)

Jocie Moore - My first peice of advise to anyone looking to starting investing is to get your own personally finances in order first (minimize expenses, get out of debt, maximize cash flow, maximize income potential, understand your true goals, etc. . ). That is the #1 best investment you can make. Then take on roles that allow you to do things that interest you. There are tons of skills involved in realestate and you arn't going to be a pro at all of them. So figure out what interests you and do it (construction/repair, marketing, appraising, tenent management, etc. . ).

Assistant Property Manager sounds like a good way to me to learn :-) Maybe it will help you earn a bit while learning at the same time.

@Bitsy Voloskie

I don't mean to scare you off the deal at all, just trying to bring something to your attention that should probably be investigated. Sounds like you have a good plan in talking with your Tax Advisor! Best wishes and let me know what they say if you get a chance.

David. Did you bother reading my post? If something is for sale on the open market and you are able to purchase it for a given amount - that is the market value.

The IRS defines it this way:

"What is "Fair Market Value?"

Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Regulation §20.2031-1.
"

So if it is being sold in the normal market for whatever the item is, then you are free to purchase it for as little as possible. If it never goes to market (ie you buy it directly from a friend), then you are not covered by this.

I am sure they have a system for determining rough value for properties in a given area and then they just flag certain transactions for manual review if they think it is worth investigating. Then they would do what everyone else does for determining property value (do some sort of comp based appraisal, or base a value on the income). If properties are really cheap in your area I would imagine they would not prioritize that for review as the potential return to them would be very small if any. Their IRS website says you are suppose to get an independent appraisal done on your own to establish value. I didn't find where it said how they would do it if you didn't.

Man I totally live in the wrong area though! People buying houses for $100-$7000??? I bought a forclosure at the bottom of the market for $230,000 +$20000 in repairs, and that was a great deal for Fairfax County VA (had gone for $400000 previously). Well i guess it is in my plan to stay a bit longer for the good jobs and then move somewhere else where I can invest more easily.

Ok, so I haven't had to deal with this situation so just doing some reading on it now. If anyone has more definitive info please chime in.

Well the way the IRS puts it it on their web page: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Gift-Tax, and I understand it:

"The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not."

Generally if something is on the open market and you purchase it in a competative enviroment then the IRS deems the purchase price as the market price (or value). However if something never goes to market and you purchase it for substantially below assesed value, they can easily make a case that it was a below market purchase and deem it as a "gift". There is a $14000 exclusion that doesn't need to be reported, so you could be covered by that, but probably not. Beyond that It is a bit more than I have had to deal with, as it is unclear to me by reading the IRS documents weather the gift would be taxed to the donor or the recipient (looks like they say donor is generally responsible, but that part is a bit confusing to me).

http://www.bankrate.com/finance/retirement/know-the-gift-tax-rules-1.aspx also talks about the lifetime exemption limit of $1,000,000 from the donor and that the donor is the one that would need to pay taxes (not the recipient). So maybe you would be ok, but maybe your friend who is in financial trouble might end up owing a large amount of taxes (he might get buy by filling out a Form 709, as the total he has ever gifted is less then $1,000,000). Maybe someone can confirm that part.

I think I would benefit more from deflation than inflation (as long as it didn't last forever). I know my "investments" would loose value but I have a large cash flow to buy cheaper investments/properties as the price drops, and I have no debt :-)

Is anyone concerned for Bitsy that this may not appear to the IRS as an arms length transaction (think that is the right term) and she might get hit on taxes on the difference between purchase price and value (becuase they deem it a gift)?

Definitly seems like it would make sense with those numbers. In generally it is a good idea to refinance if :

Cost To Refinance < Monthly Savings * Months You Plan To Make Payments (either sell or pay off loan)

To be more conservative I would generally recommend only using half (or less) the time you plan to make payments in your calculations as plans have a habit of changing. That way you are more sure to brake even on the refinance.

Sounds like you stand to save a lot and plan to keep it for a while so it would definitly make sence. Especially if you can get rid of PMI (which I am guessing you are paying now with that LTV ratio)

I think you are confusing the details of bi-weekly payments (which involve paying 13/12s of what you would have paid on a normal payment) and bi-monthly payment plans. Bi-weekly payments will save around 6-7 years off your morgage primarily becuase you are paying more into principal that you would otherwise early on in the loan. Bi-monthly plans will not save you anywhere close to that.