In trying guess what Trump’s taxes might look like I did some hypothetical thought experiments. I don’t know what his net worth is or other details of his finances. It was said in the news a long time ago that he had $4,000,000 of annual living expenses. Forbes said he has a $4billion net worth. The purpose of this essay is not to come up with a figure of what he earns but rather to discuss possible types of tax situations a wealthy real estate developer/investor might encounter. Assuming hypothetically he has a $300million net worth he might buy a portfolio of $900million of rental properties and use a mortgage for about 67% of the value. If it was an
Core CPI rose 2.2% over 12 months, the highest in four years. Does this mean inflation is returning? Roughly half of core CPI is housing. This cost is determined by both owner’s equivalent rent based on recent home purchases and by actual rent for people who rent. The trouble with owner’s equivalent rent is that it is based on the most recent home purchase. If only rich people can afford to participate in a new housing bubble they may overpay for houses and make CPI go up in an unsustainable way. Eventually the truth will come out and home prices will go down to return to equilibrium. There was an article that a house in Vancouver, BC sold for $700,000
The global economy is in a slow growth mode thanks to excessive debt and an end of high, unsustainable, and somewhat bogus growth in EM countries. The Federal Reserve’s Quantitative Easing program is increasingly viewed as a failure that is actually deflationary, so it is unlikely that QE4 will be implemented. Additionally hard money conservatives in Congress could seek to pass legislation to prohibit or limit QE. If monetarism and QE don’t work or are not allowed to work then will Congress and the president turn to New Deal Keynesian deficit spending to stimulate the economy during the next recession? I expect the next recession in roughly a year. An alternative side of the coin of Keynesian deficit
Some rental real estate in poor quality old properties yields 12% or about 8% net after paying operating expenses (ignoring depreciation). Should you buy that instead of bonds to get a decent yield? The median U.S. housing price to rent ratio is 11.3 per Zillow. This is a gross yield of 8.8% if you bought a house and rented it out. Assuming that 25% of rent was spent on expenses and there was no mortgage then your net income would be 6.6%, ignoring depreciation and non-recurring costs to sell the home. Since depreciation is real then it should not be ignored. Assuming one holds rental real estate for a long time then the true cost of depreciation will catch
It may be possible to get significantly more depreciation tax deduction for investment real estate using cost segregation. This is where a CPA writes a report showing how depreciable items in a building may only have a five year life instead of a 39 year life for an office building and then depreciation allowed per year is greatly increased. Assuming a third of the property’s improvements can be characterized as personal property instead of real estate then this could change the depreciation boosting the annual deduction from 2.5% to 3.6% of the cost basis of the property’s improvements. Assuming that an “A” quality office building with no debt received 7% annual rent as a percentage of the property’s value and
The problem with using old metrics based on the past is that the housing market was severely distorted in a way that is impossible for economists to deconstruct and reverse engineer so as to correctly predict future housing prices. The problem was that from 1984 to 2009 “Easy Qualifier” mortgages aka “Liar’s Loans” were offered by banks and this allowed a significant number of people to get homes they should not have been able to buy. Thus the data during that era is not useable for forecasting because Easy Qualifier loans are no longer allowed.
Rental real estate properties have a 4% to 5% vacancy rate. However a significant numbers of homes are still underwater so their owners are unable, as a practical matter, to sell. Once these homes have appreciated enough for the owners to have positive equity then they may sell the homes to landlords, thus increasing the supply of rental properties. In addition there is growing trend of senior citizens to keep their homes empty while they live in a Long Term Care facility. They may be there for many years before they pass on and they may prefer to keep the home vacant. Eventually those people will decide to sell or their heirs will sell. Also there is shadow foreclosure inventory