Archive for March, 2007

The US & Korea free trade agreement

Saturday, March 31st, 2007

Living in Seoul, I see articles on the free trade agreement (FTA) and protesters all over. The other day I was heading into a subway station and there was one guy with an anti-FTA sign shouting about the injustice of it all.

I don’t see what Korea could really gain from an FTA. Last year, 4,000 American cars were sold in South Korea, while South Korea exported 800,000 vehicles to the United States. I wanted to buy a Mustang here in Korea but a car that would cost me $22,000 in the US is close to $50,000 here in Korea. America sees a 13 billion dollar deficit and 80% of that comes from cars.

But the people who most oppose the FTA are farmers. Here in Korea where nearly everyone eats rice nearly every meal, you’d expect the people to demand good prices and more competition. That’s not the case, however. Rice here sells for 4x the international average. A 4 kg bag of plain white rice is at least $15 bucks in the supermarket.

Han Duk-soo, prime minister-designate of South Korea, said that if the United States insisted on including rice in the deal, “there will be no F.T.A.”

I think it’s clear that South Korea can’t afford free trade. It’s not really clear which path will be best for their economy. I suspect that the two sides will get something signed, but that it won’t be what American famrs or car manufacturers need to level the playing field.

Depressed Detroit housing market

Friday, March 23rd, 2007

It’s hard to believe that homes are cheaper than cars in Detroit these days but that’s how it is. Clearly you need to be careful when investing in real estate.

Investing in Pittsburgh real estate

Saturday, March 17th, 2007

This article about investing in Pittsburgh real estate shows a situation that seems too good to be true:

One example of how this works is a single-family, three-bedroom, one-bath house in North Braddock that sold for $12,000. The buyer put $7,000 into it and had a $1,000 down payment. The mortgage was $18,000 at 12 percent interest, Wagner said.

“There is a positive cash flow of $300 monthly, based on a $180 monthly mortgage payment, plus insurance and taxes, and a rent of $600 monthly under the federal Section 8 rental subsidy program,” Wagner said.

The mortgage at 12% interest seems strange to me – you could find a credit card with a better rate than that. Otherwise these numbers make sense to me but can they be real?

Why invest in a house if your home is a liability?

Friday, March 16th, 2007

Peter Lynch says to buy a house before investing in stocks because the home is the better investment (plus it’s useful to have a home). Robert Kiyosaki says your house is a liability, not an asset.

David Crook must be on Kiyosaki’s side judging from this article on the financial pitfalls of home ownership. He even argues that in many cases renting makes better financial sense than buying (since a mortgage is basically paying rent).

Peter Lynch might have common sense on his side but Kiyosaki and Crook make convincing arguments.

Investing in Nova Scotia real estate

Wednesday, March 14th, 2007

Here’s an interesting article on Nova Scotia real estate. It almost begins to sound like an ad for White Point Estates but Nova Scotia seems to be a real estate investing opportunity that’s not too exclusive (prices aren’t too high) and that offers good potential returns:

Since the media—including the likes of Consumer Reports, International Living and CNN—have begun to rate Nova Scotia among the world’s best places to vacation, live and retire, property costs have risen as much as 50% annually in some areas of the province. Yet despite the price increases, property here remains a fraction of what one would pay for similar real estate back home. And with enticements like some of the world’s most spectacular scenery, a relatively temperate climate (winters are milder than the northern U.S.), and a low profile, stress-free lifestyle far from the rat race, wars and terrorism, it’s easy to see why life looks so good under the Maple Leaf.

Society Hill Philadelphia real estate said to be a good investment

Friday, March 9th, 2007

Here’s an article on this month’s Philadelphia Magazine. They are trying to predict good areas for investment over the next 5-10 years: “On the up-and-coming list, Society Hill from 8th Street to the Delaware River and Pine Street to Callowhill.”

China’s economy, foreign exchange reserves, currency, trade surplus problems

Tuesday, March 6th, 2007

Here’s an interesting article that say China’s economy is the world’s problem. However, I just finished reading an article that reminds us it creats problems for China as well as for the rest of the world.

It is common knowledge that China buys dollars in order to keep the yaun artificially low, making exports more competitive. Keith Bradsher in the Tues. March 6 International Herald Tribune (Joong Ang Daily group) writes that investing these dollars in US securities (like treasury bonds) helps keep interest rates low for US mortgages and the like.

