Updated on 06.05.14

Reader Mailbag: Project Planning

Trent Hamm

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Buy or sell townhouse?
2. Collection agency debt
3. Figuring out priorities
4. Tithing
5. Thrift store receipts
6. Repossession question
7. Steve Jobs biography
8. Rent versus buy
9. FSA question
10. Ethical question

Lately, I’ve been planning a pretty large project with a lot of different dimensions (it’s more of a personal project).

I started off planning it on several sheets of paper, which gradually grew into a three ring binder. Eventually, though, that started to get cumbersome.

So, I moved the whole thing into Microsoft OneNote using a scanner. It worked like a charm (after spending a fair amount of time making sure everything moved over correctly).

For large personal projects, OneNote really really does a good job once you get used to using it.

Q1: Buy or sell townhouse?
We bought a townhouse in 2005 for $224K. Our mortgage right now is $184K ($1400 per month). We moved out of state in 2009 (and since the market had tanked, decided to keep the property) and now rent it out with property managers. It wasn’t too bad early on as we were out only $150 per month to keep the property, hoping of course that it would go back up or at least that the rent would cover the mortgage, but it is getting worse. Now we’re out $400 per month to keep the property (something about the escrow on the property was miscalculated, making our mortgage go up this year to pay it. Don’t really understand it.) but the mortgage should go back to $1250 next year, making the loss only $250 per month. I calculated that in the amount of time we’ve had it rented out we’ve spent probably $15K on that property ($400x3yearsx12months per year). That number is shocking!

I can’t refinance, because it’s not our primary residence (to refinance I need to sink in another $50K to the property in order to qualify). I can’t sell without losing money (it’s zillowing at $192K). It peaked at the top of the market at $300K, and now we’re underwater. It’s sad, really.

We want to keep it, but really does it make sense? Seattle market is forecasted to rebound sometime in 2014. It’s tight to pay the mortgage right now, but doable. Would you keep it knowing these parameters?
– Kelly

Given that your monthly payments on the property are relatively small because it’s being rented and managed, I would look at it as an investment worth sitting on.

Let’s say you pay an average of $250 a month over the course of the entire mortgage. You will have paid $90,000 total for this townhouse that’s worth at least $192,000. That’s a pretty solid investment. It might not be a grand slam, of course, but if the housing market rebounds at all, it’s going to be a pretty good one.

Unless you really need that $250 a month, I’d sit tight. I’d probably only sell if I really needed the money.

Q2: Collection agency debt
I have a bill that has gone to a collection agency, from a doctor’s visit that occurred almost 4 years ago. I paid the doctor at the time of the visit – I have a bank statement that clearly shows the charge, but the collections agency insists that they purchased it from the doctor when she retired – she retired about 2 months after my visit, so she’s been out of the business awhile. She wasn’t sharing office space with anyone, and her practice completely disappeared (the building is even gone).

The collection agency tells me that my bank statement doesn’t prove anything, that I need the original receipt (which I don’t have, because credit card receipts fade after a couple of years to be illegible). It’s only $50, which I can cover easily. But it’s the principle – I already paid for that visit.

But I’m worried about what it will do to my credit score. I’ve worked hard for the last five years to improve it from the havoc I wreaked on it in college. At this point, I want to do what’s best for my credit score. I have a car loan and student loan that I’m aggressively paying off, but no credit card debt and my salary is in the $70k range. How bad of a hit would my credit take if I ignore the agency?
– Delores

The first thing you should do is see what exactly appears on your credit report. Use the federal government’s tool at annualcreditreport.com to see what’s actually being reported. If nothing is being reported, I would ignore it.

If you already paid for the visit, you shouldn’t be obligated to pay for it again because of someone else’s accounting mistake.

If it is being reported and is relatively recent, the best move you could make is to pay it off immediately. This will mark it as “paid” on your credit report, but the late payments will last for seven more years with a relatively small (and shrinking over time) negative impact on your report.

Again, these statements are based on how we think FICO scores work. They don’t publicly describe how exactly scores are calculated, as it’s a trade secret. Instead, such assumptions are based on observed changes in FICO scores and what hints Fair Isaac themselves give.

Q3: Figuring out priorities
I currently have $8400 (about 7 months) Emergency Fund, and I am saving about 22% for retirement (but would like to up that because I’m 33, and got a late start). I am very frugal, and the only debt I have is a HELOC with a balance around $30,000 (bought a fixer-upper with cash, then financed the repairs/upgrades). I am really allergic to debt, so this worries me a bit. My current vehicle is a 2003 Kia Spectra with 90,000 miles on it, and at the rate I am going, I expect it will need to be replaced sometime in the next 3 years, so I feel I need to start saving for this immediately, so I won’t have to finance it.

Additionally, I have dreams to travel, or at least take a couple of vacations a year, one inexpensive (like camping in different places here in the US, and one to two weeks in another country, starting with places that have a favorable currency conversion) I haven’t had a vacation in years…

After retirement savings & living expenses, I have about $900/month to knock down the HELOC, and save for the other two goals. So far, I have put every cent towards the HELOC and haven’t saved anything for the other two. Like many people I have been devastated by economic events over the last three years, including massive portfolio losses, and a long period of unemployment, and I am only now digging out. I am ready to start saving and planning for something fun/positive, rather than saving to protect from fear/debt.

The short of it is I’m not sure how I should prioritize these goals. Should I up my Emergency fund to where I could buy a car with it if needed, then funnel the rest into the HELOC & Vacation fund? Should I put off my dreams for a few more years in order to be completely debt free including the new car? I am just worried that if I do not do something towards travel, it will never happen…there will always be important things that come up to conflict with it…
– Tina

If travel is a top priority for you, then I would set up a savings account at a new bank, then set up an automatic transfer of, say, $100 or $200 a month into that account from your primary checking.

