Are you an Investor frustrated by lack of good deals around?

Just recently, one of the projects I managed for my investor clients gave 86% annualised ROI. Rolled into the New Year feeling pumped to continue the ROI streak. In January 2018, I wrote many offers for my Investor clients! All of them rejected, because of overbidding. Investor friendly houses are selling for such ridiculous amounts, that I almost wonder how the Investor Buyer will profit from it!

I started my real-estate career working for Investors. Some brilliant ones! That was also the time when the housing market had fallen; and not a lot of people had cash stocked-up to invest in properties!

Lately, every 1 in 3 people I meet wants to flip houses or get double digit returns on cash-flow properties. My survey could be biased because since many people know I have real-estate investment experience, they talk to me about it! Some novice Investors even ask me to show $ 200k houses in locations that house multi-million dollar homes; because they believe I can (miraculously) get them cheap houses! Only if I could pull-out such opportunities from the magicians hat!

The fact is: In today’s market, there are not a lot of steep discounts/deals to be availed. There is a shortage of housing inventory AND a multiplication of Real Estate Investors/Deal Seekers.

Past Results: Real Estate investors had a wonderful run when the house prices were still picking up after the crash in 2008. Many made great profits from flips and rental investment properties. Other people saw the prosperity in this business. And they started pouring into the investment market. Newbie investors have increased manifold and they are raising offers on the handful of investment properties. I’ve heard of flipping nightmares by such newbie investors.

Existing Builders: With more competition, our Builder community also comes ‘all-in’. They have workers and employees they have to pay and provide enough work around the year. Builders can buy a house $ 50k above market, blow it out into a mansion, and still make a profit, albeit $ 50k lower. But it’s still, something…

Better economy: Economy is getting better; unemployment is decreasing; Stock market is at an all-time high; people have more money! Anyone who wants to diversify their portfolio or does not want to enter in a record high market, will look into real-estate investments! Thus, adding fuel to existing shortgage of homes

New tax bill favorable to Landlords: The change provides a 20% deduction on taxable income for pass-through companies. While the tax cut is a boon for private real estate investors, it will likely make the inventory shortage worst and even more ludicrous offers! Not only will they pay lower taxes on their LLC (pass-through entity) created for their rental, but they will also hold on to them due to better returns! Though I’d believe the high procurement cost would subsidize the tax benefits!

Conclusion

One thing I have learned is: stick to the investing fundamentals. Don’t buy a property if it does not make financial sense. Work your numbers – Purchase, Cost estimates, Cash flows and ROI’s, ARV’s in the neighborhood etc. I’d rather spend time in doing something I love or where I can generate more money (like putting more hours at work) rather than investing and spending time in unsustainable investing models. Use that money to invest when the market cools down! Can’t get enough of Warren Buffet’s quote for Investors: Get Fearful when others are greedy and greedy when others are fearful

But hey, everyone is entitled to their Opinions and Conclusions! And I wish all Investors the very best in their endeavors! And, happy to help :-)

Renting VS Buying under the New Tax Law

Buying a home was not merely an American Dream.. It also came with attached tax benefits and deductions.

However, the new sweeping tax bill passed by President Trump in December 2017, may change the math for many homebuyers. The new law limits or eliminates several write-offs long favored by homeowners.

On one hand, standard deductions have doubled and tax rates have fallen, on the flip side, there is a $ 10,000 cap on state and local tax deduction and a lower $750,000 limit on loan principle for the mortgage interest deduction.

New Jerseyans, by most accounts, got the short end of the stick. But about 79 percent of residents in the Garden State should receive tax cuts, according to a study by the Institute of Taxation and Economic Policy, a research group.

But what changes is the homebuying vs renting equation! In other words, with certain homeowning tax breaks getting less generous, the financial advantage of owning rather than renting your own home could diminish for many Americans.

Then Why Buy?

  • Can still deduct interest and taxes below the threshold, provided it still makes sense to itemize
  • Protection against inflation
  • Stability
  • Possible appreciation – build equity and wealth over time
  • Modify the living space as wished
  • Most importantly, have a roof over the head

 

Tax Cuts and Jobs Act 2017 highlights that may affect homeowners

The sweeping tax bill signed into law just before the 2017 holidays brings changes for virtually all homeowners — but, for the most part, not until you file your 2018 tax return in 2019.

My previous blog came at a time when these bills were proposals with major differences between House and Senate. Below are highlights of Final Bill that passed as Law (Tax Cuts and Jobs Act 2017)

Highlights that may affect homeowners:

Tax Rate Reductions:

The tax rate schedule retains seven brackets with slightly lower marginal rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Apparently, it looks like most Americans will pay lower taxes. However, for those with high mortgages/ high taxes and high income; who itemized taxes in excess of $ 12k (single) and $ 24k (joint filers), I am not sure!!!

Capital gains exclusion on sale of primary residence:

Homeowner must live in the home for 2 out of past 5 years for capital gains exclusion. This has been unchanged from previous law.

This was a significant victory that NAR (National Association of Realtors) achieved in final bill. Senate Bill was trying to increase homeowner occupancy for 5 out of 8 years for capital gains exclusion.

Mortgage Interest Deduction

Mortgage interest deductible is limited to loans of $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap.

Refinancing debts existing on 12/14/17 upto $ 1 million are interest deductible as long as new loan is not greater than loan being refinanced.

Interest on 2nd mortgages and second-homes is deductible but subject to 750,000/1,000,000 limits above. But interest is repealed for home equity debt.

The House-proposed bill would have capped the mortgage interest limit at $500,000 and eliminated the deduction for second homes in its entirety The final law, while less beneficial than old law, represents a significant improvement over the original proposals

The cap of $ 750,000 applies across all mortgages. Meaning if a buyer with a $500,000 mortgage borrows $300,000 for a second home, the interest on $50,000 worth of those mortgages is not deductible.

Even if both mortgages are less than $ 750,000, the $ 10,000 cap on state and local income tax deductions holds no matter how many homes you own.

Deduction for State and Local Taxes

Itemized deduction limited up to $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers.

Original Senate proposal allowed Zero deductions. Again, new law is beneficial over the original proposals.

Standard Deduction

Standard deduction doubled to $12,000 for single individuals and $24,000 for joint returns.

By doubling the standard deduction, Congress has greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership. Congressional estimates indicate that only 5-8% of filers will now be eligible to claim these deductions by itemizing, meaning it will also diminish financial incentives for renters to buy. More in another article of the newsletter.

Moving Expenses

Moving expense deduction repealed, except for members of the Armed Forces (which was originally proposed for all filers).

Like-kind exchanges:

The final bill retains the current Section 1031 Like Kind Exchange rules for real property.

Again, a major win for real-estate stakeholders as the proposals planned to repeal these

 

Conclusion:

I will let the economists and analysts debate on how above factors will affect the market and demography.

Do you have any inputs or real-life experience related to above? I would love to hear (and maybe include in a future blog)