2018 Tax Reform Real Estate
Articles,  Blog

2018 Tax Reform Real Estate


The new Republican tax bill is
already affecting real estate investing. Here’s how. That’s today’s episode. Let’s dive into it. Hey, freedom fighters. Welcome into the Investing
in Real Estate show. This is the show
where we want to help you build passive income
and create financial freedom for you and your family. It’s the number one
way to build wealth. And I’ve been investing in
real estate for a long time, and I’ve rehabbed
thousands of homes. My wife and I hold
many, many properties and buy and hold real
estate is the vehicle that we use to create
financial freedom. I believe it’s the number
one way to create wealth in this country. And of course, with the
new Republican tax bill that just went through Congress
and is now officially law, let’s stop even calling
it a bill anymore, it is now official,
it is the law of the land in this country,
and it’s already affecting real estate investing. We’re already starting to
see some of the numbers, you know, that here
on the show, we’d like to keep current and
give you the latest market news as it relates
to your investments, where are you going
to put your money, and how it’s affecting
things more broadly. So you got to look
at these trends. You’ve got to be smart
about this stuff. If you want financial
education, you have to pay attention
to this stuff. You have to be smart. You can’t bury your
head in the sand. And I don’t mean you
have to sit there and watch the nightly news every
night, which is often skewed, and which is often not talking
about actual real estate investing. It’s talking about the retail
buyer, the person that’s buying a flip property
with their two kids, and they’re going to live
in it for five to 10 years. That’s not what
I’m talking about. We’re talking about
real estate investing. So where and what states
would you put your money? What types of properties? If you’ve listened to
this show for a long time, if you’ve watched any of the
videos on our YouTube channel, then you know, we
invest in C and B neighborhoods, those
areas, those blue collar, upwardly trending
neighborhoods that have blue collar employees
that workers that are going to live
in those properties, they aren’t going to lose their
jobs in an economic downturn. They tend to work at
the local hospitals. They work at the post office. They work at the
local factories. They work at the Amazon
distribution center, the FedEx distribution hub,
UPS, those places that are American-based jobs
that aren’t going to China. That’s our bread and butter. Right, that’s what we talk
about here on the show, that even in economic
downturns, these neighborhoods historically have
remained constant. You know, they’re
renting for $800 a month. You’re paying $50,000
for the property, all in. That’s after you
include the rehab, and those stay
consistently cash flowing. What are you going to drop the
rent to 750 or 750 down to 725? No, they’re going
to stay consistent. It’s the A class
neighborhoods, the ones that you’re paying $4,000 a
month for that are going to get hurt in a downward economy. And we’re seeing this
already in the Republican tax bill, which is now law. If you’ll remember in 2017
as this law was unfolding, I said right here on the
show, that indicators were that we could see some
big problems in higher priced A class neighborhoods,
specifically A class states, blue states, like New York,
like California, like Miami, and areas of Florida, New
Jersey, Chicago, San Francisco, those higher priced areas. And guess what, according
to the Wall Street Journal this morning, or excuse
me, according to CNBC, we’re already seeing
this data unfolding. And what’s happening
in Manhattan, we actually saw a pullback in
the fourth quarter in Manhattan and some of these higher
priced neighborhoods, we saw a sales
volume drop of 12%. Why? Well, according to Douglas
Elliman Real Estate and Miller Samuel, the appraisal
firm in New York, they said it was specifically
because buyers were worried about the new GOP tax bill. So these prices,
these properties that were over two
million dollars that people were buying,
they stopped buying them. It slowed up quite
a bit, and why? Because the bill stopped
allowing in these blue states the deduction of state
and local income taxes. So those state and
local income taxes, the deductibility of the
state and local taxes is going to add a huge
amount of pressure to these higher priced areas,
so New York and California, et cetera. And what did we say? What did we say was
going to happen? We said– and there
was a number of reports that came out because
of the GOP tax plan, that this is going to
encourage investment and growth in other states where
the state and local taxes are not as high. In some cases, certain
states that don’t even have income tax at
all, right, like Texas and other places and Florida,
and property taxes are low. Because in New York you have
very high property taxes, so you do in New Jersey,
so you do in California. And what happens is then
the cap is at $10,000. So anything above that, you’re
not going to be able to deduct. It doesn’t make any sense. Therefore, does it make
sense as an investor to put your money in Manhattan,
or does it make sense to go into other
areas in the Midwest, where there’s a lot
of growth, and where the taxes are way lower
and encouraging investing? So I said right
here on this show, if you are investing in those,
you know, middle America spots, this is good news. This is good news
because we are going to see a pinch in those
A class neighborhoods. And I even put this out
on Facebook at one point, and because it even highlighted
some of the counties, the one county that I used to live in
New Jersey, Essex County, New Jersey, one of the
most expensive counties in the country. I said they’re going about