Once that’s out of the way, do everything you can to eliminate debt while that account builds. Then, when that account grows large enough, take that trip, using the money in that account to pay for everything.

That way, you can focus on what needs to be done, such as paying off debt and building an emergency fund, while still moving towards a personal goal that matters deeply to you.

Q4: Tithing
My religion asks that we tithe 10% of our income, so I typically just write a check to my church. However, I’ve come to dislike some of the things that my church spends their money on. I am struggling with the idea of simply taking my 10% and spending it on my own selection of charities. What do you think?

– Ronald

That’s really a spiritual question you need to answer for yourself.

It sounds to me like this is more of an issue of your disagreement with your church and the moves they’re making. Perhaps the answer is not to redirect your tithe, but to examine whether or not another church might be a better place for you. Many churches do not require a tithe, but encourage the members to make up their own minds about what to give. I personally feel that 10% is a good level of giving, but it can be split among any charitable organizations that you feel right about.

If you’d like to study more on the subject, I invite you to read the Wikipedia entry on tithing.

Q5: Thrift store receipts
I’ve been donating to the thrift store for many years now, and used to get the tax receipts. However, being a renter I found that $1-2000 in donations barely budged my taxes. As a result, I stopped asking for receipts.

My wife and I now own a home and I’ve been told that because we own a home we can get big tax incentives for donating and that I should keep the thrift store receipts.
– Richard

You won’t be getting a “big” tax incentive for your charitable giving receipts, but it is worth your while to hang onto receipts from charitable giving.

The reason the impact was almost nothing before is because charitable giving for people without a mortgage is usually wrapped into the standard deduction for people who don’t itemize their taxes, which is, frankly, most people. People who actually do itemize their taxes and don’t take the standard deduction are mostly people with mortgages or people with a lot of charitable donations.

In your case, your mortgage interest probably pushes you into itemizing, which means that your charitable donations will have an impact. If you’re in the 30% tax bracket and can claim $2,000 in charitable giving and donations, that’s going to be a $600 reduction in your tax bill.

Q6: Repossession question
Two years ago I took out a loan and bought a used car that seemed to be in excellent shape. However, after about six months it began to have serious problems and now it does not run at all. It would cost over $6000 for the repair, with no guarantee that it would run even then.

Unfortunately, I still owed a lot of money to the bank, so I am unable to get rid of the car. I contacted the manufacturer repeatedly but could not get help from them. I contacted the dealership, but they were unable to help. Lemon laws do not cover my situation. The expensive warranty I bought also does not cover the repair.

For the past year I have been making my monthly payments on the lump of metal sitting in my parking lot, and I have gotten the loan down to $5000. I do not make much money ($2400/month and have a partial-dependent) and it is really painful to continue with the $300/month payments when I know I am getting nothing in return. In addition to the auto loan payments, I also need to pay for full insurance since the bank owns the car, even though it is registered as a non-op. Ouch. This is a lot of money that I could be investing.

I know that you say to never let anything be repossessed if you can help it, but is it really worth $5000+ to keep my credit score up for the next seven years? My score is currently over 700, and I am curious as to how low it would drop if I allow the car to be repossessed.

Is this a special case, or does your “never let it get repossessed” rule still stand?
– Joe

My general stance against walking away from loans comes from a sense of how I would like to be treated if someone borrowed money from me. If I loaned my brother several thousand dollars to buy a car, he bought a lemon, and then came back to me and tossed me the keys and called it even, I would not be happy.

To me, it’s not right to treat anyone in that fashion. Many people abstract this by saying that it’s just a faceless business, but it’s still an extremely poor way to act toward others.

From a dollars and cents standpoint, it very well might be the right move to walk away here. From a personal standpoint, I never feel that it’s right to just toss the keys back at someone when you decide you didn’t like the purchase you made on borrowed money.

Q7: Steve Jobs biography
Given your comments recently about the Steve Jobs biography by Walter Isaacson, I’ve got to guess that you’re holed up somewhere with your library copy. What do you think of it?

– Reggie

I’m enjoying it so far. Walter Isaacson has certainly not written a worshipful puff piece, and that’s a good thing. It gives a real picture of a person, warts and all.

It’s important that, when you read a biography like this, you’re seeing both the good and bad in a person. To me, that makes the person real. All of us have done good things and bad things in our lives, and we hope to be judged on the good or at least on the aggregate of good and bad.

I vastly prefer biographies like this that show us both the good and the bad in a person and let us make up our own minds.

Q8: Rent versus buy
My wife and I are big fans of living cheaply, but have a conundrum (or at least it seems so). We’re in our late 20’s and have no debt of any kind. We have no college debt, no mortgage, and no credit card debt (nor have we ever). We have good credit, and some amount of savings. We’re looking to move from North Carolina to Fort Collins, Colorado in a couple months for me to go to graduate school, which will be paid for with a graduate assistantship, which will also pay a monthly stipend. From looking around, it looks like Colorado has a bit higher housing cost than what we’re used to in North Carolina. Does it make since for us to finally buy, instead of renting? We’d like to stay in Fort Collins indefinitely, with me teaching at the university, so we wouldn’t be worried about selling for many years. So, should we rent for the next 5’ish years while I’m in graduate school, and then buy, or buy an inexpensive, possibly foreclosed home now?

– Alan

My sense is that people who are in graduate school at an institution rarely wind up working for that institution after their studies. It does happen, but it’s a relatively rare occurrence.

