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Monthly Archives: February 2016

Starting the Journey to Freedom

A balanced approach to investing can help you achieve the goal of personal freedom—whatever that means to you.

A balanced approach to investing can help you achieve the goal of personal freedom—whatever that means to you.

I’ve gotten several questions about the cash flow diagram in my last post, so I’m going to explain it in detail today.

First, if you haven’t already read Robert Kiyosaki’s short book Rich Dad, Poor Dad, I highly recommend it. I even bought copies for many of my friends and team members. It’s a short read, but it packs a lot of financial intelligence in amongst its folksy yarn. It’s not biography (or necessarily factual), but the fictive stories illustrate his points. Continue reading →

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Balanced Investing in Real Estate

Lee addresses a group of investors with Ryan Connell of Grand Coast Capital and Paul Esajian of FortuneBuilders.

Lee addresses a group of investors with Ryan Connell of Grand Coast Capital and Paul Esajian of FortuneBuilders.

We are attending a real estate investing convention hosted by FortuneBuilders this week. Anyone who has ever an event like this knows that you are running from the time you wake up in the morning until the time you fall into your hotel bed at night. There is so much to learn and so many people to meet!

And the people are the best part of it. I met another investor who lives in Milam County, where our ranch is and where we hope to retire someday. Isn’t it ironic that I had to travel to a convention to meet a neighbor with whom I have so much in common?

But the highlight for me was being asked to address a group of fellow investors about investment strategies and how you can be fully invested in various aspects of the real estate economy and still have a comfortable degree of diversification. I hadn’t spoken in public since I left the corporate world a few years ago, and this crowd was the largest I have stood in front of since I left rock and roll behind in the 1980s. Being asked to explain your investment strategies to a crowd of more than 300 fellow investors is very exhilarating and very humbling.

A balanced approach to investing can help you achieve the goal of personal freedom—whatever that means to you.

My points echoed the advice of all my mentors:

  • Wholesaling and redeveloping properties should only be one part of your overall strategy. These activities have the highest reward, but that means they also have the highest risk.
  • A rental portfolio can help you build real wealth over the long haul, but it is also not without risk.
  • Putting your money to work by buying into or investing with a hard money lender can generate moderate income while spreading the risk over a much broader pool than lending on a case-by-case basis, but the returns can be lower.

For the last point, I have a considerable chunk of my investment portfolio in Grand Coast Capital, but I still engage in private money lending. While I intend to increase my Grand Coast investment over time for a more certain return I still enjoy helping my fellow local investors achieve their goals when I have free capital to invest with them.

JP Getty once said that the best way to get rich is to help others get rich. Not only is helping others efficacious, it is the most rewarding path. Helping others is not just part of our mission statement at Hermit Haus Redevelopment, it is our core value.

So I would be remiss in my helpfulness if I failed to include this caveat: Nothing you do in the investment game is without risk. As my dad used to say, “If it was easy, everyone would do it.” What he didn’t say was that if it was easy (or risk-free), there wouldn’t be any profit in it.

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Zombies are real and scary – zombie DEBTS, that is

A contractor friend of mine called me up the other day, frantic about something he’d received from a debt collection agency.  He had never gotten a 1099-C before, and the instructions said he was going to have to REPORT nearly $50,000 extra in taxable income on this year’s tax return for something that happened 20 years ago.  He called me because I’m his realtor and the debt involved a home he had owned with his ex-wife.

This topic gets pretty complicated, and could raise your blood pressure. If you stop reading here, however, just take these few points away with you:

  1. If you receive a 1099-C, you need to file an IRS Form 982.
  2. There are some exceptions where the forgiven debt is non-taxable.
  3. If you or someone you know is currently facing bankruptcy or foreclosure, that may not be the kind of relief you think it is.  Try to avoid foreclosure.  There are other options for you (like letting Hermit Haus Redevelopment, LLC help).

Form 1099-C

Lenders who forgive a debt of at least $600 must send a 1099-C to the debtor by January 31 following the year in which the forgiveness occurred. The amount of debt cancellation appears in Box 2 of Form 1099-C. If the amount is indeed taxable income, it must be reported on the income tax return filed for that year.

From IRS Form 982 Instructions (PDF)

Qualified Principal Residence Indebtedness
You can exclude canceled debt from income if it is qualified principal residence indebtedness. Qualified principal residence indebtedness is any mortgage you took out to buy, build, or substantially improve your main home. It also must be secured by your main home. Qualified principal residence indebtedness also includes any debt secured by your main home that you used to refinance a mortgage you took out to buy, build, or substantially improve your main home, but only up to the amount of the old mortgage principal just before the refinancing.

How to report the qualified principal residence indebtedness exclusion. To show that all or part of your canceled debt is excluded from income because it is qualified principal residence indebtedness, attach Form 982 to your federal income tax return and check the box on line 1e. On line 2 of Form 982.

The Deal with Collection Agencies
It seems that some debt collection companies purchase old debts, mark them up with incredibly high penalties and fees, then “forgive” them and write them off as tax losses and send the debtors 1099-C forms—which means you have to pay taxes on the forgiven amount.

Now, years later, your  financial situation may have changed for the better. You might have to pay income tax on the forgiven debt just as if you had “earned” the forgiven debt as income this year.

The new creditor (the collection agency) has to have engaged in significant, bona fide collection activity at any time during the 12-month period ending at the close of the calendar year. Robo-dialing and automated mailing don’t constitute “significant, bona fide collection activity” for this purpose.

