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larrywww

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Reply with quote  #1 

Maybe it is too soon to have a reaction since the fine details haven't been completely determined---and it is going to proceed to conference committee to hash out the differences between House and Senate versions.

An historian of the depression (Robert McElvaine) posted an article on the Washington Post website that warned this bill was like driving an already stimulated economy over a cliff (eventually---and assuming the Fed doesn't hit the brakes at some point). 

I'm not really familiar with McElvaine's work----someone I know said he was kind of "partisan".  Not really sure. 

I'm sure there are important differences----we have nothing similar to the Smoot Hawley tariff yet----although Trump has been repeatedly threatening a trade war.  Too bad Bernanke left the Fed---he is also considered an expert on the Great Depression.

What is your take on this?

BTW, Bruce Norris is seeing the wisdom of investing in Florida real estate---he is going to do a timing report there.

On the plus side, by adding a trillion dollars to companies that are already very deep in cash it might serve to prolong the stock market and real estate markets that are already very high, not to mention inflate other assets as well.  

In fact, I hear that alot of companies when given this tax windfall may use it to increase their dividends or do a stock buyback---neither of which are necessarily going to improve the job market as has been claimed.   The stock market will probably rise in response to the passage of the bill, even though the market is very high.  But it just may mean that when the crash comes (either real estate or stock) it's going to be a lollapalooza.  (Is that even a word?)

Myself, I don't claim to know---I don't think Bruce Norris most recent report could possibly have accounted for this type of situation.  The California real estate market doesn't make alot of sense right now but the question remains where one should invest.

https://www.washingtonpost.com/news/posteverything/wp/2017/11/30/im-a-depression-historian-the-gop-tax-bill-is-straight-out-of-1929/?utm_term=.410e2cbded5b

The Senate version of the tax bill repeals the mortgage interest deduction, the House version doesn't, so it will be interesting to see if that will go away.  I saw someone claim that repealing it would reduce the value of many houses by 10%, though I'm not sure what that prediction is based upon.  But I would think those at the high end of the market will be most severely affected.  Is it really so desireable to own a mansion if you can't deduct the interest?  

Individually each of these new changes may seem tolerable----but collectively they might also constitute a real tipping point in many instances.

But  my interpretation is that both versions will eliminate the deductibility of state and local taxes----though I think 1 senator obtained a concession that a certain amount of property tax will be deductible, so I'm not sure how that will end up it.

Is eliminating the deductibility of state and local interest going to bankrupt high tax states like California?  (The house limits the deduction to 10 grand in property taxes, whereas the Senate makes it go away entirely.)  I don't know the answer, but it doesn't sound like a positive development for those who live in such states.  If you are nearing retirement looking at some of those states without high taxes might suddenly seem like a good idea.  Part of the problem is figuring out how states like California will react under the new regime---and the extent to which they will need to change their policies.
I don't know how that's likely to work.

According to a NY Times article, the elimination of state and local taxes will constitute a tax hike but mainly for those earning above $100,000 a year (who will bear 90% of the tax hike).
https://www.nytimes.com/2017/11/03/us/politics/fact-check-state-local-taxes-republican.html

For a small real estate investor, the tax bill doesn't really offer much.  If there is substantial depreciation (which is almost always true), that investor isn't paying taxes anyway.  The huge tax cut on large businesses isn't going to impact most small real estate investors.

The bill also permits repatriation of foreign funds at a very low rate---but since when are most ordinary investors going to have their funds in Ireland or other tax havens?

The bill's theory is that these funds will be used to expend the businesses and create jobs---but if that is the outcome they wanted they could simply have required it.   In any case, the unemployment rate isn't that high---and this kind of stimulus would have made far more sense in 2008 than 2017.

Given that the tax rates are going down, however, it strikes at one of the reasons why most investors resort to real estate---so they won't have to pay substantial taxes.   So why buy real estate in this new tax environment?   I thnk you would have to seriously rethink it.  The other reason that investors flock to real estate is as an inflation hedge.  Is that still valid?  
I'm not sure how to answer these questions.  I wonder if Bruce needs to rewrite his latest timing report because the game HAS changed.  Recall how real estate investors got totally hosed in 1986----frequently dramatic tax changes don't work to our benefit.

Whenever dramatic changes take place---especially to the tax environment---I think you need to go back to square one and ask: Does real estate make any sense in this environment?  Is it the best way to invest funds?

I wonder what Bruce Norris will say in his presentation this month---maybe he needs to rewrite his latest timing report.  (I know he mentioned these kind of legislative changes as a factor---but it's very different as a fait accomplit.)


Maybe this is the exit signal from the market that we have all been waiting for---time to head for the hills---I don't claim to know but it seems kind of scary.  Even if real estate makes sense---does California real estate make sense in this new environment?  (I realize that alot of investors have already exited.)

