October 23, 2020
(updated October 23, 2020)
Published by Kenjidois
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Rental prices have seen aggressive growth over the past five years, but the gas tank may finally be getting low with prices over the past year growing half as much as recent years.
Raising Rents as an Investment Strategy May Get Difficult
A lot of this is market dependent and growth could certainly kick up again, but the rates have been steadily strong prior to this year so it’s worth keeping an eye on this data going forward and adjusting strategy if needed.
As a whole rental prices increased 1.4% year over year, according to apartmentlist.com data, while the month over month change for October was 0.1%.
Picking Growing Markets Is Important
Many real estate investors in recent years, especially those doing large multifamily deals have used a strategy of acquiring under performing properties, sprucing them up and raising rents as units are turned over.
Then, with the cap rate higher due to the increased rents they can refinance out of an original loan and pull a good chunk of equity or just sell outright for a profit.
It is a solid strategy, but we can’t just blindly assume higher rents will be supported indefinitely. Capital improvements will help attract higher rents, but in the end the market dictates the ultimate cap regardless of how nice a place is.
This is why it is imperative to pick strong growing markets. That doesn’t just mean in rental prices, it means a growing population with increasing job opportunities.
That will help provide the market growth needed, but will also hold up the best if we hit a period of stagnation in the future.
Growing vs. Shrinking
Here is a glimpse at some states with the best and worst year over year growth.
Arizona: 3.5% growth
North Dakota: 2.9% growth
North Carolina: 2.7% growth
Nevada: 2.6% growth
Delaware: 2.4% growth
Rental prices falling:
West Virginia: -0.8% growth
Louisiana: -0.6% growth
Alaska: -0.3% growth
No Red Flags, but Pay Mind
As you can see there are some leaders and some laggards of the 1.4% national average.
The good news is we still have growth in rental prices, the bad news is growth has slowed a considerable amount over the past year.
Again, it is data worth watching, especially for those with the business model of aggressively raising rents on new projects as growth projections may not keep pace compared to recent years.
There are many expenses involved when selling real estate taxes is one of the biggest, especially if you have to pay capital gains.
However, if you know the tax rules then the amount of taxes you pay (if any) can be drastically reduced. Let’s cover a few ways to reduce that tax burden.
Reducing Capital Gains Taxes on Real Estate, Legally!
1.) Short-term vs Long-term capital gains
Properties that are held for more than a year are taxed at the long-term capital gains rate. This is noteworthy because that tax rate is 0% up to $39,475 for a single filer. Then it jumps to 15% and holds there all the way up to $434,000.
If you buy and sell a property within one year then it’s taxed as short-term gains and you pay the ordinary income tax rates which start off at 10% up to $9,700 and progresses to 12% up to $39,475 before jumping to 15% and so on and so forth with 37% being the top tax rate.
2.) Increase Your Cost Basis
The price you pay for a property is your cost basis in the eyes of the IRS. Meaning if you spent 150K to acquire a property and sold it for 200K then you have a 50k taxable gain.
If you completed capital improvements on the property those costs can be added to your costs basis though. Be sure to keep those receipts so you can tack on that 8K cost for a new roof and reduce the tax burden.
3.) Do a 1031-Exchange
Many investors have heard of this one and it gives you the ability to not pay capital gains (or technically postpone them) on the sale of a property by rolling the money into another property.
It’s deemed a “like-kind” exchange meaning you sell an investment property to buy another investment property that is used similarly.
There is a 45 day window to identify properties to the IRS that you plan to buy and then you must close on one of them within 180 days to avoid triggering the capital gains tax.
Plenty of other rules and methods…
Those are just three ways to alleviate the tax burden, there are many other options out there such as investing from a self-directed IRA and so on. This is why it’s important to have a solid account knowledgeable in real estate investing.
Be sure to have them work you through the all the options and verify the examples I have given above as I’m an investor, not an accountant.
Having to pay some taxes is a good problem to have. It means you are doing profitable deals and are buying right. Always use the property calculator to ensure you buy right!
Yesterday I discussed Chainlink (LINK) and how $2.50 could potentially act as a support given prior price action.
