Part 3: The Seattle Tech Workers Ultimate Guide to House Hacking and Investing in Real Estate: Diversify your assets, grow your wealth, lower your taxes, and have fun while doing it.
Last time on the Blog...
Last time we talked about:
Why not a dream home?
Home values aren't 'Stock Values'
Long Term Gains, Cashflow, the Two Year Plan
Don't quit your day job.
This time, as promised, we're going to dive into:
Fear, Black Swan Events and Long Term Planning
Why interest rates don't matter.
The Tax Benefits of owning
Fear, black swan events And long-term planning.
You won't be the first to worry about “what if” situations. Frankly, we don’t have a crystal ball. But here’s what I can tell you:
During almost, every recession home values have gone up.
During and after the oil crisis of the 70s, along with Stagflation and into the high-interest era of the 1980s, home prices went up.
90’s and the DOT-com bubble, home prices went up..
2001 attacks on the world trade, values went up.
But, you are not wrong, during the depression and during the financial crisis of 2008, we did see home prices come down. The difference between the Depression, the financial crisis of 2008, and the other recessions are that Financial issues caused the housing crisis.
What people forget about the stock market crash of 1929 - which caused the depression - is that the stock market was so HOT that a large number of people mortgaged their homes to invest in the stock market. They literally took the equity of their homes and put them in the market. No one would be foolish enough to do that today and the stock market, with all its gains and bull runs, is nowhere near as HOT as it was back in the roaring run up to 1929.
As for 2008, people forget that the financial crisis happened first, then we had a housing crash. The fact of the matter is that if you look at demographics you can see that there just were not enough people to buy all the homes builders were building. Then the Banks made getting a loan too easy. Because the banks lent money to builders to build homes, they saw that mortgages weren’t being produced at the same rate as homes being built, so they made it too easy to get a loan. People who should not have been approved got approved. No income, no job - approved. Stated income, no verification - approved. It wasn't good.
Now we have the Dodd-Frank Act, and getting a loan is like a financial rectal exam followed by an enema. That is to say, It's invasive. They need an uncomfortable amount of documentation, and that has turned out to be a good thing. Making it more difficult to qualify for a loan means only the most qualified people can buy homes. Take that for what you like, but that's how it is.
The best cure to weather this storm is a strong equity position and a strong cash flow position. It doesn’t happen overnight, it takes work, but it’s worth it.
Why interest rates don’t matter.
I can hear it now: every financial adviser says I should shop for the best rate, but this guy says they don't matter!!??
They don't matter if you don’t get the property.
The fact is, the lender is your partner in the deal, and a good local mortgage loan officer is worth their weight in gold when they help you close the deal.
Listing agents don’t want to work with people they can’t get ahold of - banks, credit unions, those terrible online lenders that “save you money” because they have no staff to pay, and therefore don’t have anyone to answer your call?? That's their model. No Staff, No one to pick up your phone, and no service. I see more empty pre-approvals from online lenders than anywhere else. Plus, when - at the last minute - they find out they can't actually process your loan... then you're in real trouble.
If you’ve got 5% in earnest money on the line and might lose the house because your lender only works bankers' hours, and is somewhere in a different timezone - you might want to rethink your strategy. The fact is these Banks and credit unions don't work to protect you, your money, or ensure deadlines are met - you are just another lead in their “funnel”. If it doesn't work with you, they’ll just work with the next person who fits in their “box.”
Frankly, your job is to secure the property, not shop for rates. You can Refi when rates drop and recast at any time.
Plus, not many know this - but rates change throughout the DAY. so any rate you are quoted is worthless until it's locked in. And no lender locks in your rate until your under contract with a home to purchase. The best they can do is give you a range based on what the market has been offering in the last little while. It's my least favorite part about real estate, because you can't depend on the quote you get, because it will more than often change. Unless of course everything in national and world politics and economics is very stable - but when was that last time that was the case...?
Tax benefits of owning
We covered most of this, but here are the basics
You bought the asset on leverage. You paid only a percentage of the total value of the asset, unlike stocks
Annual Appreciation is based on the total value of the asset, not just the cash outlay you used to make the purchase.
You can force equity and value through making improvements, repairs, and renovations.
You can increase value by raising rents
You can depreciate the asset. Remember, depreciation allows a taxpayer to recover the cost (or other basis) of a real estate investment. So while your asset is producing cashflow and appreciating in value, the tax man is compensating you for wear and tear improvements, etc. this is known as a tax benefit
It's a hedge against inflation. Example: as rents go up, your payment remains the same. As GDP increases or the economy expands and the demand for real estate goes up, rents increase, but your payment remains the same.
You use leverage to acquire the asset. A 10 or 20% downpayment gets you 100% control of the asset.
Deferment of capital gains through 1031 Exchange.
Cost segregation.
(Eventually, you’ll find yourself investing in 5 unit buildings or more, this is a game-changer for your tax bill)
You do a Cash-out Refinance, Take the equity, and pay no income tax on those earnings because it's not income, you haven’t realized a gain - because it’s a loan.
Everything mentioned above has been intentionally written into the tax code as structured benefits that the uninformed referred to as loopholes.
Depreciation is the real estate investors' secret weapon. This is the built-in tax advantage no other investment affords.
Again, your primary residence is not an investment. But by keeping your day job, buying another home as your principal residence, moving, and keeping your former home as a rental, you just created an investment. Or - you can straight up just buy an investment property. Maybe you love your tiny one-bed basement dungeon of an apartment but want to diversify your investments with real estate, and the math works, so you buy a 4 plex as an investment. Then, that’s great. Most people don’t, won’t, or would never do that. For most people, the “2-Year Plan” is the best and easiest strategy, even if they do it every year or 3 years.
Next time ...
We’ll talk about No money down loans, how to Get Rich Quick, Debt leverage and Equity.
If you're making a move, reach out, and lets chat. Happy to brainstorm and come up with a solution that gets you a tangible and actionable plan that fits your unique situation.
Best,
Justin H Gazabat
Broker | PNW, Seattle, Ballard, East Side
Your Friendly Seattle Neighborhood Real Estate Professional.
www.JustinGazabat.com
P.S. I sincerely appreciate your continued trust and generous support of me and my business. It truly means the world to me when you think to connect me to your friends, family, and co-workers.
P.P.S. If anyone in your social or work circles is considering a move, just send an intro text or email with their best contact info, make sure everyone is CC’d and I’ll take care of the rest! I promise to take great care of them, serve them well, make you look really good in the process. Plus help them get great results! Referrals are crucial to our business, and we genuinely value the opportunity to serve you and your network.