Given that, I would assume that in five years, you’ll be moving to chase your career path, in which case you’ll be trying to sell the home.

The first five years of a mortgage are the worst, as the largest portion of your payment is going toward interest on the loan. The only way you’ll make money here is if the Fort Collins real estate market takes a leap in the next five years or if you find a foreclosed house with some potential for fixing it up. Otherwise, renting will probably be the most economical option.

Q9: FSA question
I have until mid-November to decide if I want an employer-sponsored FSA next year. I don’t foresee any significant out-of-pocket expenses for me or my family in 2012 – maybe a couple hundred dollars in co-pays and deductibles but nothing else. In light of that, do you think an FSA would still be worth the time and hassle? I’m thinking the tax benefits wouldn’t be that significant and I’m concerned about not being able to get over-the-counter medications reimbursed without a prescription.

– Walter

FSAs work best when you’re confident that you’ll be using the money you deposit into the account. If you don’t use it, the money typically is returned to your employer.

In other words, don’t bother depositing money into an FSA that you’re not pretty certain that you’re going to use.

In your case, an FSA isn’t worth it unless you’re able to put in less than $100 or so, in which case the tax savings may not even be worth the effort.

Q10: Ethical question
I was in a store recently where I saw an item that was obviously mispriced. It was on the order of a 92% discount on the item. I was left with a moral dilemma. Should I tell the business about this issue or should I just take advantage of it, buy the item, and eBay it for a significant profit?

– Arnold

It would depend on whether it was a large chain business or a small independent one.

If it were a large chain business, I would honestly assume that it was an unadvertised sale and take big advantage of it. I’d buy several copies of the item and check out quickly. Large chain businesses have very tight mechanisms for pricing and stocking, so I’d think the price was intentional.

If it was a local business, I’d check with the cashier first, making sure that the price was what it was supposed to be. If it was correct, I’d buy the item. If it was not, I’d still feel like I did the right thing.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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  1. Josh says:

    Q1: This is not an investment, but a liability. I did not see if other things like future maintenance are also included in that total or not. Sell it and cut your losses while you can. Invest the difference in something else once it is sold.

    Q10: It doesn’t matter if it is a large chain or local shop, the morals apply to both equally.

  2. Snowy Heron says:

    Q2 – re: collection agencies contacting you about prior bills. There was a news article I read in the Wall Street Journal yesterday about 2 collection agencies lying to people that they owed certain debts. Don’t let yourself be told you need to pay something you don’t owe. My daughter got herself in trouble with that kind of a situation a few years back. I could never figure out if she knew exactly what she owed since these places DO NOT SEND OUT STATEMENTS!! That should be illegal – trying to collect debts without providing the debtor with any kind of a statement. If you do not owe the money, don’t pay it! Even if it is only $20, it will only encourage this sort of scam from continuing. And that is what it is – a scam!

  3. Riki says:

    Q1 Kelly

    You say your mortgage is currently at $184K. Even if we assume that Zillow is a fairly accurate estimation of what you’ll get for the house (which it may or may not be), an estimated value of $192K means that you are NOT underwater. My understanding of being “underwater” means the sale of your home would leave you with outstanding mortgage debt. (In other words, you would have to owe more than your home is worth, and it doesn’t look like you do).

    Would you lose money on the sale of your home? Yes you would; it doesn’t look like you will get the money you paid into the home back. But that doesn’t mean you’re underwater. From the rough numbers you provided, you could probably cover your costs from the sale (paying off the outstanding mortgage and the agent’s and lawyer’s fees).

    Either way, it’s not a good situation to be in but you do have options. For starters, if you want a better estimation of how much you might sell the house for, I would talk to a couple of real estate agents and really scour the market for similar houses already for sale. Do your own research because Zillow is only a starting point and to make this decision you need more information. Then you need to do some soul-searching — this house does have the potential to pay off for you in the long run but there are risks. Commenter #1 pointed out long-term maintenance costs, but there are also the challenges of owning a rental in a different state. Do you want this kind of committment? If you’re thinking of the house as an investment, you will have to maintain it to help the house retain its value.

    Losing money on the house overall sucks, but at least you do have the option of selling. I would make this decision based on what’s best for your family moving forward. The rest is just sunk costs.

  4. Vanessa says:

    Q2: I disagree with Trent that you should pay it just to make it go away. Like #2 Snowy Heron said, this could be a scam. It is the collection agency’s responsibility to prove that you do owe the bill, not yours to prove you don’t. If it’s on your credit report, dispute it and the agency will have to provide proof of the debt. I wonder why an agency would be so aggressive in collecting such a small amount? Sounds fishy.

    Q10: I don’t see what the size of a business has to do with ethics. Even large businesses make mistakes on pricing. There’s no right or wrong answer, but I think if you have doubts that what you’re doing is right, that’s a good indication that you shouldn’t do it.

  5. MattJ says:

    Q10, Trent’s answer:

    It would depend on whether it was a large chain business or a small independent one.

    No, it doesn’t.

  6. Tom says:

    Q1: Most people would not look at a cash-flow negative rental as a good investment, although Trent’s view that the renters are subsidizing your purchase of property is an interesting take on it. I kind of have similar advice but with opposite emphasis, ONLY keep it if that $250-400 is really comfortable in your current budget. Have you even thought about what happens if your rental sits vacant for 3 or 4 months? Is there a reason to keep property in Seattle for you?
    This is intended as constructive criticism and not an insult, but it sounds foolish to rent it out just because a short-sale was less convenient than renting it out at net loss.

