Tax Consumption. not income or wealth

[surveyor]

Macro/Micro/We all scream economics…

PS – one of the things i notice about your posts is that you tend to have trouble differentiating between macro and micro economics. Because Roubini (a.k.a. God) says the whole country is going to go through a 30% median decline, you assume that every single piece of real estate property in the United States of America will decline 30% in price as gospel. =shrug= It’s up to you. And I’ll agree that my San Diego properties are going to lose value over probably the next five years.

But you ignore the fact that other states are not on the same real estate cycle as California. There are other places around the country that are actually rising up in value. So it is possible to buy an investment PROPERTY (not house) in a good market and it will not lose value.

By the way, my time frame is not 3 years. If we’re still around, I’ll let you know how the properties are doing in 2016, which by my calculations should be when the next San Diego boom is (more or less). That is when I will sell. We can compare tax analyses then. 🙂

And if the properties decline in value, so what? It’s only temporary. They’re cash flowing, they’re lowering my taxes.

Here’s the thing – you complain about how hard it is to get rich. Well, real estate is still the best way to do it, even in this environment.

Does that mean buying in San Diego? No!

(dunno if I put enough caveats for you all, but i will leave it at that. i know i’ll get reamed for this later. =sigh=)

[(former)FormerSanDiegan]

It also requires a minimum of 750 hours a year spent on that work. That’s 14 hours a week.

This is true, a minimum of 750 hours as a RE professional, but it also requires that you spend more hours in that activity than other activities. So, one would have to switch to less than full time (likely less than half-time) at their current profession. For working professionals making > $50 per hour, doing so requires more than just working tax loopholes. It requires a change in lifestyle, just for the purpose of exploiting the tax code. I have no problem deploying assets, executing 1031 exchanges, etc to benefit from the tax laws. But making a career change is much more complicated than that. Again, it is very dependent on circumstances, and just because it works for Aunt Sally doesn’t mean it will work for you.

As a holder of real estate, I agree that it can be an important part of a balanced portfolio and over the long run it pays off. I also agree not to trust people’s anonymous advice on the web. Use the the ideas given, then do your homework.

[surveyor]

Real Estate Investing Loopholes, page 199:

“There are two different ways that the recaptured depreciation may be taxed. For real property, the portion of accelerated depreciation that exceeds the straight-line depreciation is taxed at a special 25% tax rate. The portion of depreciation that would have been taken under the straight-line rate will be recaptured at the ordinary tax rate. Non-residential real estate must be depreciated over 39 years using the straight-line method, so only recaptured depreciation will just be taxed at ordinary rates.”

standard disclaimer applies: see a tax expert. talk to a tax expert. feel up a tax expert. 🙂

standard disclaimer #2: disregard “feel up a tax expert.”

[powayseller]

surveyor, of course you are right, real estate is local. So the 30% median drop for the US means the heavily populated (and higher weighted areas) will fall perhaps 50% (CA, Northeast US), while the sparsely populated areas will fall less (Midwest). I supposed some areas could increase too, but I’m not clever enough to figure out where those might be. You’d have to find a place where hardly anyone used exotic loans, and that is immune from the ripple effects of this recession, and that didn’t use their home as an ATM. Hmmm…does anyone in this country fit that definition? Even Wyoming as a 25% Option ARM rate.

Besides the depreciation to reduce your taxes, how is real estate the best way to get rich?

[surveyor]

30% of 50% of 100%…

Exotic loans. ATM homes. 25% option arms. Sure. These were available pretty much everywhere in the RESIDENTIAL real estate market. I mentioned above to avoid the RESIDENTIAL real estate market. Do not buy any SFRs or condos.

From what I’ve read of the bubble, it has affected RESIDENTIAL real estate, not commercial (defined as office buildings, 5 plexes and above).

And the reason why real estate is the best way to get rich is simply because real estate is how most rich people have become rich. All of the good tax breaks are in real estate. You can put down 20% to buy a property that you can take advantage of 100%. Simple. This is true in down markets and up markets.

(does this mean you can buy any property and it will make you rich? no, you have to choose well).

(for a person who is good at internet research, the idea that you’re not clever enough to figure out where the possible up markets might be is somewhat perturbing. if anything else, refer to my post above where I mentioned Texas and North Carolina)

I would like to tell you more, but I get the feeling that there is nothing I could say to make you change your mind. Which is cool.

Have fun!

[sdduuuude]

I’m a fan of the consumption tax method, mostly because we would end up spending less money on accountants, and you would get the IRS out of the hair of individuals because the burden of paying taxes would be on the businesses selling the goods.

We spend sooooo much time and money trying to figure out what our income was. It opens up loopholes and games and it has just gotten messier and messier and messier.

A consumption tax would put the accounting industry in upheaval. H&R Block would disappear. Can you imagine NOT having to file taxes each year?

