economics

Insurance as an Inflation Indicator

I closed the books on 2022 and got our taxes filed this past weekend, a full month early. I didn’t do too bad with the projections from last year. We only owed $400 this year. It’s the smallest check to the IRS I’ve written in quite a few years. With that, the financial merry go round never stops. It’s time to start on 2023’s projections.

Our insurance costs went up significantly this year. We just got our insurance bills for the year. Homeowner’s insurance is up 35%, auto insurance up 11%, and our umbrella policy is up 10%. Overall, insurance costs are 16% higher than last year.

The stunning increase came from our rental. Expenses for running our rental were up 27% year over year (2021 to 2022). We only raised rent by 11%, so we lost ground, making our margins smaller. We made a profit of about 7.4% on our investment. Our target is 8%, so we were a little under what we want to see.

This is being caused by increasing expenses. It’s going to be just as bad for 2023, and we only raised rent by 12%. For our rental, insurance is up by 56%, 2022 to 2023. In fact, we are seeing big increases across the board:

  • Insurance is up 56%
  • Pest Control up 7%
  • Termite treatments up 12%
  • Lawn Service up 10%

I do all repairs, and that is dependent on how many problems there are. Still, we are looking overall at a 20% increase in expenses there. That will mean another rent increase next year, and we may see a loss for 2023. That will mean a minimum of a 10% increase in rent for 2024, perhaps as high as 20%. I would love to hold it to less than 15%, but that depends on how the rest of 2023 goes.

There are regulatory filings with the state that are due in April. Required annual reports, fees paid to registered agents, those sorts of thing. Those remained unchanged from last year.

The next big expense will be coming in July when we get the TRIM notice of expected property taxes from the county. Since our largest expenses are insurance and taxes, that largely sets the rental rates for the coming year.

I imagine that many households are seeing similar increases in their budgets. I am guessing that inflation’s true number is somewhere around 15%, all things considered.

By Divemedic, ago

Taxes Are Racist

It’s tax season, and now we have an article claiming that taxes are racist: “Black married couples face heavier tax penalties than white couples,” and it’s pure BS. This is the logic:

When a Black or white couple have the same income, deductions and family structure, they will have the same tax liability, Gale said. But given the average economic differences between white and Black couples, according to the report, Black married couples are still more likely to face penalties and smaller bonuses.

Before tearing into the faulty logic here, I want to point out that “white” is not capitalized once in the article, while “Black” is capitalized every time. A bit of subtle “othering” that happens in journalism today.

So the taxes aren’t racist, it’s just that black married couples have more children than their white counterparts and taxpayers with children generally tend to face larger penalties under our current tax code. So it would be more accurate to say that the tax code discriminates against those with children.

I call bullshit on that, too. If a couple has a child, they get additional personal exemptions, they also get:

  • child tax credit
  • dependent care credit
  • earned income credit
  • adoption credit
  • education credit

Let’s look at two married couples: they have the same income, same jobs, same financial situation. Each couple earns a combined $68,000 a year. Their employers withheld $5,000 from their paychecks for Federal taxes. The only difference is that couple one has no children, and couple two has two children.

Couple one is in the 12 percent tax bracket, with an effective tax rate of 11.03%. They will pay $4,644 in Federal income taxes this year, so they will get a $356 refund.

Couple two has two children. They are both latchkey children, so there are no childcare expenses to deduct. They are also in the 12 % bracket, and had the same effective tax rate as couple two. However, they get more credits, so only wind up paying a net $644 in Federal income tax, and will wind up with a refund of $4,356.

So if in fact black couples have more children that whites, blacks pay LESS in taxes.

By Divemedic, ago

Value of Employees

The left is complaining about a company that is laying off 8,000 employees while it continues to pay Matthew McConaughey $10 million a year. The article complains that CEOs aren’t making sane financial decisions. This attitude comes from a complete lack of comprehension of how employees add value to a company.

Let’s look at the numbers. Salesforce has about $31 billion a year in annual sales, earning about $200 million in profit. That’s a profit margin of less than one percent. The company employs about 80,000, meaning that 8,000 workers are about ten percent of the workforce, and cost the company somewhere around half a billion a year in salary and other HR costs. McConaughey costs the company $10 million. Since he is a contract employee, there are no real HR costs.

So how much value do those employees bring? That is, McConaughey may cost $10 million, but if him being the spokesman brings $800 million in sales, it’s a good investment. That’s why companies have celebrity spokesmen. It’s why Michael Jordan was the single best shoe salesman in Nike history.