  7. Dee says:

    Q6: Car repossession

    Can’t the bank still sue you for the balance of the loan after they repo the car and try and sell it (which in this case probably won’t net them very much money)?

    Q10: Ditto everyone else.

  8. Tom says:

    Riki – the equity they have in the house would not cover the transaction costs (realtor commision, transfer tax, etc.) of selling. In short, if the Zillow number is believeable, and they found someone to pay that amount, they would likely be writing a check to someone at closing. I would still consider that “underwater,” or at least a similar idea.

  9. valleycat1 says:

    Q2 – I agree with the other commenters. IF this is on your credit report (check first, it may not have actually been reported to any of the big 3, as unpaid debts like this actually have to be reported by someone to get on your report), then you follow their instructions to dispute it with the credit report company and attach a note to your record. If the collection agency contacts you again, deny any responsibility and request something in writing from them that verifies that the debt still exists (chances are they’ll drop it at that point); when they contact you again, just hang up.

  10. valleycat1 says:

    Q8 – I thought most colleges/universities have graduate housing available for a reasonable price. I’d contact the school’s student housing office to see whether they do, or at a minimum they probably have other resources you can pursue. Unless you plan to stay in Ft. Collins after you finish school, I’m with Trent that buying probably isn’t the best idea; keep your savings for emergencies or to keep building your downpayment once you start your career.

  11. Webgrandma says:

    Totally with you on using OneNote for projects. My husband and I use it frequently to collaborate on projects, including task lists, notes, etc. It’s a really great way to keep track of thoughts, etc.

  12. valleycat1 says:

    Q10 – You should ask the manager or owner whether the price is correct. Trent is wrong to suggest taking unfair advantage of a possible human error, no matter the magnitude of the price error OR the size of the store. If it’s a legitimate sale price, they aren’t going to jack it back up just because you asked.

    Once a local grocery store had put the price of a case of water in their system as one small bottle, word got around among their customers and they finally figured it out when there was a run on the product.

  13. Kevin says:

    Q1: Something that COSTS you money every month is not an investment. It’s a liability. Investments PAY you money every month.

    You did not choose to go into the rental business, you ended up there out of circumstance. People who hang on to cash-flow-negative rentals are amateurs. Dump that thing ASAP.

    Q10: I agree with the others. I was shocked at Trent’s answer. It doesn’t “depend” at all. The Golden Rule applies here. If you see a Sony PS3 for sale for $32, that’s not a “loss leader” or a promotion. That’s a mistake. Regardless of whether it’s Wal-Mart or Tony’s Electronic Emporium. If your heart is telling you it feels wrong, then it’s wrong.

  14. Mister E says:

    So it’s not OK to toss your keys back at the faceless corporation because of do unto others and all that, but it IS ok to take advantage of an obvious pricing error.. as long as it’s a faceless corporation.


  15. Jonathan says:

    @Kevin (#13) do you consider any real estate purchase to be a liability rather than an investment (unless it is rented out for more than the total monthly costs)? In other words, is buying and holding real estate or taking out a mortgage on a house ever an investment?

  16. jackowick says:

    Q2: Biggest x-factor is to check your credit report before anything else to see if the charge is real. That will give you the path ahead.

    Q10: I only run into this issue at large chains (funny that small stores usually have a handle on this) and I will honestly admit that if I like the cashier, I will fess up. I was at a big boxy store recently and the cashier forgot to ring up my drink, a $1.50 on top of a $40 purchase. He was a nice kid, polite, and said thanks and smiled, so I fessed up. If the cashier is disinterested/lazy/texting/rude, I look at my dent to their sales as my way of enforcing feedback that this person isn’t doing a good job.

    On the flip side of “fessing up”, I recently found what I thought was a mismarked item and asked for a price check. It was indeed a super close out. The floor worker grabbed the last box off the shelf for themselves and thanked ME for finding a good deal they could stash until Christmas as a gift. Sometimes, doing the right thing has a pay-it-forward benefit of making someone happy.

  17. Jonathan says:

    Q10 – I agree with others that the same ethical considerations apply in this situation whether the store is a large corporation or a small mom and pop place. However, Trent never suggested that it is ok to take advantage of a pricing mistake made by a corporation. What he said is “Large chain businesses have very tight mechanisms for pricing and stocking, so I’d think the price was intentional.”

    It is reasonable to disagree with Trent’s assessment that the price is intentional since it is in a large chain store. Those types of stores can certainly make mistakes the same as smaller stores. I’m not sure that its reasonable to suggest that Trent is telling people to take advantage of pricing mistakes as large chain stores, however, since that is not what he said.

  18. Baley says:

    Q10 – one thing that no one has pointed out yet is that Trent KNOWS it would be wrong, hence his “check out quickly.” Why would he need to check out quickly if he “honestly assumed it was the correct price?” That sounds fishy to me. I agree that it doesn’t matter the size of the store! Generally, though, depending on the policy at the store, if the price is marked incorrectly, the cashier has to sell it to you at that price (had this happen at Best Buy once).

  19. Gretchen says:

    I used to be a cashier in a large box store and I assure you that prices were wrong all the time. Also ditto post #10.

    Q5: 2 thousand dollars in donations to just the thrift store?

  20. Cc says:

    Q10 & baley: I could be mistaken, but a friend of mine worked at a best buy style big box electronics store, and if there was a loss due to errors or theft or whatever, it came out of the employees paychecks. They were super vigilant about keeping shoplifters at bay when it was their cash on the line!
    Again though this is secondhand knowledge so I could be wrong.

  21. Kevin says:

    @Jonathan: I didn’t buy my house to be an investment, I bought it to live in it. On the other hand, the ONLY purpose of a rental property is to make money. If it’s not making money, then it’s not an investment. And since I’m not living in it, that only leaves one possibility: It’s a liability.

