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How Much Home Can You Buy With Your Income?

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Miller Samuel President and CEO Jonathan Miller discusses the U.S. housing market. Bloomberg Intelligence’s Carl Riccadonna also speaks on “Bloomberg Surveillance.” (Source: Bloomberg)



Solid gains in home values mean more homeowners could face a hefty tax when they sell. Keeping track of home improvement costs could help defray that tax.

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By:  Robert Neubecker

June 5th, 2015

The New York Times


A tax time bomb is ticking for an increasing number of people who have been lucky enough to see big gains in the values of their homes.  This is especially true in and around cities like New York, Los Angeles, San Francisco, Boston and San Diego, where home prices have increased smartly over the last decade or two. There, single homeowners with gains of over $250,000 and married people who have notched at least $500,000 could end up paying federal tax of as much as 23.8 percent on real estate gains over those amounts when they sell. Additional state taxes loom for some of them as well.  If you are in this situation or think you may be just when you need those gains to live on in your old age, there is a small pile of paperwork you need to start filing away now and keep until you sell the home. That paperwork is for all the improvements you have made to your home. The cost of those improvements counts against the gain. Even a single remodeling can offset the gains by well into the six figures.  Just how many people might this tax affect? I asked the number crunchers at the real estate website Zillow to take a look. Currently, they believe that 3.8 percent of the homes around the country are already in the tax zone for single people and that 1.2 percent have reached the threshold for married couples. The number of people affected is much higher, however, in expensive cities. In San Francisco, for instance, a quarter of all homes have a gain of over $250,000, thus having a tax impact on any single owners. More than one-third of the homes in San Jose, Calif., do, too.  For married people, the numbers become more frightening when you assume a 3.5 percent annual increase in home prices and look ahead 10 years. By then, 15.9 percent of the homes in the New York City area could be in for a tax bill if they’re owned by married people, along with 19.6 percent of the homes in Los Angeles.  Those numbers could be higher if real estate prices rise more quickly. They could also be lower, given that Zillow, in its projections, assumed that the homeowners were not moving to other houses or making improvements in that period. Their tax bills might also be higher if, like many people, they failed to realize that they should be keeping their receipts and closely tracking this potential tax.  Now that you are no longer among the uninformed, however, where should you start with the record-keeping extravaganza, in case you find yourself among those with outsize gains on your home?

The bible for all of this is Internal Revenue Service Publication 523: Selling Your Home. On page 12, you will find the I.R.S.-approved list of things that you can, in effect, subtract from your gain before you determine whether it’s below or above the $250,000/$500,000 limit. Homeowners usually pay no capital gains taxes on any amount below those numbers. Also, you generally have to have been living in the home for at least two of the previous five years before the sale to receive the waiver on the taxes if you are below those thresholds.

On that list in Publication 523, you will find improvements and additions of all sorts, including decks and patios; landscaping, including sprinkler systems; pools; a new roof or siding; insulation; and kitchen remodeling. Some smaller and perhaps surprising things are there, too: installation of utility services, which could include any fiber charges from Verizon for FiOS or money you paid to the person who hard-wired your Apple TV to your cable modem. Each additional electrical outlet should count, too. Also, you can add in many legal, title and recording fees (plus transfer and certain other taxes) from your closing.

Repairs don’t count, and this gets tricky. Most people have to paint, so that’s generally a repair. Refinishing wood floors is maintenance, too, though installing new ones is an improvement that ought to count in your total.

Built your house from the ground up? Your list includes the cost of the land, all materials and any money you paid to contractors and their laborers plus architect fees. If you swung a hammer yourself, tough luck: Your hard work counts for nothing in the eyes of the eyes of the I.R.S. Ditto your friends who pushed up walls in exchange for pizza and beer.

If you live in a condominium or cooperative building or a community with homeowners’ association fees, some of your monthly charges and many of your special assessments may also count. Ask the managing agent about this, and require the building or community’s accountant to offer this per capita figure each year in a format that allows you to file it away and keep it.

The catch here is that you need receipts for every one of these things. Nobody tells you this at the closing table. Or if they do, you don’t hear it because you’re freaking out about the cost of your home or too excited to go check out tile samples after signing 100 closing documents. Sober-minded individuals tend not to consider the possibility of a big gain at some later date, either. After all, you’re not supposed to think of a home as an investment, even if the I.R.S. does in this particular context.

But you do need to keep the paperwork, long after you have discarded your older tax returns. The website even reminds us all that certain thermal receipts will fade away over time. It’s best to photocopy them or take digital photos and put them away somewhere in the cloud.