Investors doing high end flips were already in a fairly risky environment----is now the time to go on hiatus?

One of my problems with the new tax bill is the timing---the 1986 act took 2 years to enact---this one had 2 months of closed door hearings----and now they are going to seek to put it into law so quickly there wasn't even enough time in some instances to fully type it out---Ouch.  Bruce Norris has a concept he calls a "market maker"---and surely a tax change this dramatic would qualify.  The 1986 act is instructive for another reason----it changed the rules almost 180 degrees---professionals would use tax shelters to shelter income whether or not the investment made money or not.  After 1986, that kind of market crashed and burned.  For alot of real estate investors 1986 was a catastrophe.

I think that California real estate is just plain worth less under the new regime in view of:

1) The state and local tax deduction elimination.  (The 10K property tax deduction may survive, but it wasn’t in both versions)

2) The mortgage interest elimation

3) The low wages and income disparity.

4) The fact that rents have never been higher, historically speaking, and cannot possibly increase

5) The fact that health insurance will be eliminated.

6) The fact that other benefits are also going to be targeted.

7) the fact that interest rates can only go up, not down.

8) The fact that we are overdue for a recession / downturn since the business cycle is much longer than usual.

9) The fact that we were already facing austerity at some point given the deficit and now we will be forced to address this at a time when the government is receiving much less income.  Do you have Section 8 tenants?  Ward Hannigan, one of the smartest landlords specialized in such tenants.  Good luck with that surviving the new round of budget cuts (required because the government is receiving so much less income).

10) The fact that Bruce Norris landed in a no income tax state that arguably isn’t going to face the same budget challenges makes him look, by 20/20 hindsight, like a genius.   (OK, that  was probably just lucky since he did it in 2015---and deals like he found are in VERY short supply).

11) Given the dramatic shrinkage of the government, we will probably be destined to have low growth or no growth for a very long time.

12) The real estate market was already flat anyway.  No sense in sticking around at this point.  I wonder if Bruce Norris will say something similar in his presentation at sdcia?

13) A landlord has to have something to sell that is affordable.  By any measure, going forward is going to be a much more challenging environment and how are tenants going to pay their rent (at historic highs) in this new environment? 

14) The lending world is going to need to cut back on front end and back end ratios since buying real estate has also become much less affordable, especially in California.  Also, migration to California has been decreasing---not really affordable here.

15) The Republican tax increase might find themselves in opposition to the Fed since one of their underlying aims is to avoid inflation and the tax increase is very inflationary.  It would have been smarter for them to have delayed the tax increase, perhaps triggered by the state of the economy. 

The end of the year is usually a good time to consult with a tax advisor---it seems like there will be alot to talk about this year.
Curtain going down on California real estate?  At a minimum, I think one should consider leaving the market.  Though since almost every other asset class is grossly overvalued I'm not sure what options are attractive at this point.

Will the last investor who exits the market kindly turn the light off?

Anyone else have a thought on this?

rickencin

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Reply with quote  #2 
Politicians are in the business of buying votes and selling legislation.  Did you see that 60 Minutes piece where Congressman are expected by the party to spend 30-40 hours a week phoning for campaign contributions?  Apparently as little as $5,000 is considered acceptable.  Since votes are a commodity, they buy the cheapest ones.  Hence all the means tested poverty programs.  Try buying votes from millionaires.  The names may change but the game remains the same. 

Much has been made of Trump's projected Trillion dollar deficits (increase in debt).  The first year deficit was $666 billion.  Much less than Obama's frequent trillion dollar deficits.  Roads, water infrastructure, firefighting and railways are going to hell, but there just isn't any money left over after buying enough votes to get elected.  

The government is a big Ponzi scheme that will blow up eventually.  Inevitable since they started raiding the Social Security Trust fund,   I've got my fingers crossed that it will be after I collect my final Social Security check.  This will be known as "The Big Reset".  Goods and services will still be made, so taxes will still exist.  We need to start applying income taxes to robots/automation based on the value increase they create.  Then it won't matter that we are all out of work.  How many high paying/high education jobs do you think there will be when AI's are smarter than people?

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Rick
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Reply with quote  #3 
Quote:
Originally Posted by rickencin
Politicians are in the business of buying votes and selling legislation.  Did you see that 60 Minutes piece where Congressman are expected by the party to spend 30-40 hours a week phoning for campaign contributions?  Apparently as little as $5,000 is considered acceptable.  Since votes are a commodity, they buy the cheapest ones.  Hence all the means tested poverty programs.  Try buying votes from millionaires.  The names may change but the game remains the same. 