    Real real-estate investors don’t hang on to cash-flow negative properties. They know that in order to succeed and grow, they ONLY purchase cash-flow positive properties. People who hang on to cash-flow negative properties are not really savvy investors, they’re merely landlords of circumstance.

    The letter writer wouldn’t have gone out and deliberately bought a rental unit knowing it wasn’t going to generate enough rent to cover the note. And yet, through a series of events, that’s where they are. Now, due to inertia or sunk-cost fallacy or whatever you want to call it, they’re hanging on to it. If they were suddenly free of it, and offered to get back into the same deal, they wouldn’t go anywhere near it. Yet since they’re already in it, they stay for some reason. Call it emotion, financial naivete, whatever you want. But it’s NOT an informed, wise financial decision.

  22. Jonathan says:

    @Kevin – I’m glad to hear from someone else who holds my view on home ownership. Like you I do not view purchasing a house as an investment. My house is my home, not just an asset on a balance sheet. I think that the “house as an investment” attitude played a part in the housing bubble.

  23. Diane says:

    Q1: What is your “loss” after taxes? You might be surprised to find you’re not as negative as you think, particularly when your escrow account is back on track next year. If your escrow account was underfunded, it sounds like you may have done a re-fi. If this is true, did you also take some cash out?
    Your “loss” calculation, based on the numbers you quoted originally is way too high. Probably somewhere around $8400, not counting tax savings. Do some more homework to find out your true costs before making this decision.
    The Real Estate market has always been cyclical. It will go up again.

  24. Gretchen says:

    More on #1: zillow means nothing until you have a buyer sitting at that settlement table.

    Also, “Seattle market is forecasted to rebound sometime in 2014” also means nothing.

  25. First Step says:

    Q1: Are you ever going to move back to the area, and would you want to live in the house if you do? Potentially moving back to the house is the only reason I can see for keeping it. Zillow isn’t necessarily accurate, although if you sell at $192K, you will need to bring money to the closing, unless you can get an agent to give you a huge commission break. Agents in NC aren’t giving much of a break these days because they need every sale they can get, and properties are generally taking much longer to sell. Good luck with your decision!

  26. MattJ says:

    #21 Kevin:

    1) Real-estate investor buys a rental property in a good neighborhood. The renters are lined up to get in, and the property gives the investor a good return. By your definition – the property is an investment.

    2) The major local employer shuts down their factory, and the vast majority of their employees are fired. Suddenly, no one wants to pay the rent that the property demanded last year, and the value of the property sinks. Presto! The property is no longer an investment.

    3) A new employer occupies the old factory grounds and starts building hi-tech widgets. The property shoots up in value, and once again renters are lined up to move in at massive rents. It’s an investment again!

    Perhaps you see where I’m going with this, but if not, let me explain: When something is a liability you claim it’s “not an investment”. The rest of the financial community says “it’s a bad investment.

    Do you think the original meanings of the words are wrong, somehow? Why can’t I call my bad investment an investment, if I want? What’s the point of denying that a losing proposition is an investment?

    Finally, the day-to-day cash flow is one, but only one, part of how an investment turns out. If I purchase property that costs me tax every year for 20 years but no other moneys change hands, but in the end I sell it for 5 times what I paid (including the tax payments), inflation-adjusted, then it was a good investment, yes?

  27. kristine says:

    Q#10 Ditto all.

    If you feel the need to “check out quickly”… why? Because someone might discover the pricing error and take away the sweet deal?
    The faceless corporation is deserving of ethical treatment regarding loans, but not regarding a small purchase?
    Small-scale moral relativism?

    Q4- I am truly impressed by anyone who consistently tithes 10%, in any fashion

  28. Adam P says:

    Moral relativism doesn’t suprise me with Trent, he’s been openly hypocritical before (how’s your Prius?)

    To Jonathan, I disagree that Trent wasn’t saying that it’s okay with a big company because of pricing controls. He’s clearly saying that a big store deserves to be taken advantage of if they make a mistake because they have the resources to know better; where a small store doesn’t have that. It’s moral relativism and it’s wrong.

    For the 10% tithe thing, my tax rate is (including consumption/sales taxes) approaching 50% of my income here. While a good deal of that goes to services I use to give me a good environment to live in, a huge deal goes to subsidize others who are less privelaged than I am. I give to the Humane Soceity and Care Canada, because I believe in those causes; but I do wonder how much of that 45% or so I pay in taxes can reasonably be called part of my tithe given that it has charitable benefits to so many?

  29. jim says:

    Q1 : Do you want to be a landlord? Do you want to speculate on real estate in Seattle? Can you easily handle the negative monthly cash flow and potential costs of running a rental? If you don’t answer yes to those questions then I’d sell it. In fact theres a good argument to sell it even if you do want to be a landlord speculating on the Seattle market. I don’t any very good reasons to keep that property.

    You’re in an OK spot to sell right now. You seem to have some equity and if you take a loss on a sale it won’t be too high. Makes sense if you want to dump it now. DO NOT sit and wait for the value to get back to the $224k level from 2005. That probably won’t happen for several years and in the meantime you’ll be spending a few thousand $ each year.

    You are putting around $3000 a year into the principal. You are probably eligible for pretty substantial tax deductions which would save you another $1000-$2000 on your taxes (maybe). If you add these in then you may not be losing money really.

    On the other hand you may have significant costs you’re not considering. What about vacancies? What about major repairs or maintenance? etc.