Because we are talking about taxes here, there will be exceptions, carveouts and exceptions to the carveouts issued in I.R.S. private letter rulings and whatnot. If you fall into any of the following categories, it’s probably best to consult a tax professional: widows or widowers, members of the military, newly remarried couples who already have homes, people who have moved for job transfers, nursing home residents who have kept the homes they used to live in, people who sold a home before 1997 and rolled their capital gain over into the home they live in now and people who rebuilt after a fire, flood or other similar event.

Ditto if you inherited the home or got it as a gift and also if you rented it out at any point or used it for business. People who received the first-time home buyer’s credit in 2008 should also dig deeper.

A few other quirks that can help or hurt. If you have a capital loss in your past, you can use it to offset the gain you may receive from your home. Jean-Luc Bourdon, a certified public accountant with a personal finance specialization at BrightPath Wealth Planning in Santa Barbara, Calif., told me about a client who panicked in 2008 and sold investments at a large loss. Later, when he sold his home for a large gain, he was able to offset the gain with the losses he took in the stock market.

Eva Rosenberg, an enrolled agent who maintains the site, warns of a common problem she sees in states like New York and California, where prices have risen a fair bit. People borrow against their homes, spending the money and draining the equity. Then, when they sell and receive, say, $50,000 after repaying their mortgage and home equity loans, they think that’s their capital gain. But it isn’t, and sometimes their tax bill is actually much higher than that $50,000.

So could the rules change, or might lawmakers at least index the $250,000 and $500,000 figures to inflation? It could happen, most likely in a Republican administration. But it’s the sort of thing that only benefits the truly lucky.

I was tempted to use the word rich in the previous sentence, but Mr. Bourdon told me not to. “It isn’t true anymore,” he said. “If you’ve owned nearly any home here in Santa Barbara long enough, you could have a taxable gain on your home.”

If nothing else changes, his assessment will be increasingly accurate in many other areas of the country as well.

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Consider Cash When Buying a Vacation Home Overseas

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Consider Cash When Buying a Vacation Home Overseas

U.S. residents buying vacation homes overseas may find that financing their slice of paradise isn’t so dreamy.


By: Anya Martin

April 1st, 2015

The Wall Street Journal

Breathtaking ocean views, a five-minute walk to the beach, and regular sightings of toucans, iguanas and sloths— Todd Harris and Mary Bradley own their slice of paradise called Villa Alegria in Costa Rica. Financing their vacation home, however, wasn’t as dreamy.

When buying their Mediterranean-style villa in Dominical, a popular surfing destination on the Pacific, the Atlanta couple approached a Costa Rican bank—and were offered a mortgage with an above 7% interest rate. At that time, April 2014, average rates for a 30-year fixed-rate jumbo mortgage in the U.S. were 4.45%, according to, a mortgage-information website.

So Mr. Harris, a 37-year-old independent investor, and Ms. Bradley, a 34-year-old stay-at-home mom, paid cash for the vacation home.

That’s what many Americans buying property abroad do, says Kathleen Peddicord, founder of Panama City-based Live and Invest Overseas, which publishes an online newsletter and books on living, retiring and investing in foreign real estate. Most U.S. banks won’t lend for purchases outside the country, but Americans who really want to finance a foreign home do have some options, she adds. Borrowers first need to realize that many countries don’t even have mortgage lenders, Ms. Peddicord says. “In Europe, there’s a more sophisticated, competitive lending industry, but in Latin America, there’s not,” she adds.

Foreign banks that do lend to U.S. citizens will ask borrowers to make at least a 20% down payment, if not 30% or more, and pay higher interest rates than they’d get in the U.S., Ms. Peddicord says. Also, 30-year fixed-rate mortgages are virtually unknown in other countries, with the standard being an adjustable-rate mortgage with a 20- to 25-year total term, she adds.

Because the foreclosure process isn’t as refined in most countries as in the U.S., a borrower also may be required to take out a life-insurance policy in the loan amount with the bank as beneficiary, Ms. Peddicord says. Insurers in some countries place age limits on who can get a life-insurance policy, such as Panama (typically age 75).

Most U.S. banks won’t lend for purchases outside the country, but Americans who really want to finance a foreign home do have some options.

U.S. borrowers with holdings at a global bank may be able tap into that relationship when getting financing abroad, says Saul Rasminsky, owner/broker of Dominical Real Estate, which helped Mr. Harris and Ms. Bradley find their Costa Rica home.

HSBC, which has operations in 73 countries, will refer its U.S. “premier” customers—those who hold at least $100,000 in an account—to relationship managers in other countries, says Peter Alongi, a senior mortgage manager with HSBC Bank USA.

