With interest rates climbing holding cash is much less painful than it was a year or so ago. Investment real estate has some wonderful tax advantages but the depreciation deduction is not a real big deal. If you buy a $1,000,000 apartment property with improvements valued at 75% of purchase price your annual depreciation deduction is only 750,000/29.5 yrs = $25,000 for a tax saving of about $12,000 ignoring AMT considerations.
Some day that depreciation deduction will have to be recaptured at a tax rate of 25% (assuming tax laws don’t change.)
About going out of town. I have heard several stories that began: I was an inexperienced investor and I decided to invest out of town. I figured the locals didn’t know what they had. Very few of those stories had a happy ending and several had tragic endings.
A few months ago Greenspan gave a speech that was not double talk. He very articulately expressed some sentimens I have had for some time. The gist of the speech was: Investors have forgotten the concept of investment risk and premiums for accepting that risk. Investors have been purchasing risky investments for nearly the same price as safe investments with similar investment returns. He believes that the concept of a major economic downturn is being totally ignored in the pricing of assets.
He finished by saying that “When that has happened in the past it has usually ended badly”.
This has happened in most or all asset classes. Some obvious ones are the spread between treasuries and junk bonds. I don’t know where they are today, but a few months ago the spread was at an all time low.
In real estate terms City Heights apartment buildings were recently selling for only slightly less than North Park Properties. North Park is a much superior neighborhood that attracts higher income residents with better credit histories and fewer bodies per unit. As the apartment market has softened North Park Prices have held up much better than City Heights Properties. I think that process is just beginning.
The point being virtually all assets are currently over priced and in the process of being re-valued. Cash is still trash but it is changing fast.
Any little hickup on the international scene, could lead to a tightening of credit. A perfect example is the monetary tightening going on right now in Japan where short term interest rates have been at zero for a decade.
My suggestion: Pay your taxes take pride in being such a good citizen. Put your money in very safe short term debt instruments. With today’s flat yield curve there is little or no premium for buying long term debt instruments.
