All Forum Posts by: Arlen Chou

@Michele Williams @Dawn Anastasi @Michael Hacker @Mindy Jensen @Karen Margrave @Deborah Moser @Corey Woodruff a little bird told me there will be one this year!!!

@J. Martin any comments???

@Brian Beck regarding the capital gains taxes there are 2 basic paths you can go down:

1)  Sell you primary right away and avoid cap gains taxes. I believe the rules have changed recently.  It use to be that if you lived in the property for 2 out of 5 years, you got the full benefit. However, now it is related to the percentage of time you lived in it for those 5 years.  Simply put, if you live in it for 2.5 years during the last 5 years, you get half of the benefit now vs. before the rules changed you got the whole enchilada.  So if I understand the rules correctly, if you turn it into a rental and you rent it out for 5 years, you get no benefit...  Conversely, the most tax benefit you would get is if you move out and sell the thing without turning into a rental. 

2) Depending on your situation, you could do a 1031 exchange at a later date.  In this case you are not "exempt" from the capital gains, but the taxes become "deferred".  There are various strict rules about this process that are outlined in other various BP posts.

@Chris Jones, looking at a recent report published by Cushman & Wakefield regarding commercial space lease rates, I would tend to agree with @Account Closed that the shift will happen in late 2017.

Vacancies are up by 30 basis points from last quarter, but are down substantially from Q1 of 2015.  Keep in mind that over 4.8 msf of newly constructed office space was added to the market over the past 12 months indicating that absorption rates are still very high.  Sublease inventory has actually gone down slightly from 16% to 15.6% from last quarter.  Meaning that space is getting filled instead of sitting as vacancies or as subleases.  Additionally, average lease rates are actually going up to over $4/sqft.  The last time lease rates were above $4/sqft was back in 2001.  This would be another indicator that spaces are actually being used instead of sitting dormant or going to the sub-lease market.

HOWEVER, when the data is looked at in smaller bites, occupancy growth is down substantially from last quarter.  It went from 1.2 msf down to 242,000 sq for Q1.  Deal activity also went down substantially from 3.0 msf in Q4 of 2015 down to 1.7 msf for Q1 of 2016.  Paired with currently high absorption rates and the slightly down number of subleases, I would venture to guess that corporate plans laid many quarters ago are going forward, but new plans might be stalling out.  

This is only 1 quarter of change, but it is worth noting.  Additionally, over the next 12 to 18 months there will be over 5 msf of new office space coming online.  Approximately half of this is build to spec and the other half is speculation.  It will be interesting to see if sublease rates go up and per sqft rents go down...

@Brian Beck you should really take what @Account Closed has to say.  There is a ton of data on BP and other places about the appreciation of properties in the Bay Area, you should really take a look at that info before deciding to sell.

Continue with your plan to move out to Tennessee if that is your goal, but hold on to the 2 homes in the Bay Area.  To buy a $120k house in 3-5 years means that you only need to save up $24k for a 20% down.  That equates to $4,800 to $8000 per year (depending on you time frame) of savings...  

According to your numbers between the two properties, once you move to Tennessee, you would be bringing in $4700 gross rent per month.  This number should be more then enough to pay your monthly nut for the properties in the Bay Area AND what ever you buy in Tennessee...

By keeping the properties and focusing on saving to buy a primary residence in Tennessee, you avoid taxes, you avoid agent fees, you have properties that you know well, AND you have properties in the Bay Area that cash flow that will pay all 3 mortgages!  After you are established and you can show the income from the rentals in CA you should be able to do a cash out refi on you "golden geese" and buy more properties in TN.  What more can anybody ask for???

@Emily Shirk, as @Jay Hinrichs has noted, if you are buying for your primary home then a "housing bubble" is not an issue, unless you have to sell during the burst.  

The property will not be the problem, but your W2 income might be of more concern if/when the "tech bubble" bursts.  The "tech bubble" is a very wide and vague catch all phrase of what is going on in the Bay Area.  If your W2 is tied into tech, you should look very closely at the specific market segment that your job is tied.  Intel just announced 12k global layoffs, but other companies are "quietly" doing as large or larger layoffs.  As an example Hitachi Global Storage Technologies is laying off 20% of their global work force, but there is no recent news on this topic.  That is not hundreds of people globally, but over 10k people, thousands per each facility.  These examples are hardware and chip related segments of "tech", but there are software, development and other segments of tech that are going strong.

When the last real estate bubble burst, there were many "quiet layoffs" going on in the tech industry that were never widely reported.  So my humble suggestion would be to make sure you are secure enough to make it through the next storm.  If you are comfortable with your W2 position then don't worry about a "housing bubble" and look for a long term primary residence.

@Monika V. Keep in mind the rapid increase in rents is starting to slow. Be careful using a blanket strategy for all of your properties. I went through something similar when I purchased 8 doors in MV.  Unless you can financially carry several units going empty at the same time, I would suggest that you tailor your strategy based on which tenants you want to keep and which buildings you need/want/can renovate.  The speed at which you turn over your tenants should also depend on the city your units are located.  Best of luck to you!

@J. Martin its sad that so many city governments are legislating the creation/retention of giant slums... 

@Andrew Halbert, I think you already know the answer to your question. Just do a ROI on the projected additional $12k you are thinking of spending to get an extra $50 a month... The exercise would be different if you were going to flip the property. However, if you are just going for an extra $50 per month, it is going to take you a LONG time to make back you $12k. It looks like the house is only worth $50k... for that $12k could you not put 20% down on another property?

Let us know what you decide.

-Arlen

@Dan P. It depends on your personal situation.  If I was single, I would sell the property and take the tax free capital gains and roll it into a small multi-unit.  That way I would reap all of the benefits: tax savings, primary residence loan rates, cash flow.  However, if I was married with or planning to have kids, I probably would not do that.  Depending on the current interest rate of my loan and how much cash I had available, I would seriously consider the refi o my current loan with some potential cash out to invest.

Let us know what you decide and good luck to you!

-Arlen

@Wes Brand sorry if my post seemed like a slam, it was not intended to be that way.  That is great that you are saving the difference between your RC rate and the market rate.  It is even better to hear that you have enough socked away to be able to retire in 10 years, especially if it is based on index fund growth.  That should mean that you have a good chunk of change put away.  Banks will like that when you are out shopping for loans.

Like I had said, if you are saving the difference between RC rates and markets, then you should stay in your situation and look to buy outside of SF.  It sounds like you are using the 1% mark, from time of purchase, as one of your criteria.  As @J. Martin pointed out there are deals in places like Richmond that already hit or are close to the 1% mark, but you have to be ok with Richmond.  

Good luck to you and I hope to see you around at a meet-up.