In 10 years of selling homes in Costa Rica, Mr. Rasminsky has only had one buyer who used mortgage financing, because of the high cost. On the other hand, he has often brokered seller-financed loans, he says. “It’s not uncommon for a buyer to put 30% to 50% down and have up to five years of owner financing in the 3% to 5% [annual interest rate] range,” he adds.

Some buyers also have taken out home-equity loans or lines of credit on their primary residences in the U.S. to help finance a Costa Rica home purchase, Mr. Rasminsky says. Costa Rica sellers accept U.S. dollars rather than requiring local currency, and homes prices are typically listed in dollars, he adds.

Mr. Harris and Ms. Bradley spent about four months last year in their Costa Rica home and rent it out for an average of $2,500 a week.

“Costa Rica from Atlanta is an easy destination and it’s different in that it’s not like going to a resort,” Mr. Harris says.

Here are a few more tips for financing an overseas home:

• Self-directed IRA. If the purchase is solely a rental or investment property, a buyer may be able to set up a self-directed IRA or other retirement plan and use those funds to make the purchase, Ms. Peddicord says. All expenses related to maintaining the property are paid by the IRA. The account holder cannot use the property—even occasionally—until after retirement.

• Check local laws. In some countries, noncitizens and/or nonresidents aren’t allowed to buy real estate, or are limited to a certain number of permits a year, says Stuart Siegel, president and CEO of the New York office of Hamburg, Germany-based global real-estate brokerage Engel & Völkers. “If you want to buy a ski chalet in Switzerland and aren’t a Swiss resident, you need to make certain if you are eligible to buy it,” he adds.

• Exit strategy. Local market conditions and limitations on who is allowed to buy property can also make it difficult to sell a home when it’s time to move on, Mr. Siegel says. Even though they love their Costa Rica home, Mr. Harris and Ms. Bradley have listed it for sale at $895,000 as a precaution because homes there can take years to sell, Mr. Harris says.

Tips for Homeowners to Ease the Tax Bite

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Tips for Homeowners to Ease the Tax Bite

In addition to deducting interest payments, homeowners can use these strategies to reduce their taxes


By: Anya Martin

March 4th, 2015

The Wall Street Journal

Jumbo borrowers enjoying low, low interest rates may have a bitter pill to swallow come tax time: The IRS limits the deduction on interest payments for loan amounts over $1 million.

Happily, homeowners have other ways to soften the tax bill, accountants say. Here is some advice from four CPAs:

Rule of two. The $1 million restriction applies to debt acquired to buy, build or improve a home, as well as an additional $100,000 of home-equity loan or line of credit debt. But deductions can be applied to up to two homes (or a boat or any structure that has plumbing and a bathroom).

Borrowers will come out ahead by first deducting interest payments on the loan with the highest interest rate—which is often the second home, says Jeffrey Schragg, tax partner at the McLean, Va., office of global accounting firm BDO USA.

Back to nature. Got a scenic lookout on your property or a wetlands that attracts a variety of birds? A homeowner can take a conservation easement and donate that land to a nonprofit that will manage its preservation. The homeowner can then take an itemized deduction of the appraised land value as a charitable contribution, Mr. Schragg says. He has seen this deduction used mostly for second homes, which are more likely to be in locations of natural beauty, he adds.

“It doesn’t have to be open to the public, it just has to be preserved and it can’t be developed,” Mr. Schragg says. “Sometimes if it’s a large piece of property, the owner will do it in increments over several years.”

Conserve energy. If a home remodel includes energy-efficient products or a solar-energy system, a portion of the cost may be eligible for a residential energy credit, says Mary Canning, dean emeritus of Golden Gate University’s School of Taxation and Accounting in San Francisco. Some federal credits expire with the 2014 tax year and have varying caps, such as $200 for energy-efficient windows and $500 for insulation. Some high-cost upgrades have credits that can go up to 30% of the cost, including installation of solar panels, solar hot-water systems, a geothermal heat pump and small residential wind systems. These credits expire in 2016.

Whatever is claimed must be substantiated with documentation — canceled checks, credit-card receipts, bank statements

In California, eco-friendly upgrades of existing energy systems are growing in popularity for both people who plan to sell while home prices are up and those who plan to stay, Ms. Canning says. “People are more and more looking at this being the place where they are going to retire and putting in solar,” she adds.

Home-office homework. The home-office deduction is a notorious potential red flag for an IRS audit. But for people who genuinely do work from home, it can be a lucrative deduction, says Eric L. Green, a partner with Stamford, Conn.-based law firm Green and Sklarz, which specializes in tax matters. Eligible for deduction: office space, as well as a share of certain expenses that apply to the entire home, such as mortgage interest, utilities, property taxes, insurance and even landscaping and snow removal, he adds.

