U.S. Real Estate Predictions for 2019

Similar as to how political pundits claim that this election cycle will be the most important in a generation, this year could be the most important year in recent memory in terms of mortgage loans and the residential real estate industry at large. (And if you believe that I have some swap land in Florida I’d like to sell you). For a variety of reasons, I have decided unilaterally to keep it short and sweet this year. Hence, here are the three perennial predictions for 2019.

1. Gig Work
At first glance, the phrase “Gig Work” seems antithetical to sound mortgage underwriting standards, but it is in fact actually very refreshing. And that is to say that as the aftermath of the 2008 crash could not be further from the subconscious, there perhaps is subprime “creep” into present underwriting standards. But this is not your Daddy’s Oldsmobile underwriting standards. Meaning, that lenders today are more than willing to count part-time and intermittent work as bonifide income, even though it had been looked down upon post-2008. 
According to Saideh Brown, President Emeritus of the National Council of Women at the United Nations, “Mortgage lenders are beginning to factor in gig-work for mortgage approval. This is only going to become more prevalent with the current job market. Banks are looking into all sources of income and gig-work is quickly becoming a primary source of income for millennials and must be factored in to get an emotional buy-in to homeownership from this generational block.”

Thus, the bottomline for 2019 on Prediction 1, expect creative – yet reasonable underwriting standards to become apart of normal mortgage underwriting procedures.

2. Saved by the Millennials (again). Whaaat?? 
At second glance, who isn’t bored by the self-absorbed Millennials. Me for one, but not withstanding that tongue and cheek denigrative response to the flavor of the month generation – who will undoubtedly be replaced by the next off-spring of eternal hopefulless, they do at least make for good print. And here’s the angle; while many are concerned if real estate is a safe bet today, then historically speaking it is – and thus, one’s perspective should be long term, despite the naysayers on non-real estate appreciation for 2019.

According to Dan Green, CEO of real estate site Growella, “Rising mortgage rates aren’t slowing the Millennial Generation’s desire for homeownership. Pent-up demand will continue to unfurl through 2019, moving home values up across all price points. Like all markets, housing is defined by supply and demand. And, so long as supply and demand remain within tolerable ranges, housing will continue to be a good investment.”

Thus, the bottomline for 2019 on Prediction 2, buy now and forever hold your peace, since interest rates are still good.

3. Home price decline
Real estate has always been local. Hence, the adage “Location, location, location.” With that in mind, there is nothing to catastrophically fret about in terms of buying a home as a primary home. If you’re an investor, then pick your fights carefully, since not all markets will perform as anticipated no matter how smart you may think you are! With that in mind (again), there will be a slight degree of variability – as there sound be, since it would be insanely moronically not to expect some degree of variability. Even in the Garden of Eve, market value likely dipped in price after Adam bit into the apple. 
According to Ruben Gonzales, Chief Economist at Keller Williams, “As we look toward 2019, we are anticipating home sales to decline around 2%. We’re expecting it to be another slightly slower year as buyers continue to wrangle with higher mortgage rates after contending with several years of rapid price growth.”

Thus, the bottomline for 2019 on Prediction 3, proceed with caution as an investor, but as a primary homebuyer nothing should reasonable caution you from a buying decision, since home appreciation should be an afterthought, and especially so depending upon your hold period.

BIG TAX BENEFITS? Qualified Opportunity Zones

BIG TAX BENEFITS? Qualified Opportunity Zones

I received another call last week about someone wanting to invest in an Opportunity Zone (OZ). I asked “Why?” and they said, “To save on taxes and make more money.”

OK, I understand and that is a good answer, but what is the plan? How will you save money on taxes? How much will you save? There seems to be a lot of hype around OZs, and for good reason. They could be great, but it has to be the right situation and planned correctly. Because of the hype, and misunderstanding, I wanted to share my understanding on what OZs are and how you, as an investor, can benefit from them.

Legislation passed in 2017 allowing the US Treasury Department to created OZs. In 2018, the information on the incentives were released. Because this is so new, it is highly misunderstood. The idea is to spur economic growth in real estate and jobs by giving tax benefits to investors for investing in businesses or real estate located in certain parts of town. The zones are determined by the state and approved by the federal government. My understanding of this is the only tax benefit is some deferrals and forgiveness of long-term capital gains tax, and there are some hoops to jump through.