to see some prices dropping big time in these counties. I mean, you couldn’t even– houses there, we
didn’t keep inventory because they were
selling so stinking fast. Guess what, instead of
selling for a million bucks, it’s going to start
selling for 800 and 700,000 because of the lack of
state and local income tax deductibility under
this new tax law. And guess what, we’re
already seeing a move, because in a separate
article on the same morning, we saw some of these abandoned
factory buildings downtown in parts of Indiana
and Michigan, there are already companies
saying we’re buying them. We’re going to
buy them and start to put in some higher priced
condos, some A class condos. Now, I don’t invest in
those types of properties. But what that does is that’s
great for the tax base, right? That means more jobs, more
people coming into that area. And it helps the areas
that I do invest in, and those C and B
neighborhoods grow as well. So we already saw
there’s an abandoned GE building in one
part of Indiana that is now about to be turned
into luxury condos. That’s because it
was sitting vacant. It’s huge. I think it’s like 39 acres,
the size of this complex. And that, instead of
investing in New York City, investors decided we’re going
to buy this big thing up, and we’re going to
remodel it, and we’re going to turn it into some hip,
trendy condos for investors. And I think that’s a great move. So here, again, is what we’re
seeing some of the signs. I want to go through
some more of what’s happening in this
CNBC piece to give you some more data on this. The high end of the
Manhattan market right now is showing some
of the biggest cracks. The inventory of these
luxury apartments that I’ve been talking
about right here on the show, those in
the top percent by price grew by about 15%. And now there’s
a 17 month supply of these luxury
apartments in Manhattan, and that’s up from about
10 months a year ago. So now with all
of these new condo towers that are sprouting up
all over Brooklyn and Manhattan, those numbers are
likely to grow, where they’re just going
to be sitting there, and they’re not going to
be able to demand the rent prices that they were
able to once before, because people aren’t going
to buy them as investments. You know, they’re
not going to pay two million dollars for
these things anymore, because now they will
not be able to deduct the state and local taxes. And therefore, it’s not
as much of a tax shelter as it once was. Remember, I always
say the tax code is written to benefit you as an
entrepreneur, as an investor. But there is the problem,
and the big caveat, if you live in one of
these blue states that have very high property taxes. So again, as an
investor, you need to be smart about where
you’re putting your money. They also said in this piece
that resales, as opposed to new development
are holding up strong. So not a lot of new
construction right now. So resale properties, and the
median sales price is up by 2% over last year. That’s a good number. So without all this
new construction, the resale value has been
holding strong as well. And the number of
new developments is expected to continue to rise
this year and next, which is going to add to this inventory. Now, this isn’t something where
these people are just starting the new construction right now. They’ve already
been in permitting, they’ve been planning. This has been going
on for three years before they’ve
actually broken ground on some of these projects. If they had to do
it all over again, you have to imagine
that they would have put the brakes on these
projects in these areas. A lot of them would. We saw that this
is what happened in Miami before the crash. This is what happened
in San Francisco. This is what happened
in Nashville. This is what happened in a lot
of areas, this rush to build, and then suddenly, boom. Recession hits. And now all of these
high priced buildings, these condos that
they were going to sell for a
million bucks a pop, guess what, they had to
turn them into apartments, and rent them instead. So here, we are starting to see
the effects of this tax bill before it even became law. And now that it’s
law, we’re going to be watching this very closely
over the course of this year, what will this mean for
you as an investor in some of those middle markets in
this country, those lower priced areas, that are
catering to those blue collar workers, those blue
collar renters? That’s what we go after,
because to me, that’s the safest, smartest, and
longest play in real estate investing. I would love to know
your thoughts about it and if you’re already seeing
that in your neck of the woods and are you starting to see some
of the pinch where you live. Let me know on the common
threads on this video, if you’re watching the video. And if you’re listening to the
audio, please I’d love to hear. I’m on Twitter, @claytonmorris. You can reach out
to me there as well. We publish this show
multiple times a week, and we always try to stay
on top of the trends. If you are ready to dive
into real estate investing, and you’re ready to pick up
your first rental property, that’s what we do. That’s what my company
does at Morris Invest. So just come on over. Book a call with our team. The link is right below. You can click on that and
book a call with our team. We’ll jump on the phone
with you for 30 minutes and get a sense of
what your goals are for your life, how much
financial freedom would you like to create, what
is your freedom number, do you need to hit $4,000
a month in passive income, is it $5,000, let us know. And we’ll work with
you to make it happen. That’s what we do all day long. Thank you guys so much. Now, just go out
there, take action, become a real estate investor. It’s the number one
way to build wealth. And we’ll see you back here on
the next episode of Investing in Real Estate podcast. Have a great one, everyone.