To survive an audit, the area designated as office must be used exclusively for work, with a few exceptions, such as an in-home day-care service. And the space should be a reasonable proportion, Mr. Green says. “If someone is claiming 42% of their home as a home office, stuff like that is an audit trigger,” he says.

Keep receipts. When a home is sold, the seller doesn’t have to pay federal taxes on the first $250,000 if filing single or the first $500,000 if filing jointly of the capital gains. To lower the potential tax hit, certain home-related expenses can be subtracted from the profit, including money paid for upgrades, closing costs, property taxes and transfer taxes from the initial purchase, says Robert Winton, a partner with White Plains, N.Y.-based accounting form Citrin-Cooperman.

Still, whatever is claimed must be substantiated with documentation—canceled checks, credit-card receipts, bank statements, Mr. Winton says.

“If you are audited, you have to be able to show that you spent the money on the house, and that it was an improvement, not just maintaining the house,” he adds.

The Best Time to Refinance

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The Best Time to Refinance

A surprise interest-rate drop in January spurred a record number of homeowners to refinance. What you should know when rates fall again.


Illustration: Chris Gash

By: Anya Martin

February 27th, 2015

The Wall Street Journal

When mortgage broker Mathew Carson saw interest rates fall unexpectedly in January, he picked up the phone and called every home buyer he had worked with since the summer.

“My refinance business is 50% better than this time last year,” says Mr. Carson, of San Francisco, Calif.-based First Capital Group.

In a winter surprise, average interest rates for 30-year jumbo fixed-rate mortgages dropped below 4% for five weeks from the week ending Jan. 9 through Feb. 6, according to, a mortgage-information website. As a result, refinance applications for jumbos and other mortgage types skyrocketed nationally by 49% in the week ending Jan. 9, the largest weekly gain since November 2008, according to the Mortgage Bankers Association. That’s 45% higher than the same week in 2014.

Rates were back to 4.06% for the week ending Feb. 20, according to And even a small rise can plug up the jumbo refinancing rush as quickly as it accelerated, says Mike Fratantoni, MBA’s chief economist. If rates drop by a quarter of a percentage point, “jumbo borrowers will turn their heads,” Mr. Fratantoni says. “But if that goes away, they are no longer interested.”

Homeowners who missed the boat this time may wonder if refinancing is worth it the next time rates come down. A general rule of thumb for mortgage borrowers is to refinance when rates decrease by half of a percentage point. But because of their larger loan size, jumbo borrowers may save substantially even with one-eighth of a percentage-point drop, says John Schleck, centralized and online sales executive at Bank of America Home Loans, which also saw jumbo refinances spike.


Jumbo mortgages exceed government limits of $417,000 in most areas and $625,500 in some high-price places.

“If you’re borrowing $200,000, your monthly payment may go down just $28, but you might save $100 a month on a $700,000 loan,” Mr. Schleck says.

Homeowners should also calculate the number of months it will take for the money saved in monthly payments to cover the closing costs when refinancing, says Greg McBride, chief financial analyst of, a personal-finance website.

Luxury Mortgage, a Stamford, Conn.-based lender that serves Connecticut, New Jersey and New York, has been able to offer some jumbo borrowers rates as low as 3.5% for loans up to $1.5 million, says Peter Grabel, managing director. Luxury also saw an uptick in calls from jumbo borrowers interested in lower rates surged, Mr. Grabel adds.

Borrowers have the option to pay closing costs upfront, but with rates so low, Mr. Carson says he has been able to wrap closing costs into the loan with an interest rate that’s slightly higher but still saving them money. In January, the lowest rates First Capital Group was able to offer for a 30-year, fixed-rate jumbo were 3.75% with $1,000 to $2,000 in closing costs and 3.875% with no closing costs.

A few more tips for borrowers considering a refinance of their jumbo mortgage:

• Tight qualifications. Because jumbo-loan amounts are high, borrowers who want the best rates will typically need a FICO credit score of 740 or above. And the loan-to-value ratio, which reflects the loan amount as a percentage of the home’s value, shouldn’t exceed 80%, Mr. Schleck says. Jumbo cash-reserve requirements usually are as high as 12 months of mortgage payments, rather than just two for conventional loans that fall within government limits, Mr. Carson says.

• Proper seasoning. Even if home values have risen in the area or the homeowner has made expensive improvements, many, but not all, lenders require 12 months “seasoning” before considering a new appraisal if the loan is a jumbo to be comfortable that the increased value will be sustained, Mr. Carson says. Because the loan-to-value will be based on the original appraised home value, this practice may disappoint people who want to borrow more or use a new appraisal to lower their loan-to-value ratio to improve rates.