First, an individual cannot invest in a piece of property in an OZ. For an investment to qualify for the tax incentives it must invest in the OZ through an opportunity fund (OF). An OF is an entity that is taxed as a corporation or partnership, like an LLC, that invests at least 90% of its equity into OZs. According to the IRS, for an entity to qualify as an OF is simply self certifies by filing a form with the IRS.

The tax benefits can be big. Investors can defer paying taxes on gains if they invest gains into an OF. This works very similar to a 1031 exchange, but it does not need to be a like kind exchange, meaning you could liquidate other investments, like stocks, and defer gains on those. The deferring of taxes gets even better with OZs because the amount you pay on the gain reduces over time. If you invest in an OZ and hold the investment for 5 years you will reduce your gain by 10%, which in turn reduces your taxes. For example, if you have a $50,000 gain from the sale of stocks that you roll into an OZ, after 5 years the report-able gain that you will pay tax on reduces by $5,000 making the taxable gain $45,000. If you hold the assets for 7 years, the gain is reduced another 5%. Making the taxable gain $42,500. In 2026 you will need to pay tax on the differed capital gain whether you sell the asset or not. The big benefit however is when you hold the property for 10 years. After 10 years, you will pay no capital gain on any appreciation on the asset from the day you purchased it. So, if your investment increases in value $100,000 over 10 years and you sell it, you pay $0 in taxes.

Being forced to use OFs to invest in OZs is interesting. From what I can tell, it is done this way to attract larger investments for the largest impact, but I did not find anything saying you cannot set up your own OF to invest in a single property in an OZ. These benefits are big, but the way I see it, it only makes a good deal better. I would not specifically invest in an OZ just for the tax break.

Myths of Opportunity Zones: Here are the two most common myths about opportunity zones that I hear:

I can roll capital gains into OZs, hold the property for 10 years and never pay tax on the gain.

It is true that you will never pay tax on the capital gains from the original investment after 10 years, but you will need to pay taxes on the gains you rolled over in tax year 2026. The gains that you roll into an OZ is simply differed and will reduce over time, but it will never be eliminated.

I can buy a rental in an OZ for big tax savings.

There are two reasons this won’t work. One of the hurdles to OZ investing is that you need to invest through a OF. Once you identify an investment you will need to set up a separate LLC, partnership or corporation to invest in that property and then notify the IRS that your entity qualifies as an OF.

A much more confusing hurdle is substantial improvement. According to IRC Sec. 1400Z-2(d)(2)(D)(I), qualified OZ property held by a qualified OF must satisfy one of the following requirements:

The original use of qualified opportunity zone property commences with the qualified opportunity zone fund, or

The qualified opportunity zone fund substantially improves the property.

The way I understand this is that if you purchase a property you will need to either build new (new original use) or make major improvements. There was recently clarity on the definition to “substantially improves.”

To qualify for substantially improves, you will need to make improvements that doubles your basis (make improvements that equal the amount paid for the asset) in any 30-month period while the asset is owned. The basis does subtract the land value, so the improvements needs to equal the value of the improvements only. For example, let’s say you buy a rental for $100,000. According to the county assessor the value of the land is $20,000. In order to qualify for the tax incentive, you will need invest another $80,000 into the property within a 30-month period at some point in the next 10 years before you can sell the asset.

So, what’s the strategy?

The obvious strategy is to buy land in OZs and build to hold. Other strategies for real estate investors could be to buy and scrape to build town-homes or condos. In those cases, you will want to hold on to a few of the units as rentals for at least 10 years. Another option that I can see some creative investors taking advantage of is accessor building units (ADUs). These are small out buildings or additions used as additional units or apartments. These are becoming more popular with the boom in Airbnb in many areas, you don’t need to be zoned for multifamily to build them. Because of the regulation on short term rentals, you may need to rent these out as long-term rentals, but the number could still work. I can see if you buy a single-family house in need of repair, by the time you rehab the house and build an ADU you could qualify for the tax incentive.