[powayseller]

City % Overvalued
Austin, TX 17.7%
Dallas/Forth Worth, TX 15.2%
Corpus Christi, TX 14.2%
Lubbock, TX 11.9%
San Antonio, TX 11.0%
Beaumont/Port Arthur,TX 10.6%
Raleigh-Durham-Chapel Hill, NC 8.6%
Greensboro-Winston-Salem-High Point, NC 8.5%
Brownsville-Harlingen-San Benito, TX 8.0%
McAllen-Edinburg-Mission, TX 6.8%
Fayetteville, NC 3.9%

Source: John Talbott, former investment banker at Goldman Sachs, visiting scholar at the UCLA Anderson School of Management

I would like to know which cities are NOT overvalued, and your proof.

Commercial real estate is in a bubble too. The December 6 2006 story in the Washington Post:
“The new story is the bubble in the commercial real estate market — offices, hotels and retail establishments — which has generated spectacular returns for investors over the past few years. Prices have risen to ridiculous levels, relative to the risk involved and the amount of income generated by these properties. But even those prices don’t seem to scare away pension funds, university endowments and Arab investors, who continue to pour hundreds of billions of dollars into real estate investment trusts, private-equity real estate funds and hedge funds that specialize in real estate finance.

Exhibit A is the purchase of Equity Office Properties, the country’s biggest owner of office buildings, by the real-estate arm of the Blackstone Group, a private equity firm. What you need to know about this $36 billion deal is that 80 percent of the purchase price will be financed with debt, and that the “cap rate” — the rate of return from next year’s rental income — is an estimated 5.5 percent.”

Commercial real estate lags residential real estate, that is just basic knowledge. Sam Zell knows this all too well – he just sold $20 billion of REIT’s to a private equity group, cashing out of the commercial real estate bubble.

I think REITs are going to be hit hard next year. This economic slowdown will bring a glut of vacancies to that sector.

[surveyor]

Money article

There’s an article in money.cnn.com right now that talks about the housing markets that are likely to drop and those that are likely to go up. It lists Texas and North Carolina areas as places that are likely to go up.

http://money.cnn.com/popups/2006/fortune/invguide_realestate/2.html

It’s evidence of what I’ve been saying that not everyone is on a California/San Diego real estate cycle.

As for commercial, the properties I’ve been investigating cash flow well and that is the sign of a healthy market. I’m not trying to buy billion dollar properties. I’m just trying to buy small commercial properties. The most expensive one was a 12 unit for $775k. For that price, you can buy a house in San Diego, but in other places you can get a 12 unit that cash flows.

And let’s say the 12 unit goes down in value over the next 3 years. It still cash flows. As long the the properties make money, it is ok. The worst thing that happens is that I can’t refi money out of it.

There are opportunities out there if you do a little research. If you instantly say to yourself, well the entire U.S. is going to hell in a hand basket, it will blind you from the steps necessary to make you rich.

[powayseller]

I believe real estate is a risky investment right now. I put more credence in John Talbott than that money article. Their past surveys/projections were absolute jokes.

I hope your commercial properties continue to cash flow when the vacancy rate increases in the next downturn. I hope that your tenants have businesses that sustain them well.

Commercial lags residential so from my perspective you are heavily exposed to a declining market with those commercial properties. It’s not a risk I’m willing to take, anywhere in the US, heading into a recession.

[sdrealtor]

PS,
I think you (and we as a group of Piggington’s for that matter) apply what is happening here in SoCal to the rest of country too much. What is going on here and in the rest of Socal is such a small portion of what is happening in the economy as a whole.

Two years ago, when we were humming I was back on the East Coast and went to a shopping mall to have an extended family photo over Thanksgiving Weeekend. It was shocking to me what a ghost town it was. Our economy was racing and theirs was getting crushed. I was back this year and it was booming there also. What is happening here doesnt necessarily happen every where and in reality the complete opposite frequently occurs.

[surveyor]

A future investor

powayseller: I know you are planning to re-enter the real estate market both as an owner and as an investor at some time in the future (correct me if i am wrong, those are statements you have made). During all this time, I know that you’re educating yourself as much as possible.

And I don’t have to tell you that time is the greatest tool to manage risk in an investment, real estate or not. Time is even more critical in real estate investing. The less time you give yourself, the more risk you take. I do not hold any illusions about convincing you anything about real estate, but you should consider that.

I know that there is risk in the real estate market, but there are ways to manage risk in real estate – by diversifying into other areas of the country, by holding several different types of properties (avoiding SFRs and condos), using time to your advantage, and by being strict in choosing high quality properties (but not necessarily high-priced).

Like I said, I do not think I will convince you of anything nor do I desire to. I’m just backing up what I’ve said in previous posts and giving you a rationale for why I think the way I do. In case you think I’m in denial or delusional about the real estate market.

[powayseller]

surveyor, I have gained immsense respect for your logical, professional, and respectful way of communicating. I don’t have any experience in real estate investing, so I wouldn’t know the first thing about buying properties during a national downturn. However, if you do, all the best wishes for you.

[Author]

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