    Seattle has been a very strong real estate market and will likely continue to perform well. So it isn’t the worst thing to have a rental that losses a little bit each month. When buying rentals in such a market you’re speculating on appreciation as much as anything. Without that appreciation the numbers don’t work out. Doesn’t make sense to buy a rental for $200k if your rent is like $1000 a month. The money is better used elsewhere. But if you expect / bank on that property gaining 5-10% value annually then it starts to make better sense. You can’t bank on that now but its not unreasonable to expect good long term appreciation in the Seattle market. However you cut it that is speculation in real estate which amounts to gambling. Don’t do it if you can’t easily afford the money you gamble.

  30. Jonathan says:

    @Adam P – Sorry, but I have to disagree with your interpretation of what Trent was saying. I thought his meaning was clear, but obviously I was wrong. I’m sure your interpretation probably seems just as obvious to you as mine does to me. I suppose we’ll never know the truth unless Trent decides to chime in.

  31. Courtney20 says:

    Re Q6 – this is why we buy new cars, take care of them, and drive them until they’re dead. Warranty covers the first couple years and lemon laws will protect you in the rare instance you get a horrible one.

  32. jackie says:

    Q6. You can’t just give the car back and wipe away your debt. I just doesn’t work that way. If you default on your car loan you car can be reposessed. You still owe the bank the money! The bank will sell the car and subtract that gain from what you owe. By the sound of it, they won’t get much from it. You’ll still owe $5K.

    Honestly a $6K repair sounds fishy. What could that possibly be? I’ve replace whole engines for less than 1/3 of that.

  33. lurker carl says:

    On selling a rental property that is being depreciated on your income taxes. You’ll have to repay the imaginary depreciation Uncle Sam so generously allowed unless the property actually sells below the depreciated value or another rental is purchased via IRS guidelines. And you’ll owe additional tax on any gains realized on the sale.

    Once you’re in the landlord business, it’s expensive to escape. There is no free lunch.

  34. Vanessa says:

    @Jonathan – I’d give Trent the benefit of the doubt as to what he meant, but he’s done things before that many readers have questioned the ethics of, e.g. copying passages from books at the bookstore. Remember that? His reply saddens me but doesn’t surprise me.

  35. Jonathan says:


    Yes, I remember the post where he talked about copying passages from books at the bookstore. Personally I don’t consider that to be as ethically questionable as saying “take advantage of big stores if you can”. I’m not saying that Trent has never done or said anything that went against my values, because he certainly has.

  36. jim says:

    Q2 : I’m not an expert on this nor is Trent. There are better sources of information out there. Do some google searches for “dealing with collection agency”

    Don’t simply ignore them. Send them a certified letter requesting they verify the debt. If that doesn’t stop them then go from there. But this first step may make them go away. They could be scammers or borderline crooks. Also find out the statute of limitations for debts in your state, they may be bottom feeders buying debt about to expire or debt that already hit the SOL.

    Q8 : I would rent for now at least. Don’t expect to get a job in that city after graduation. Its also possible you may not like living there. Buying could be a big financial mistake if you move soon and you have little certainty you’ll be there for more than a couple years.

    Q10 : I disagree with Trent on this like most everyone else.

    Big stores are very prone to making pricing mistakes. I don’t know why anyone would assume big stores are especially good at properly tracking all the prices on their 1000’s of items. Fleeing quickly is not the work of someone who’s doing nothing wrong. You should treat the situation the same for any store and ask a clerk for a price check. Many stores will even give you the discount price even if it is their mistake. Honesty can pay.

    Usually when someone asks if something is unethical the answer is often ‘yes its unethical’. If you worry that something may be unethical then thats a sure sign it is unethical. Your conscience wouldn’t be making you ask this question if you really felt you were doing nothing wrong. The fact that you have to ask means you feel its probably wrong which is your answer. If you worry that something is probably wrong then don’t do it.

  37. Melody says:

    Yes, Trent said he’d check out quickly – however, sometimes large stores do have promotions and sales that are only valid for a limited time. You’d be surprised at how frequently some manufacturers will run promotions, effectively giving their products away, fairly frequently. It can be a purposeful, though short term, thing. It’s not necessarily an ethical issue there – it’s a marketing thing.

  38. jim says:

    #33, Lurker makes a good point here. Depreciation isn’t a free lunch. You do have to repay ‘depreciation recapture’ tax rate of 25%.
    This can be a nasty surprise for some landlords.

    But depreciation can still work out well for a landlord. My dad enjoyed big fat tax deductions for decades from the 80’s and 90’s. Today if he sold the properties would be 100% depreciated so he’d have to pay back tax on the amount he depreciated if it sells for more than he paid. But its only 25% rate on the amount you depreciated. And it only counts if the property appreciated. So today if he sells one of his rentals for $80k he’ll pay a tax bill of $4k due to repayment of the depreciation and another $10k in capital gains cause he paid $12k for it 3 decades ago. But that $12k of depreciation was a nice big tax deduction spread over the years in the 80’s and 90’s. You can also avoid the tax bill if you swap for another rental property with a 1031 exchange.

    Depreciation recapture shouldn’t cause the reader for Q1 to have a big tax bill since they’ve had a large loss.

  39. AnnJo says:

    Re: Rentals,

    It’s always desirable, but cash flow is only one measure of whether a rental property is a decent investment. Part of your cash flow is going to pay down the principal of your mortgage, and therefore increasing your net worth even if it’s not generating cash now. And when you calculate cash flow, you should consider the tax savings you might realize from claiming depreciation on your property.

    Lurker Carl is correct that on sale you may have to “recapture” depreciation, but assuming inflation continues and no change in your tax rate, it’s still a good deal to save on taxes now and repay them later with less valuable dollars.