Here's the transcript of that 60 Minutes piece.  Interesting reading:  

https://www.cbsnews.com/news/60-minutes-are-members-of-congress-becoming-telemarketers/


Quote:
The government is a big Ponzi scheme that will blow up eventually.  Inevitable since they started raiding the Social Security Trust fund,   I've got my fingers crossed that it will be after I collect my final Social Security check.  This will be known as "The Big Reset". 



If the oldest generation loses its Social Security, the following generation will have to step up and take care of grandma and grandpa.  It is very liberating for those of us who still are working not to have to bear that burden personally.  So while the Social Security program almost certainly will be adjusted around the edges, I would consider it extremely unlikely that voters would agree to allow Social Security to be eliminated.

I doubt government will "blow up"; there is too great of an interest in having functioning government, and legitimately so.  There is a risk of gradual or not-so-gradual currency debasement through inflation, which has the side-effect of raising additional tax revenue for the government without anyone having to vote to increase taxes.  


Quote:
We need to start applying income taxes to robots/automation based on the value increase they create. 



This sounds like an argument for a Value Added Tax.  Taxes are needed in order to raise revenue for governments, but the downside of most taxes is that they often discourage desirable behaviors.  Excessive income taxes discourage work, and excessive investment taxes discourage investment.  

Before the advent of income taxes, most taxes were in the form of customs duties and other excise taxes.  In modern economies, these have largely been replaced by taxes on income.  It is possible that we're now bumping up against the limits of what feasibly can be raised through income taxation, in which case it is entirely possible that a VAT will end up being part of the "solution" to the taxation problem.  Probably not this year or next year, but perhaps within a decade?  



mks_97

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Reply with quote  #4 

I don't think that the tax plan is too bad for a buy and hold RE investor. Obviously if values of SFR in CA go down (as a result of the tax bill), it does impact everyone.  If the incentive to buy RE is taken away, it can only result in more renters, causing rents to potentially go up further (demand and supply). 

I am not sure how the pass through tax is going to work for properties held in LLC's. If these are also going to be taxed at 20%, then it can can be a boon for investors in high individual tax brackets, assuming your rental portfolio was profitable. Probably help flippers and lenders  too, as they are generally taxed at higher rates.

If you are unable to deduct your CA taxes on your federal tax return then this really means that your tax bill will go up. Will this cause migration out of CA? We will have to wait and see. A lot of CA tax payers who had to pay the dreaded Alternative Minimum Tax (AMT) were not able to avail of the CA state tax deduction or the property tax deduction before this bill. Earlier, this bill proposed the repeal of AMT. I now read they left it in there (but raised the threshold on when AMT kicks in). 

I think there will be fewer people moving residences at the higher end. If you are able to deduct 100% of your 1M mortgage, it will be hard to let it go and move to another high end home in which you can only deduct half of that.

It remains to be seen what the final bill looks like after reconciliation between the house and senate bill. All indications are that it is not good for CA residents. 
larrywww

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Reply with quote  #5 
The answer may not seem obvious, but every time Bruce Norris gives one of his timing reports he mentions a whole raft of factors that are critical to determining whether to invest in real estate in the current market or not.  Each time there is a major sea change, I think he would advise everyone to go back to the drawing board and do the math.   Clearly, the tax bill is a major factor that would warrant making the inquiry.

Ultimately, this decision is up to you.

Obviously, there are going to be buy and hold investors who will stick around----that's a valid option.  Part of the answer may depend on what kind of real estate you have---and how difficult it is to manage---and what other alternatives are available.

Bruce Norris was willing to relocate at the drop of a hat because he didn't have Mike Cantu quality rentals---he made major returns by investing  in some gritty areas.

But I also think that Bruce Norris hasn't researched endpoints----he seems to leave that to accountants, 1031 companies, asset  protection experts, etc.  And I certainly wish he did more such analysis.

Of course, Norris is already fabulously rich---he doesn't need to worry given his treasure trove of trust deeds.

The puzzling thing (to me) is that (insofar as I understand it) he didn't really appear to have any plan other than to hang onto his rentals---which are probably higher quality than most of those who frequent the board.

I really think that owning real estate in California is getting more and more risky---and I am closer to Rick Solis that maybe I don't need rentals going forward.

Too many investors go 1031 wild----and I don't think they consider just paying the taxes.  I just think that 1031 is like a treadmill---you have to keep buying more and more properties, and in this market that means taking properties with fleas and making them better---not fun.

Look at it this way----anything you keep is going to lose at least a 1/3 of the value anyway (or more)----and that arguably would be enough to simply pay your taxes.

And then you can invest with your post tax earnings.

What are you really losing?  Keep in mind that much of commercial real estate is only getting low single digit returns---even sub 5% or 4% returns.  (Especially but not only in Bay Area).