Just a little trade…
Now that price touched the 10 day moving average after digesting the prior up move I have decided to take a shot and bought 300 coins at 2.56
If you look at the chart you can see we may have a little double bottom intraday as 2.45 was the low of yesterday’s candle and today so far.
I may be jumping the gun as this candle had not closed and anything can happen in the remaining hours, but with a clear exist of 2.45 it was worth risking 10 cents to make 30 or so as the high of 2.98 is my profit target.
It certainly doesn’t scream get long, but it’s a decent enough risk-reward and setup to speculate and try and pickup an easy $100.
If you have done a couple large renovation projects then you know what I’m talking about. When estimating rehab costs – always add a buffer on top of your total number.
Here’s Why You Always Add a Buffer to Your Reno Budget
This isn’t about how good an investor is at estimating the costs of repairs and replacements. Most of us can get good at that with some experience.
This is about the stuff that you generally can’t foresee. The stuff that just pops up, and trust me there will be things that pop-up. Especially if you are working with properties that are much older. In fact, the older the property the more likely you will have “surprises.”
Real Life Examples
I’m going to keep it simple and give you a “cheapie” I’ve personally experienced so not to scare you off. Just know, the surprises can range much higher is cost.
This is one of the reasons I stress performing as much due diligence on a property as you can before purchasing.
There are many “surprises” that can be avoided – then there are some that are just part of doing business.
My latest example fits into that category.
Main Water Valves and Sleeves
We are finishing up a major renovation on a property that was built in 1901. However, along the way we got caught with a few surprises. One of which had to do with the main water shutoff and the sleeve pipe that runs to the water department’s main valve.
Long story short is the sleeve had become so cockeyed that it was not possible to access the valve to turn it back on. Considering you need water in a home this was a bit of a must fix.
The real question was – is the sleeve bad or the valve too. Either way we needed to have a qualified operator come in a do his thing to repair.
After widening the opening to the exterior piping/valve and doing a little digging out the earth he was able to access the sleeve to replace and test the valve.
Good news – valve was fine. Bad news – sleeve needed to be replaced. $1200 later all is good an we can got water turned on.
Unexpected cost, yes, but at only $1200 feelt like a win. Here’s the things though. What happens when you have 4 or 5 items come up that cost that?
Since this property was so old that is exactly what happened because things needed to be up to code. Replacing the side door entrance became a $1500 costs instead of $300 because of all the layers of siding that had been slapped on over the decades. The flashing had been bumped out so far it was a mess and we basically needed to re-frame it.
These examples are the cheap ones. I have heard plenty of stories from other investors that got hit with $5-10K “surprises.”
Add a Reno Budget Buffer
This is why on the majority of big rehab projects I always slap an extra $10K on my total expected budget.
If the numbers still work with that then I know in the end I should come out in decent shape and better yet, if the “surprises” are limited or not existent than the deal becomes even more profitable.
Altcoins continue to get hammered. Meanwhile, BTC is plodding along steadily in a sideways direction, the bulls trying to break to new 2019 highs, but not having the power to overcome the bears who could plunge prices back towards $8000. The old 5 August chart (shown below) from THIS POST is still valid from the bearish perspective. I consider the market to be in favour of the bears at the moment, so this is still the chart which I am basing my own BTC buying prices on.
What we are watching is the interplay of market cycles. Lately I have found myself discussing market cycles in the comments sections of various posts on multiple platforms.
I would like to thank CryptosDecrypted in particular for inspiring this post. If you read his post titled “The Sunday Recap – Down the Rabbit Hole 42“, you will see that he chats a bit about market cycles, a chat which we continued in the comments section of that post. Incidentally you can follow him on Twitter if you don’t already do so. He’s a quality crypto analyst and blogger, so I recommend that you keep an eye on what he has to say: https://twitter.com/GordonBuckley3
Bitcoin price moves in cycles. Altcoin prices move in cycles – generally together and closely tied to that of Bitcoin. The major financial markets of the world move in cycles. In his blog post, CD remarked:
“My two cents – we are a full economic cycle from BTC (and only BTC) becoming established as a reliable counterweight to global market corrections.”