  40. Rap says:

    If it were a large chain business, I would honestly assume that it was an unadvertised sale and take big advantage of it. I’d buy several copies of the item and check out quickly. Large chain businesses have very tight mechanisms for pricing and stocking, so I’d think the price was intentional.

    Why exactly would you feel it is not appropriate to check with a store clerk on the pricing?

    There’s loss leaders and there then there’s errors and if its not the day after thanksgiving, something priced 90% under it’s actual value is not a loss leader.

    This is all made worse by Trent’s advice to not only take advantage of the probable error but to a) buy several instead of just one and b)get out of the store as soon as you can with the loot, lest anyone correct Trent on his “honest assumptions” about the pricing.

    Sorry, if we’re playing ethical games, morally, whether a large store or a small independant, the moral ethical thing to do is have a clerk check the pricing if you’re that shocked by the price.

    This is made more hilarious by Trent pontificating how walking away from loans is wrong, but if he sees Wiis marked at 25 dollars at Best Buy, his plan is to buy as many as he can and get out of the store before anyone notices… but if it was a small, family run store, only THEN would he be concerned about taking monetary advantage of an error.

  41. kristine says:

    Ann-Jo, that is assuming continued inflation. Deflation is still a possibility. Split-flation is also debated as a possible outcome of the fiscal mess, where basic needs inflate (food, water, power gas), and luxury items deflate (just about everything else.). Relying on inflation is not a sure thing.

    Re Q10: in NY, if an item is mispriced, you are still entitled to buy just one at the posted price. This was done to combat bait and switch price tags.

  42. BirdDog says:

    My interest in this blog is waning. This was the first pf blog I started reading when I set about buckling down and putting money away. Sadly, I just look at some of the titles these days and then close the browser. I enjoy the mailbags due to all of the commentary. Trent seems to be out of anything fresh to post and even contradicts himself in posts like this. Often the mailbag questions are ridiculous.

    I know, I know, I don’t pay anything for the content so if I don’t want to read, I dont have to. And that may very well be what happens. I haven’t even been noticing comments from Johanna.

  43. moom says:

    I agree with Trent on #8. Colorado State would likely only hire you as an adjunct which pays very little after graduation. If you are doing a PhD (if not forget about teaching at a place like CSU) then expect to have to move anywhere in the country afterwards to get a good job. I moved country to get a decent job…

  44. Rockledge says:

    Q#3 Travel while you can. I could travel very cheaply when I was young, but now I’m in my 50’s with arthritis and I can’t do the cheap trips such as camping and hiking anymore. I don’t even want to spend the time sitting on a plane to fly overseas because it’s so uncomfortable. I’m very glad I did the traveling I did when I younger and wish I had done more of it.

  45. SwingCheese says:

    Q8: I also wanted to chime in on the teaching positions where you went to grad school, and I also agree with Trent. In my experience (the humanities), it is very unlikely to be hired at your graduate institution. In fact, one of the profs I spoke with said that the purposely look for new professors who did not attend the institution. (This may be different in the sciences, but none of my humanities friends from grad school have a teaching position at the same institution we went to, though one is teaching at her undergraduate alma mater.)

  46. Mark Gavagan says:

    Q1 – There’s no mention of many expanses that will arise, such as repairs and replacements (I would factor-in $200 to $300 per month for this expense – it might not be needed for awhile, but a new roof, washing machine, etc. is a matter of when, not if).

    Also, Trent’s comments assume the property will always be occupied by people who pay the rent. My rule of thumb for an attractive apartment in a middle class neighborhood to well-screened tenants is vacancy of 1 month every two years. This means you should lower your rent forecast by about 4%.

    From a cash flow perspective, be prepared for 3 or 4 months in a row without rent.

    Thanks for reading.

    -Mark Gavagan
    Author of “12 Critical Things Your Family Needs to Know”

  47. Mark Gavagan says:

    I meant “expenses” instead of “expanses” in #46

  48. Tom says:

    Ditto on what SwingCheese said in comment #45. Every chemistry professor I ever had and every grad student I eve knew did undergrad at one school, PhD elsewhere, and taught at a third place. Sometimes they would do undergrad/master’s at one university, and sometimes later in life would come back to teach where they received one of their degrees, but unless you have a phenomenal research subject and are indispensable, you likely will not be teaching where you receive your PhD.
    It may be possible that Fort Collins has lots of industrial opportunities in your field, which might sway your decision, but that’s a different discussion than teaching at your University.

  49. Kevin says:

    @Jonathan: I’m not sure I understand what you’re saying. You seem to be assuming that any given purchase must either be an “investment” or a “liability,” and that once decided, it can never change. It sounds like you’re trying to trap me into saying the house started as an investment, then became a liability, then became an investment again, so you can say, “Gotcha!”

    Sorry, but that’s what DID happen. Investments are not set in stone – they can change.

    A tofu burger on a whole wheat bun is health food. Then someone slathers mayo on it, and it’s no longer health food. You wipe the mayo off, and presto, it’s health food again.

    Yes, when the big employer left town and your hypothetical house plummeted in value, it became a liability. You should have dumped it, unless you had secret knowledge about the new employer coming to town (“secret” because if it was public, then the house never would have dropped so low in value in the first place, because everybody would have known that a new employer was coming and housing demand would return).

    Investments are fluid. Things that started out as good investments can turn into bad ones (see: RIM stock). You make the choice to either hang on to the liability, or dump it and find a new, more promising investment. In this case, their Seattle home is a liability. As I said in my first comment, if they DIDN’T already have that money-losing rental, and you came up to them and offered them that deal, there’s no way they’d agree to buy it. The only reason they have it now is because they already had it when the stuff hit the fan, and now they’re afraid to make the big moves necessary to dump it.