What's the upside of staying in the market?   Rents going higher?  In the Bay Area?   John Burns says we are already at a point where rents are at historical highs.  I don't see any upside in that----renters aren't getting the wages they used to get decades ago---and under the new tax bill they are going to lose deductions, pay for their own health insurance, have other unpleasant surprises.  The tax bill doesn't address income inequality---except to exponentially inflate it.  Besides, alot of the bay area is under rent control---higher rents are not exactly a foregone conclusion.

Also, it's obvious that the multifamily market  is grossly overpriced (especially in the Bay Area).

The question is whether, if you had the cash rather than this entity could you get equally valid returns.  I'm not convinced you couldn't----and let's face it, managing rentals is like having a full time job anyway---it's not like you would earn nothing if you instead directed your efforts to other opportunities.

I think someone like Sean O'Toole would say at that point----those returns really doesn't accurately reflect your risk.

In any case, it will be interesting to hear what Bruce Norris says.

The other thing that we are lacking is any kind of economic analysis, which was why I was interested to hear from this Depression area historian.  Most economists were against this tax bill, but we haven't heard any predictions about what will likely happen when it passes.  I would like to hear from John Burns and Christopher Thornburgh, etc. what they think is going to happen.

For what it's worth, Robert Samuelson has indicated that (1) the economy is doing fine and doesn't need stimulus and (2) overstimulating the economy may lead to inflation, which given our multi trillion dollar debt might be catastrophic.  (Samuelson explains that the Fed only dictates short term interest rates, long term interest rates are dictated by the market---so it's not like the Fed can dictate the interest rates that govern our national debt---unfortunately.)

https://www.washingtonpost.com/opinions/beware-an-economic-boom-really/2017/12/03/3baddc2a-d6d7-11e7-b62d-d9345ced896d_story.html?hpid=hp_no-name_opinion-card-f%3Ahomepage%2Fstory&utm_term=.c34735e729a1
davidoosnk

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Reply with quote  #6 
An article I read today had an interesting take on all this, that policies driven by one party only like Obamacare with the Dems and this recent tax bill with the R's tend to not continue over time and if they do they end up seriously modified so I would take all of this with a grain of salt. 2018 not looking particularly promising for the current majority party. 
chatterweb

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Reply with quote  #7 
How will all of these wildfires play into all of this? California has a real housing shortage now and it ain't over yet.
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brycewheeler

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Reply with quote  #8 
Hey guys and gals, don't jump the gun!!!  We don't have a new tax bill yet, and the senate's and house  bills are far apart.  This screwy congress may not get their act together to pass a bill before 2018.  That is what I am hoping because I got a whopping Calif. income tax deduction this year--which may go to waste.

Anyway I plan to  stick with rentals as my biggest investment by far.  A small stock fund and even smaller crypto fund to play around with but for serious stuff IMO nothing beats rentals for small mom and pop outfits, basically buy and hold both for income and long term appreciation.   A small guy or gal can't beat Wall Street or the banks who control everything.

  Bryce
larrywww

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Reply with quote  #9 
You have a point.  Whether Congress is going to stick with the provision designed to bankrupt California, New York and other states with high taxes remains to be seen----a majority of the Republicans in these states didn't vote for it (the "SALT" deduction---state and local taxes).

And there is some difference between the what happens with mortgage interest (one version allows a property tax deduction up to 10,000)

The margin in the Senate right now is razor thin for other reasons.  Susan Collins, Independent from Maine but who caucuses with the Republicans, voted for the bill on the understanding there would be an Obamacare fix----the latest version not only rejects any fix but repeals the Obamacare mandate.  Could the Republicans still win?  Yes, but they would need the Vice President to break the tie.  And they couldn't afford to lose even one more vote. 

The Senate and the House are required to vote on the same bill---and the Alabama Senate race on Tuesday right now is too close to call---though the timing will be tricky.  The new Senator could be sworn in as late as Jan 3rd---or sooner---depending upon what the Republican governor does and also maybe what the Senate does.  And even if Roy Moore is elected, he has always been a wild card----and has expressed concerns about the impact of the tax bill on the deficit.  And he is no fan of McConnell.  In September, Roy Moore has indicated that he fears the US would end up like Argentina or Greece---so adding 1.5 trillion to the debt might not popular with someone running on a populist platform.  Really, no one knows what will happen---and if they get it passed before he is sworn in they won't have to deal with this variable.  Though given they are also going to be fighting about the debt ceiling, it's not clear whether this will happen.

Here is an article from Roll Call about the situation.  https://www.rollcall.com/news/politics/could-the-alabama-senate-race-upend-a-tax-overhaul


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