Some Considerations for Disputes

How do you know what the collection agency actually paid for the debt? They’ve paid pennies on the dollar for this debt. They’ve made money.  How is the “forgiven amount” calculated? Do you use the original amount of the debt with the creditor or what the collection agency paid for it?  With the horrendous shape the collection agencies records typically are, it would be tough for them to prove ANY relationship between themselves and the original creditor.

The IRS has a process in place for dealing with this situation. Ironically, they don’t provide this form on their website. To deal with this errant 1099-C, consumers should:

  • Call the IRS (1-800-829-1040 ) and have an IRS representative initiate a Form 1099 complaint.
  • The IRS will fill out form 4598, “Form W-2, 1098, or 1099 Not Received, Incorrect or Lost.”

Here’s My Question:

From http://consumerist.com/2008/02/08/collection-agencies-sending-out-1099-c-forms-for-zombie-debts/

Every state has its own statute of limitations that determines when you can no longer be sued for old debt; however, the FTC says that doesn’t prevent collection agencies from attempting to collect time-barred debt provided they don’t harass you or engage in anything illegal. Collection companies aren’t allowed to collect more than the original debt, “unless your state law permits such a charge.” Debt included in a bankruptcy can’t be collected at all.

Does anyone know the laws in Texas regarding this specific activity?

For further reference:
http://consumerist.com/2008/02/08/collection-agencies-sending-out-1099-c-forms-for-zombie-debts/
http://www.creditinfocenter.com/wordpress/2009/07/13/can-a-collection-agency-issue-a-1099-c-for-settled-debt/
https://getoutofdebt.org/43711/how-to-deal-with-a-new-1099-c-issued-on-old-debt-using-little-known-irs-form-4598
https://www.irs.gov/uac/About-Publication-4681
https://youtu.be/8cyQO89xgzA
https://www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation

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Cloudy Title

I borrowed this picture from a WUNC article on bank robbery. It seemed appropriate to use it in a discussion of robber banks.

We found out about a bogus $14,000 lien against one of our rentals today. Bogus liens are a multi-million dollar industry.

It is ridiculously easy to put a lien on someone’s property in Texas.

This morning I was talking to our banker at First Texas Bank about a Home Equity Line of Credit (HELoC) we are in the process of taking out in the company name using a house Suna and I own free and clear. This is a strategy to help build credit in the Hermit Haus name. The company is responsible for paying back the loan, but Suna and I are still on the hook. It’s like cosigning for your kid’s car.

During that call, I found out that a bank put a lien on our Lloydminister property—the one we own free and clear—in the name of Susan Kendall and her husband. The bogus lien is for roughly $14,000. That’s no pittance in anybody’s book.

Apparently, having a name that sounds like someone else is good enough. Someone at that bank decided that Susan Kendall must be the same person as Sue Ann Kendall and filed a lien on our property. Texas has no mechanism to check the legitimacy of these liens. The state blithely assumes that anyone filing such a lien must be correct and homeowners are guilty until proven innocent.

I have known about the possibility of these bogus liens for years, but I have never encountered one before. In checking with a couple of Realtors, I was told situations like this one happen “all the time.” The problem apparently amounts to millions of dollars each year in legalized fraud or robbery, depending on how you want to look at it. The good news is that the lien holder  can’t force us into foreclosure. They have to wait until we find out about their scheme or sell the property.

Many people don’t find out about one of these bogus liens until they have a contract to sell their property. Then they are under too much time pressure to fight the fraud and end up paying for someone else’s debt just to be able to sell their own property. But on the positive side, it’s the title company’s job to clear these things up, and, given time, they are pretty good about clearing them up.

Luckily we found out with time to fight. Keep following this series to learn more as I do.

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Communication Is Key

The siding is up on the kitchen bump out.

The Blue Ridge project is still running behind schedule, and there were a couple of developments that will put it farther over its budget this week.

First the good news: the cabinets and countertops are in in the kitchen and both bathrooms. The granite countertops really pop against the white cabinets, which are not quite Shaker style. We even had the folding table in the laundry room topped with the granite.

And the siding is up on the kitchen bump out—the one where we had to remove the brick facade last week. Part of it got knocked down, and it was safer to remove the rest of the brick than to repair the remainder. The horizontal HardiePlanks echo the siding on the other three sides of the house. It looks good, even in the weird default primer color. It will look even better painted to match the house.

That brings us to the bad news and the title of this post. Last week, we messaged the contractor, Chris, a picture of the color fan showing the color we wanted matched against a wall. The contractor asked if we were sure, and we responded that we were without really understanding what he was asking. The problem is that each blade of the color fan has a range of shades of the color ranging from very pale to dark. We had used the lightest at a different house, and that one had a note written on it. Chris thought we wanted the color with the note, and we thought he would understand we wanted the one that matched the background against which we took the picture of the color fan blade. Neither of us actually mentioned the name or color code.

So when I showed up to inspect the property today, I asked in all innocence if they had just sprayed the house with primer. “No. That’s the actual color you guys chose.” Argh! The whole exterior of the house is the wrong color. So we get to buy more paint and pay to repaint the house: More money over budget and more time lost!

The bottom line is this: when you are talking with your contractors (or human beings in general), be as specific as you can. If you’re talking about paint, talk color codes and names. It’s an easy mistake to make and a difficult lesson to learn—again. Get Sue Ann to tell you about the time I had her house painted orange.

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