Bradsher goes on to say that Chinese citizens are unhappy to see the money invested abroad. They would rather see the money invest in say Chinese education. However that would mean selling dollars for Yaun and allowing their currency to appreciate against the dollar. China can’t do this because they want to keep their export businesses as strong as possible.

China may be getting ready to diversify, possibly mimicing Singapore’s Government Investment Corporation. What effect will this have on China and the world?

Are cheaper homes better investments?

Sunday, March 4th, 2007

It’s interesting to me how the cheaper real estate in an area is typically in high demand compared to more expensive real estste. For example at the Jersey shore by Long Beach Island, a small home on a lagoon in Beach haven West was worth about $90,000-$100,000 in 2000. Today it’s more like $350,000. During the same time, a house on the bay, bigger house and better location, went from being worth around $400,000 – $450,000 up to about $800,000.

In this case the lesser home was the much better investment. The location wasn’t as nice and the house was much smaller but there’s always pressure at the entry level it seems. Take this article for example. It says that people are giving up on amenities or increasing their budgets in the $200,000 to $400,000 range in Philadelphia.

However, the multu-million dollar homes (often highly personalized) of professional athletes are not selling. When they say that there are more homes on the market, you wonder if that means there are more pricey homes on the market. Entry level homes in the New York / New Jersey area don’t seem to suffer from flagging demand at all.

And it makes you wonder what will happen to these homes in Philadelphia. Is the view worth millions in this market?

Gold last week and next: Central Fund of Canada, IAMGold Corporation

Saturday, March 3rd, 2007

Over the past 5 years, gold stocks have been my best investment. Just look at CEF and IAG I used to own WHT and sold it when they were merging with IAG) compared to the S&P 500 on the chart.

Yet with gold down like crazy this week despite all the geopolitical uncertainty that is supposed to be good for gold, you have to wonder. Here’s one author who is not bullish on gold and sees short term pain.

Commercial real estate tax when same building has a rental office and personal business office

Thursday, March 1st, 2007

A recent question:

My father has owned a commercial building in NJ for years. He is trying to retire now and plans on selling it. The building holds two separate offices. He has always worked out of one for himself and has always rented the other, earning (and paying taxes on) rental income. Upon the sale, is their a formula that Uncle Sam uses to figure out how the sale should be seen (sale as a rental property vs. sale as a place of business)? He is also thinking about using the rental sale proceeds for a 1031 Exchange and buying a retirement home near the Jersey shore that they would eventually retire to. In theory, he would rent it out for a few years and then move into it as their primary residence, when they sell the house they live in now. Is such a scenario a viable way to avoid capital gains taxes? If so, is if there is a minimum amount of years that the shore house must be held as a rental property before making it their primary residence, to avoid paying capital gains tax on it? Thanks in advance.

And some answers that came from an internet message board – don’t make any decisions until you verify this information:

I’ll answer the first question: use the same formula you used to allocated the basis for depreciation purposes between the business and the rental.

To answer your second question: I believe he should avoid capital gains tax. One may exchange a business property for rental property (in your case) and meet the requirements of IRC section 1031.

These rules generally provide that no gain or loss is recognized when business or investment property is exchanged solely for other business or investment property of like kind.

What is like-kind? Without going into it too much, real property exchanged for real property shall be considered like-kind provided that both properties are either business or investment properties. There are also some timing requirements that you must be met.

But if you plan to seriously enter into this transaction, please consult a professional.

For the shore house to be considered a primary residence you have to live there for two years.

And some more questions from someone who is trying to answer:

How was the property reported for tax return purposes – i.e., you mention that is is ONE building but TWO different offices (one rental real estate and one for your father’s business)? Was the rental real estate reported on one Schedule C of your father’s Form 1040 and was the office used for your father’s regular business reported on a separate Schedule C ? Or was your father’s business separately incorporated as C or an S corporation, or setup as an LLC ? Just curious because the way the two separate businesses have been reported may affect the way you want to handle the proceeds from a potential like kind exchange. I assume that when your father sells the building he will sell the whole building, thereby creating proceeds allocable to both the rental real estate business and his “regular” business. In other words, the building is not anything like a duplex where title can legally be sold to one unit (rental real estate part) and the other unit doesn’t have to be sold (father’s regular business).