FINANCIAL DEFENSE The True Path to Wealth

FINANCIAL DEFENSE The True Path to Wealth

“Congratulations! You play fantastic offense” This was said sarcastically by Thomas J Stanley in his famous book, The Millionaire Next Door. I have not read or listened to this book in more than eight years, but I still remember this phrase. That one, and the millionaire saying, “I drink two types or beer. Budweiser and Free.”

The message in his book is that you need to watch your spending with more tenacity than to increase your income. Obviously, it is a combination of income and spending that creates wealth, but controlled spending is far more important. As long as you spend less than your income, you will be moving forward, and consistent progress will make you rich! The problem I often see is that people spend what they make, or worse, spend more than they make. In either of these scenarios, you are at best staying even, but most likely going backwards. Many want to be investors and entrepreneurs, drink the get rich Kool-Aid and focus all their energy on increasing income. That is what sells coaching programs, mentor-ships and advertising on TV shows. With energy and focus comes success, so many of these entrepreneurs and investors see results. And with the positive results of higher earnings comes… higher spending!

I am fortunate enough to live in a great neighborhood. Most people in the neighborhood are high income earners, but several of them live above their means. It is not uncommon for me to see neighbors move out of the area because they can no longer afford to stay. They are the same ones with the new cars and the extravagant parties. It is a look at me attitude and peers feed on the pressure to keep up. This creates a little spiral of friends living outside their means. But hey, at least they are all moving backwards together.

The ones that live below their means feel pressure to spend or get left behind. And on the surface, many of them do. One challenge about living below your means is it takes years before you realize the benefit. During those years it seems as though you are missing out. I see it so clearly and understand the pressure, but I also see a high percentage of our aging population that should be retired, working their asses off. They are stressed and busy and churning to get by.

If you have not yet, you owe it to yourself to read The Millionaire Next Door. This book really sank in for me on the power of financial defense. Of limiting spending and protecting your earnings. I am able to live in my neighborhood, provide for my family, enjoy my time away from the office, and many other benefits because of the control I had with spending as my income was increasing. As you invest earnings for income, instead of spending it, you will witness exponential growth of income.

If I recall correctly, the quote from the book “Congratulations! You play fantastic offense” was referring to a broke high earner. He made more than his peers but would miss a mortgage payment if his income stopped. That is not a comfortable life, yet he was proud of it. If I could help one piece of financial advice sink in, it would be to focus on defense before offense.

Travis and I both recently read the book, Set for Life, by Scott Trench. This is another fantastic book focusing on the correct way to build wealth and retire early. It is a simple formula. Spend less than you make and invest the difference.

The Perfect Disaster

The Perfect Disaster

Why trying to be perfect is a great way to fail – and how to avoid it.

The best is the enemy of success! What I mean by this is so many of us are so focused on the best that we take very little action towards our success. We are focused on the best place to eat, the best time to work out, the best way to lose weight, or the best way to make some extra money. We are focused so much on the best that we think too much about what we should or could be doing.

Focusing on a process toward success will prevent failure and accelerate your results. Take Travis in our office for example. He loves the gym and wants to get bigger and stronger. He can focus on the perfect diet, the best supplements, the best workouts, and the best technique. Or, he can eat healthy and get under the bar. The reps give him experience and strength. The results provide the momentum, and he finds himself spending more time in the gym and focusing more on diet and supplements. Now he has trouble fitting into his shirts. It all started with reps.

Dating is another good example. Typically, we need to kiss a few frogs to find our prince or princess. It does not come easy, but as we work through it, we start to learn what a good match looks like. We should start to get more confidence and our decisions become faster and better. Eventually, we hope, we find someone we are compatible with and live happily ever after.

Business or investing is no different. Obviously, we want to strive for quality, but quality will come with some thought-out quantity. Takes sales for example. If we just pick up the phone and start making calls, we will get better and better on the phone and will start closing more deals. The practice on the phone will produce better results than spending time finding the best phone script or the best people to call. With investing, we start taking steps to our goals. Maybe that is interviewing agents or sending out mail to motivated sellers. As we see results, we can adjust and improve. The fact that we are taking action, organically gets us closer to perfection.

So how do we avoid the perfection trap?