• One size doesn’t fit all. Borrowers should consider their full financial profile and upcoming big expenses, such as retirement plans and a child’s college tuition, when deciding whether a fixed-rate mortgage is the best fit, Mr. Carson adds. Borrowers planning to sell their home within several years may save with an adjustable-rate mortgage.

Corrections & Amplifications

Greg McBride is the chief financial analyst at An earlier version of this article said he was the chief financial officer.

How to Own a Vacation Home—With Someone Else

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Figuring out how to share a vacation home is no day at the beach. But it may be the only way to have a day at the beach at all.

That’s because the price of second homes is rising, and few people have enough cash to buy one on their own, let alone enough vacation time to justify the purchase. So increasingly they’re teaming up with friends or family to buy—or, in the case of inherited property, to keep—that much-coveted retreat from the hassles of daily life.

And, too often, straight into the hassles of shared ownership. What could go wrong when sharing a vacation home with your dearest friends and family? Plenty, it turns out. The potential issues run the gamut—from how do you buy to how do you share time to how do you split costs to how do you sell.

Powers of Deduction

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For those weighed down by large mortgage payments, there are ways to save money when next year’s tax season arrives; beekeeping, anyone?


One rueful lesson of tax season: Some deductions require lots of advance planning. Homeowners willing to do the legwork now can find some creative ways to lessen their tax bills next year.

Jumbo-mortgage holders can only deduct annual interest payments on up to $1 million of debt that they take to buy, build or improve a home. They can also deduct interest on up to $100,000 of equity-line or equity-loan debt.

Homeowners who rent their primary residences for fewer than 15 days a year don’t have to report rental income on their federal returns. Getty Images
But federal and state income taxes, as well as property taxes, offer a variety of exemptions, deductions and credits that can save money for luxury homeowners, according to certified financial planners. Here are some examples:

Rent your home for two weeks. Homeowners who rent their primary residences for fewer than 15 days a year don’t have to report rental income on their federal returns. That can be a hefty sum if the rental is a luxury home in a prime location, says Robert Walsh, founder and president of Red Bank, N.J.-based Lighthouse Financial Advisors.

For example, Mr. Walsh has a client who nets around $15,000 for renting a home on New York’s Long Island for 14 days every summer. Another client rents his house in the ski country of Killington, Vt., once a year to his company for an employee retreat and party. “The company gets a tax deduction, and he gets the rental money,” Mr. Walsh says.

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Warren Buffett Reveals His Secrets for Investing in Real Estate

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by Brian Lund

There is no lack of information available about the institutional investment strategies of the world’s billionaires — how they move money in their capacity as the heads of large public companies and investment funds — but how often do you get the chance to look inside the personal investments of those billionaires? And how often does a billionaire offer you insights that you can use in your investing?

Warren Buffett did just that with his annual letter to the shareholders of Berkshire Hathaway (BRK-A), which he sent late last month. In it, he highlighted two personal investments in an area he is not normally associated with — real estate.

He talked at length about a 400-acre farm he bought in Nebraska and a retail property purchased near New York University and in the process provided a number of lessons for anyone thinking about investing in real estate. Here are five takeaways from the letter and Buffett’s words supporting each.

1. Invest in Undervalued Real Estate

From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders.

In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier.


In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the company’s CEO, told me about a New York retail property adjacent to NYU that the Resolution Trust Corp. was selling. Again, a bubble had popped –- this one involving commercial real estate –- and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.

2. Think in Terms of Income, Not Appreciation

With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.

If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so.

3. Focus on Underutilized Properties

I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

And regarding the New York property …

Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant – who occupied around 20% of the project’s space – was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings.

4. Use Partnerships to Fill In Gaps in Your Expertise

I knew nothing about operating a farm. But I have a son who loves farming and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. 

And …

I joined a small group, including Larry and my friend Fred Rose, that purchased the parcel. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our original equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I’ve yet to view the property.

5. The Macro View Is More Important Than the Micro

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following –- 1987 and 1994 -– was of no importance to me in making those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm or the New York real estate.


Perhaps unsurprisingly, Buffett’s philosophy on investing in individual companies is similar to the one he applies to investing in real estate. Find investments that produce income, have long-term value prospects not currently being recognized by the market, and, once you buy them, increase their operational and managerial efficiencies to maximize recurring revenue.

These are ideas that you don’t need to be a billionaire to understand, nor to put them into practice in your own portfolio.