  50. mary m says:

    So if you ask the cashier to check the price, they look it up on their system and say “yep, thats right” because it’s the system that has been programmed in error.

  51. Jonathan says:

    Kevin was #49 meant for me or MattJ?

  52. Beth says:

    Well I’ll say it: It will damage your soul to give your hard-earned money to people acting agaist your beliefs just because some man at the front of the room TOLD you to. Give the amount of money that feels right for you and give it to the people YOU believe will have the most impact on making the world a better place.

  53. Rap says:

    So if you ask the cashier to check the price, they look it up on their system and say “yep, thats right” because it’s the system that has been programmed in error.

    Then you’ve done your part, and can buy the extremely low priced item with no ethical concerns. You did the right thing by asking for a price check… if the store is so disorganized etc that they let you buy it for that extremely low price, you’ve done nothing wrong.

    But that is different than merely assuming that for some reason, the large store MUST be selling products at extremely low prices on some unadvertising sale (really the handwaving at morals here is *hilarious*), grabbing as many as you can and getting out before anyone notices what you’ve done.

  54. Angie says:

    #16 jackowick:

    “If the cashier is disinterested/lazy/texting/rude, I look at my dent to their sales as my way of enforcing feedback that this person isn’t doing a good job.”

    Well you’re just costing us all more money because the store has no clue about the message you’re trying to send. They simply look at the bottom line, and raise prices as needed to make up for losses.

    Do everyone a favor and just communicate your displeasure with the clerk to the management. That is FAR more effective than overlooking the fact that you weren’t charged for something!

  55. MattJ says:

    #49 Kevin:

    I’m not trying to ‘trap’ you into saying anything – just trying to get you to recognize the falsehood present in the first thing you said in this thread:

    Something that COSTS you money every month is not an investment. It’s a liability. Investments PAY you money every month.

    It is not true that “investments PAY you money each month”. Some investments pay regularly, others do not. In fact, many investments pay nothing until they are sold.

    It is not true that “Something that COSTS you money every month is not an investment.” In fact, many investments do cost money on an ongoing basis. Most people in the finance community, for instance, recognize that the money Elon Musk spent establishing SpaceX and Tesla Motors as investments. They may turn out to be bad investments, but just because they may be or become liabilities, does not mean that they are not investments.

    Investments are not set in stone – they can change.

    I would have thought my example would make it clear that I understand that. I see by your final paragraph that you understand my point – That investments can change from ‘good’ to ‘bad’, and that when an investment turns ‘bad’, it doesn’t stop being an investment.

  56. Golfing Girl says:

    @ #8:
    I would definitely rent in Colorado until you become very familiar with the area. Make sure you understand commute times from different areas, get to know the schools and be sure you indeed like the area (even if you are offered a job, you may not decide to stay). Once you feel you can’t leave the area because it feels like home, start shopping around. You probably have a few years before the housing market and rates rise anyway.

  57. Andrea says:

    Q4. I’ve served on the finance board at my local church for a few years so my perspective is coming from someone who does give regularly to my church as well as somone who served and saw the ‘office’ side of the church operations.

    Giving is absolutely something that should be done with a joyful heart.

    If your concern is serious enough that you feel you should switch churches, then my preference would be to tell the church, pastor or finance person, that you are no longer going to be giving your pledged amount (if your church does that) becuase you have decided to leave the church. It’s not something meant to be confrontational, but informative.

    Those who sit in the office, collect and count the offerings each week then must turn around and pay the electric bill, the pastor’s salary, office staff salary, mortgage on the church building, etc. Those fixed bills dont ‘go away’ if you decide you dont didnt like the decison on what color they painted the kitchen, were offended at a comment made from the pulpit, etc and your decision to not want to send in your money anymore puts a great deal of pressure and stress on the staff. Did your money not come in becuase you were on vacation? do you have some sort of long term illness? did you get mad? no one knows until often months have gone by and it gets to a ‘critical’ state and perhaps some staff member has to be let go because that is easier to cut expenses than turning off the electricity.

    Since you are a church going person, take the biblical approach and go and meet with the person who made the offensive/concerning decision/comment and see if you can work it out one on one. If not, then bring another party into the conversation and see if you can resolve the issuse that way.

    As a member of the body of beleivers, at that location, it is your obligation to help continue the mission of the church which is likely that there is a place for unbelievers to come and seek God. Usually people want basic things like light and heat/A/C (in Texas) when they walk in the door–see post on Maslow. As a memeber you are providing the resources for that to happen. Withholding your offering from your ‘home’ church hurts your local body.

  58. prufock says:

    Disagree with everyone else on #10. The pricing of items is the STORE’s responsibility, not yours.

    #20: I would hope that you are mistaken. At least in Canada, there are laws against that kind of thing. Maybe not the same everywhere though.

  59. MattJ says:

    #58 prufock:

    Don’t say everyone. Many of us have only said that the answer to the ethics/morality question does not hinge on the size of the business.

  60. jim says:

    Prufock, Regarding docking pay by employers. I had to look that one up. I found an MSN article that says : “For hourly workers deductions in pay are pretty much allowed across the board unless the reduction translates into a worker being paid less than minimum wage, or the dock in pay is discriminatory.” It has more details like the rules should be documented in advanced. Docking pay for a salary worker is a lot harder and union contracts may not allow it.

    Its possible that individual state laws regulate it further or don’t allow it. Our labor laws vary state to state.

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