Then consider the 8,000 employees. How much do they bring in? That’s the question that needs to be answered, which is what the CEO does. It’s a value computation, not just a cost computation. Companies are not there to be a jobs program. Companies exist to make a profit for their investors. If there is not enough profit, there are no investors. If there are no investors, there is no operating capital. If there is no operating capital, there is no business. It’s not that difficult.

If you want to make more money, make yourself more valuable as an employee. You do that by showing your employer that you can help them make more in profits. Learn a skill that your employer finds valuable. If all you know how to do is flip a burger, pick boxes before putting them down over there, or pushing an idiot stick (a broom), then you are worth very little and can be replaced by nearly anyone. Or no one.

The real minimum wage is zero.

By Divemedic, ago

Get Woke, Go Broke

The collapse of SVB bank is the second largest bank collapse in US history. It’s stock price lost 90% of its value in less than 48 hours. Most of the depositors and their deposits are uninsured. People are going to lose billions. Just who was in charge of this place?

The CFO was Joseph Gentile. He was the CFO of Lehman Brothers when they failed.

The Board of Directors is filled with diversity hires who are there because of their woke credentials. They all have pronouns in their bios, which are filled with corporate newspeak. The Head of Financial Risk and Model Risk Management was this nutbag:

This is what happens when you allow people to manage your money based on woke principles instead of on their actual skill and competence. I hope the depositors at this failed bank enjoy all of that diversity, because diversity is your strength, eh?

Get woke, go broke.

By Divemedic, ago

War on Math

If you think that 32% of $71,456 a year is $6,000 a month, it explains why you still rent and don’t own a house. You can’t do simple arithmetic.

In Massachusetts, Florida and New York, Americans spend 32.9%, 32.6% and 31.2% of their income respectively on rent. Assuming you make $71,456 (the mean American income as of 2022), if you live in the Sunshine State, you’re actually sitting under a dark cloud: paying close to $6,000 a month in rent, based on those income and 32.9% figures.

I really don’t know where they are getting these “average” numbers from. Florida has a median household income of $61,777. (source: US Census bureau) When you want to borrow money for a home purchase, lenders want you to have a Debt to Mortgage ratio of no more than 35%, and a total Debt to Income ratio of no more than 50%. So that equates to a payment of $1650 per month for housing (35%) and all monthly debts that are no more than $2,575 per month. (including housing)

In most places, that gets you a pretty decent place to live. There are places claiming that the median one bedroom apartment in Florida costs are higher than they really are. Rent.com claims that renting a one bedroom in Miami costs an average of $3,250 a month. That’s about average in places like South Beach, but South Beach is a VERY expensive area where oceanfront condos regularly rent out for $25,000 a month. But if you don’t make a pile of money, don’t live in Miami Beach.

Closer to my home, there is the Orlando area. There are over 900 one bedroom apartments there for less than $1,600 a month. Go out to the suburbs, and the rents are even less. You can rent houses that are a short commute away, and pay $1,600 a month for a three bedroom house.

The problem is that people want luxury living in the most desirable areas and think it should be free. IF you are living on minimum wage, expect a minimum standard of living. My mom used to call that “Having a champagne and caviar taste on a beer and crackers budget.”

By Divemedic, ago

I have to work and save? Capitalism sucks!

As if more evidence were needed that we are seeing an entire generation that doesn’t understand money, we have young people claiming that them having the housing that they want at the price that they feel like paying. Yep, housing is a human right, but landlords making a profit is a luxury. Those are the exact terms used in this story.

Granted, the above story is from Australia, but the sentiments are identical to those here in the US, as evidenced by posts seen on social media where the latest generation vents that landlords should lose money because they are rich. They claim “they don’t own the properties at all most of the time, they just keep taking out equity from the last place and end up with 7 mortgages that need consistent renters.” Yes, that is how investing works. It’s called leveraging. You borrow money, invest that money, and turn a profit. The rate of return has to be higher than the cost of borrowing the money, or the investment isn’t worth making.

Proving that many legislators don’t understand economics either, the state of Connecticut is considering a law that would prohibit rent increases that are larger than the CPI plus 3%. The law would also make it illegal to evict a tenant when the lease expires. Since we all know that the CPI is complete and utter horse manure, it is easy to see where this will go. As expenses increase, they cut into profits. The landlord can’t ask the tenant to leave when the lease expires, meaning that a lease becomes a lifetime contract of involuntary servitude between the tenant and the landlord. All because housing is a “human right.”