Goals are so incredibly powerful. A goal should be a tremendous help, but it can also hurt you. For new investors I love the idea of setting action-oriented goals. What I mean by this is to not focus on results, at least to start, and only focus on the small actions that should lead to results. As you hit your goals, you gain confidence and momentum. Let me give you an example. If you want to make $30,000 a month, you might start with how many deals you need to do to hit that goal. If you are a fix and flipper, it might be one deal. Then focus on how many offers you need to make to get one deal. Because we are in a tough market, we know that it might be 60 or more. Obviously, this is a bit of a guess until you can track it, but let’s start with 60 for this example. A great goal to help get you started would be to make 60 offers this month based on your buying criteria. The criteria being deals that should net $30,000. Focus on the fact that the goal is the number of offers, not the number of deals or the amount of money you want to make. That way, even if you don’t get a deal, you can, and should, celebrate the fact that you accomplished your goal. If you consistently hit action-oriented goals, you will see tremendous results.

I recently read a story about a college art professor that split his class in half at the beginning of the year to do a study on actions and results. One group was the quality group and one was the quantity group. The quantity group would be graded on the number of photographs turned in by the student. The quality group, as you can probably guess, was graded on only one photo for its quality. Guess which group turned in the best photos? The quantity group had more high-quality photos turned in because they were out practicing their skills trying to hit a quantity goal. Because they were not trying to take the one perfect photo, they ended up taking more action and better photos.

Disney in another great example. In the 80s the company had 3 CEOs and was not profitable. Then CEO, Michael Eisner, changed the way the company thought about the movie business. Instead of producing perfect movies, they went for quantity. In the late 80s and through the 90s they more than doubled the number of movies they were producing. They spent less time, money and energy on any one movie. The result? Blockbuster smash hits like; Beauty and the Beast, Aladdin, and Lion King.

Want success in business? Stop focusing on perfection.

Will We See Another Housing Bubble?: 4 Considerations

Will We See Another Housing Bubble?: 4 Considerations

In the past few decades, we have witnessed a variety of different housing markets. We’ve seen buyers, sellers, and neutral real estate markets, to a wide variety of degrees. There have been periods, when it seemed, every house, sold, as soon as it was listed, at, or above, the listing price, and we have also seen, considerably more challenging circumstances. For the past couple of years, we’ve observed an upwardly, rising, real estate market, with a combination of relatively, low inventory, combined with escalating prices, etc. Is this a trend, a sort of fad, a longer – lasting, new normal, or is there a risk, there will be another bubble, in this industry, and, if so, when might we expect and anticipate it? With that in mind, let’s look at four, possible considerations, which may be an indication, etc.

1. Have prices risen, too quickly?Prices have certainly, gone up, significantly, in most real estate markets, in the past few years. Have they risen, too quickly, and too much, too soon? Or, is this the new normal? Certainly, the primary causes of this housing market, has been, the relatively, low inventory, of houses, available, for sale, as well, as near, historically low, interest rates. When mortgage rates are low, one is able to purchase more house, for his money, because, the vast majority of home buyers, depend upon a mortgage, for a significant component, of their ability to purchase a house. Will this hot market fizzle – out, or continue, into the foreseeable future?

2. Limited inventory, and low mortgage ratesIt seems, we will be witnessing, little rise, in interest rates, in the nearer – term, but, no one has a crystal ball, and, the Federal Reserve, may change direction, if/ when, they deem it the best, for the nation. How long will the limited inventory, prevail, or, will existing homeowners decide, to cash – in, before it’s too late? Smart consumers realize, and recognize, times and circumstances change, but, will these changes, be eased – in, or create another bubble?

3. Will we see a correction?In the stock market, we often refer to market corrections, when we discuss, prices lowering. Will this also occur, in this housing market? If so, will it be, a minor correction, and shorter – term, or a somewhat longer – term reaction?

4. If so, when?Will we witness another housing bubble, as we have witnessed, at various times in the past? While history, often, repeats itself, does that mean, it will do so, this time? If so, will it be significant, or merely, a minor, temporary blip?

No one knows, for sure, whether we will experience another housing bubble, and, if so, how severe, or, when, that might occur? Smart consumers, will weigh their specific needs, and priorities, and look at housing, more from a long – term standpoint, than a short – term gamble.