That got me thinking a bit, to the point that I believe I must share my own views on the topic (hence this post). Note: I’m not saying that CD is wrong, his opinion carries weight and is probably at least as valid as my own. Realise that none of us analysts own a working crystal ball, we all just call what we observe as best we can. Here is my take on it:
I doubt that we’ve seen a proper global stock market crash since The Great Depression. Bear (pun intended) with me here: I realise that the 2008 crash is spoken about in hallowed tones. But 2008 was akin to a failed suicide attempt: a dramatic cry for help, but a cry which averted the disaster. You see: the markets bounced straight back. The reason that we don’t call it “The Great Depression II” is that it was nowhere near that scale or duration. Yes, it has absolutely had a lasting effect on some asset classes, look at precious metals for instance, but the fiat based assets recovered and moved on!
We must now ask the “How?” and “Why?” questions. The answer is not pretty.
Zooming out on the situation and looking in retrospect, we can observe how fiat saved itself. Contrary to reason and sound financial practice, solid assets – good stores of value – were sacrificed in order to prop up the failing fiat house-of-cards. As analogies go, I don’t think you can do better then comparing fiat money to a house-of-cards. Ironically, the booming housing market played a role in the last “crash”, ironic because property is typically a good store of value. Regardless of the cause, the markets took a big dip, but they were prevented from crashing entirely. Governments stepped in to protect their house-of-cards from being blown down by the Big Bad Wolf. Unfortunately for them, there was no Big Bad Wolf. All there was was a very shaky arrangement of unbacked fiat-based derivatives built on top of an unbacked fiat money system.
The markets dipped simply because investors were no longer confident that what they held was worth what the markets said it was worth. That’s bad. That means that the fiat foundation of the house-of-cards has cracked. But fear not! The government came along and applied liberal doses of Quantitative Easing plaster and patched over the cracks. Then they painted it with a big tin of debt coloured paint, the special kind which contains micro-particles of Fractional Reserve Banking.
So we’re all living in the same house-of-cards which we lived in a decade ago, only now it is much MUCH bigger, is covered in considerably more debt, contains a wealth of inefficient private entities which should have died (but which were bailed-out with public funds), and is generally looking about as sturdy as a crowbar made of cheese.
The reason this matters is because the really big crash has not been avoided, it’s been delayed. A healthy corrective crash – a correction which would have weeded out much of the unsustainable fiat rot – was prevented from occurring. What has happened is that the market’s have been set up to fail, far more than they ever would have a decade ago if they had just been allowed to crash organically.
That matters too.
That matters because it means something very important to us: There is no precedent for what will happen next.
We can talk about market cycles, but we will be kidding ourselves. What happens next will break new ground. Our best bet will be to look at what happened during the Great Depression. But even that was almost a century ago and in a very different world – there is only so much that we can take from that example. 2008 may look big to us, but that’s only because we don’t have something bigger to benchmark it against. We haven’t seen a proper crash since the establishment of Bretton Woods. That caused an upset of its own, but that was just the market reestablishing its footing at the time. Everything since then has been a mini-crash or a temporary correction, much like 2008 – fiat has yet to fail, so far it has not been allowed to do so in an unrestricted fashion.
Look at the cryptocurrency market of 2008. that was a crash, a proper crash. All the little altcoins that should no longer exist due to poor management, lack of funds, lack of performance or just poor marketing – they were wiped out. Nobody bailed them out, and the altcoin world is now far stronger for it. The fiat markets took the exact opposite approach, they did the equivalent of bailing out the shitcoins which should have died, be it the tiny little ones or BITCONNNEEEEEEECCCCTTT!!! itself!
Take home point: the market cycles may well soon “break” and behave unpredictably. The current system is an unsustainable house-of-cards. Something has to give, and when it does, it will definitely have enormous repercussions.
End of Part 1
Let that sink in a little. In Part 2 we will look at crypto cycles – BTC and the altcoins. Then we will determine if and how these cycles may influence one another.
Yours in crypto
“The secret to success: find out where people are going and get there first”
~ Mark Twain
“Crypto does not require institutional investment to succeed; institutions require crypto investments to remain successful”