This is nothing more than slavery disguised as human rights. They are demanding that property owners provide losers with a subsidized place to live. Communism in a nutshell.

The part that make me laugh as I realize the magical thinking here is the sentiment that “Get those houses back into the market, 70% of renters want to buy!” as if there are no houses out there for sale because landlords own them all. If renters wanted to buy, all they need is good credit, a steady job, and a grasp on managing money. They don’t have those things.

Many young people don’t grasp the way things are. They want to live in luxury without paying for it, without sacrifice, without work. They have decided that all they must do to have everything that they want is protest and vote for it. Working for what they want, being responsible with their money and saving for a down payment are all foreign concepts to them. As far as they are concerned, having to do those things means that capitalism has failed.

By Divemedic, ago

Tax Question II, the Search for More Money

If you get the movie reference in the title, bonus Internet points for you. Don’t use them all in one place.

So it seems like I have an answer to my tax problem from Monday. (I am posting this so I won’t lose my train of thought before I talk to the attorney on Thursday.) I would rather set a stack of $100 bills on fire than pay it to the IRS so crooked bastards in politics can use it to make themselves rich, so any way that I can avoid paying taxes that won’t see me land in Club Fed is a good idea, in my book.

The TL:DR version is that I need to sell the old house to an S corporation that my wife and I own. To do this, there are a few things that need to happen:

  • Form a Florida corporation. No sweat.
  • Within 2 months of forming, file an IRS form 2553 (pdf alert)
  • Get the old house appraised
  • Have the newly formed S corp buy the old home for the appraised value (since the sale was not an “arms length” sale, the appraisal proves it was being sold for fair market value)

This allows me to do two things: take the capitol gains deduction for the difference between the original purchase price and the appraised value that the S corp bought it for, and resets the cost basis for the property. This second part is nearly as important. The reason for that is called “Save Our Homes.” To understand Save our Homes, we have to first understand how Florida calculates property taxes.

Ad Valorem

In Florida, the county property appraiser is an elected position that estimates what your house is worth each year, called your “market value.” If your house is your primary residence, you can take a deduction called the “homestead exemption” of $50,000 from that market value. The result is called your “assessed value.” Each July, the property appraiser mails out the proposed value of each property to the property owner. If you don’t think that the value is fair, you have 30 days to appeal that valuation. Most people want it to be as low as possible, because that is the value that your taxes are based on.

The tax collector (also an elected position) charges a “millage rate” as an “ad valorem” property tax. Each “mill” is 0.1% of your home’s assessed value.

It seems complicated, but it really isn’t. For example, let’s say that your house has been deemed by the property appraiser’s office to have a fair market value of $100,000, and your county charges a property tax rate of ten mills. You would take the $100,000 market value and subtract your homestead exemption to arrive at an assessed value of $50,000. The tax of ten mills on that would make your property taxes to be $500 for the year. Clear so far? Good. It gets a bit more complicated.

Save Our Homes

Back in 1995, the voters of Florida passed an Amendment to the state Constitution that limits the annual increase in the assessed value of your homestead to the lesser of 3% or the consumer price index. Since real estate increases more than that in value each year, the longer you own your home, the better. The gap between the market value and the assessed value is called your “Save Our Homes” credit.

In most cases, you want the property appraiser to set your assessed value as low as possible. The only reason you don’t, is if you are about to move to a more expensive home. The reason is called portability. If you are moving from an old house to a new one, you can take your Save Our Homes credit with you. That can mean a significant tax savings.

So how will that help me?

As an example, let’s say that I paid $200,00 for a house, and 10 years later the tax assessor says it has a market value of $300,000. The Save Our Homes credit would be $31,000. If I buy a new house worth $400,000, that house would be assessed at $31,000 less. If the millage rate was ten, this would save me $310 a year in taxes. But what if I could get the tax assessor to admit that my house actually had a market value of $350,000? That would make my Save Our Homes credit $81,000 instead, and this would save me an additional $500 a year in property taxes at my new house.

It would seem to be a wash, since I am keeping the old house as a rental, but remember that the old house’s taxes are deductible as a business expense, and if the millage rate is higher for the new house’s location (which it is), the savings are even larger.

By Divemedic, ago