All Forum Posts by: Sam Josh

How are capital gains calculated on investment properties? Is the tax levied on Selling price minus purchase price or does the seller get exemption on selling costs such as broker fees? For example I buy a property for 100k, sell it for 120k. I incur 6k to sell the property. Am I taxed on 20k or 14k. The latter accounting for exclusion of selling costs.

Isn’t real estate by nature a long term buy and hold investment vs an instrument you buy and sell often? If that is the case I wonder what is the point in predicting or anticipating a turn in the market. Ok you buy a property. Well clearly no savy investor is going to buy one if it is not priced right or at a discount. You rehab it and rent it. Your analysis should reflect a “stress readiness” also called margin of safety on certain variables if they were to go south. Let’s say rents drop 20% or vacancies rise 25% etc. Frankly a lengthy debate on a potential downturn makes me nervous because the debate only has merit if investors are highly levered and have been borrowing like crazy to expand against their equity and purchase more assets / doors. That is what was happening in 2008. Lots of leverage, crazy financing terms etc. If the “balance sheet” is solid then the only debate to have is 1) Can I survive if rents fell 20% 2) Vacancies rose 25% 3) where to load up RE when the market takes a turn. If on the other hand one is levered up the wazooooo like 2008 or bunch of your mortgage debt is at a short term variable rate, you may have essentially thrown a party for a whole lot of people all of whose last name is trouble. One thing to fear is the non savy investors. Your neighbor who is clueless and is levered up to his eyes. Unfortunately when he falls in the downturn, he may take you the and rest of the neighborhood down with him.

Did you do a background check on this tenant?

I wonder if during the depths of the recession people were discussing the massive boom that was upon us! I personally don’t recall hearing much of a chatter rather than how much worse things were going to get from how bad were. Not saying we won’t have a slowdown or crash or whatever but it just is interesting how human psychology works.

Is there a scenario where you can hold the Bay Area property and buy out of the area in due course of time. That way you can keep getting appreciation benefits over the long term but also build cash flow assets. I know it could be a stretch but may be worth it over the longer term.

A lot of people are quoting historically low rates even as they keep rising. But I am wondering if that is even valid given we are at all time highs on asset values. So why would it make sense to compare a 10% rate on a home mortgage in 1982 for a home that cost 125k to a 5% rate on the same home that today costs 1.5 million. Granted we have higher income levels but asset prices have gone up a lot. I think people are under estimating the power of high interest rates and the QE roll back on liquidity. I can’t see why that will not put a damper on RE prices or rents once the Fed has tightened further and the impact of those changes start to flow broadly through the economy.

Combine high asset prices, with high appraisals and higher property taxes and then put rising interest rates on top! The cocktail sounds to taste bitter. Somethings got to give then.

I can’t predict a recession! I wish I could. The fact is between QE and the Fed’s rate easing policies we have had a flood of liquidity and very low interest rates. Now QE is being rolled back and the Fed is tightening, that should have some dampening in liquidity. Higher rates also mean more incentive for consumers to hoard money in savings accounts vs spend or invest.

Mortgage rates reflect the Feds decision to tighten. What this means is a gradual but sure path to less liquidity in the market causing a slowdown in the investment cycle. Eventually this will translate into subdued economic growth and a slowdown or a stall in Asset prices. Mortgage rates are at their highest in 7 years. They are historically still low but compared to 7 years back asset prices have gone up, in some cases doubled or tripled. So the interest rate is going to appear more expensive now than back in 2011. Imagine 5% on a 1.2m home vs 5% on the same home that cost you 500k in 2011. Fact is last two times the Fed embarked on a tightening spree (2000 and 2006), the outcome was a recession. A lot of 5 year ARM resets are on the horizon and these rates could stress property owners who are not prepared for higher refi rates.

Every correction feels tough. 2001 - 2003 was tough but now it feels like a dwarf when compared to the 2008 - 2011 downturn. But I lived through both and they were painful on everyone. That said in both cases there was a healthy population of people who saw it coming both times. Was a lot of chatter during the dot com bubble about how it would end badly and then same before the housing collapse. I can’t see much at this point in terms of big catalysts. Some things being thrown out are retailer bankruptcies, higher interest rates. Not sure I have heard of any other Tsunami’s, but happy to take ideas.