30 Comments

  • Bryce Sawyer

    I have only spoken to a couple realtors that say their investors don’t want to buy in Denver because they think the Denver market is too high and won’t last. All the others I speak to are telling me the opposite. This spring-summer is expected to be crazy hot! As if the last few years were not crazy hot. New construction is still going strong in the suburbs. But I found that the property taxes on the new construction is much higher than resale homes that are 20 plus years old. Even though the purchase price of anew and resale is close to the same.

  • christopher carmody

    Great video Clayton, my question is since a VA loan can’t be placed in a LLC do I lose the tax Benefits if I pull the funds the renters pay into the LLC out of the LLC and transfer to my funds to pay the mortgage? (Before that though I used a VA loan to originally buy my first house then deployed so I was able to be allowed to rent out the home)

  • Cesska STO

    Clayton, I'm curious what you think of the new law in Seattle forcing landlords to rent to the first qualified person that comes along, seems like a nightmare for real estate investors.

  • Drena C

    Your videos are very informative. I've been investing for almost 25 years and still learning. LOL Thanks for your professional opinions.

  • Ashfaq Sheikh

    Clayton and Natali
    Theoretically, under the new tax law, even if one holds a large number of lower-end properties under a single legal entity, one would be hit as adversely as the one owning high-end properties in high tax jurisdictions. Am I right? Although you guys could not have anticipated several years back the $10,000- cap, I am glad that being prudent and risk averse, you guys have had the foresight of owning only a limited number of houses under a single LLC. Very happy for you.

  • Make This: Workshop

    Please feel free to correct me if I am wrong or missed something, but as a TX investor you are not subject to the 10k limit on your investment properties. Stated differently, a property tax bill of $20k per year in aggragite will still be an expenses that offsets income for a business, correct? For Example: I have 3 rental properties each with property taxes of $4k (Total $12k). This would put me well over the 10k limit for state and local tax but all $12k of it is business expense and therfore offsets the business income effectivly making it tax deductiable. The $10k limit, again specifically in Tx since it isolates property tax by not having state imcome tax, would only relate to Personal Property Tax related to your Primary Residence and non business vacation homes, correct?

    I agree this will reduce the demand for properties in with property tax bills near or above $10k per year and if I were a builder I should take that into consideration but I dont think as an investor that the deduction matters except that it could negativly impact the value (Read Price) of properties that have property taxes individually that exceed or approach the 10k annual deductable limit. I have apprecaited the information you provide in your channel and am a RE investor in Tx since 2007 so I believe in your cause and not trying to be a couch jockey 😉

  • Prowler

    I love your show but I have to disagree that this is good news for me who lives in Texas. Let my tell you why, I rely heavily on tax deductions that comes from my property taxes but the fact is, "Texas has some of the highest property taxes in the U.S. The average effective property tax rate in the Lone Star State is 1.94%, the 4th highest rate of any state. Those taxes are the primary source of revenue for local governments, and fund local services like schools, water systems and law enforcement." Source: http://www.chron.com/homes/article/Texas-property-taxes-among-the-nation-s-highest-6181429.php

    Personally, the property tax rate in my local Texas county I'm in is close to 3%! This is much higher than the states you mentioned like California which has less than 1% on an average for property taxes. This is bad news for me as a home owner and a real estate investor in Texas. Market value for residential homes in my neighborhood is ~$300k. That's around $9k for property taxes. This would put any Texan investors who lives in decent neighborhood in a terrible disadvantage since tax deductions for real estate is now cap at $10k.

  • Ricardo De La Peña

    I live in So Cal, are you suggesting that property values under $1M are likely to rise at a higher rate than properties over $1M?

  • Zachary Dean

    “Stopped allowing in these blue states” You’re hurting your product with that talk. It’s in any state that has high priced homes. I appreciate your vids and podcasts.

  • Eric O

    I'm in Essex Co NJ, but in a very small "starter" home (1200 sq ft, taxes about 10k even). Do you think that due to what you explained properties like this in the area will be in higher demand and be worth more?

  • sitarang07

    Government choosing winners and loser, its okay if it is GOP? You either get rid of state tax and M.I deduction or keep it, by limiting it at 10000$ govt is helping red states with low real estate price and hurting blue states where people can afford to pay more for homes. Government choosing winner and losers, again its okay if it is GOP?

  • Ashfaq Sheikh

    Serious real estate downturn is around the corner even in Red States. For example, a large number of rehab properties are ready for sale in the previously hot market of Austin, Texas but there are no buyers. In the coming reversal, we might see a 1/3rd haircut in prices. This RE slump will effect every market including stocks.

  • Lindsay Maupin

    What is the website for the statistics of home sales you are using? I want to be able to track local housing sales

  • That DIY Couple

    Thank you for this video! My husband and I are also buy and hold real estate investors and do it yourself fixers, and on the path to FI. I’m happy to find your channel, great content! New sub!

  • Young Park

    Clayton, thanks so much. I can't stop.watching all.of your videos.
    Which city do you invest?
    I live in sf bay area I have 3 property

  • KD NOFYUDBN

    How do you rehab a home you recently purchased if its not in the state you live and have a full-time job like most of us?

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