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As the 10-year yield did not move much this past week (note it failed to break up through the 2.3% resistance line), I want to focus today on two issues.  The issues are the potential tax code changes and rent control.

Most of us realize that the revamping of the tax code is just in its early stages.  No one knows what this will look like until the changes are enacted.  However, that does not change the psychology for many in the Bay Area.  After reading the Mercury News article below (and lots of other articles all surmising what the changes mean), I realized there will be folks who fear that we have reached a peak in real estate values.

Now over the long term, real estate values here have moved up.  There have been some pullbacks, but we have enjoyed a great deal of appreciation.  Some feel that the values we have experienced are unjust.  And that is why many are afraid that the potential tax changes could cause values to drop.  Whether they do or don’t, we won’t know for some time.  But, I am guessing there will now be owners (who have been on the fence) that want to sell now to lock in their gains.

I also want to bring in some of the fear in owning investment housing.  With rent control gaining more and more traction, the profitability on owning residential investment properties may start to wane.  I believe it is safe to say that there is an added risk on the table due to the constant changes to protect renters.  These investment property owners are beginning to look at their options.

So, if we add in the fear folks from the potential tax code changes with those now wary of the risk in owning residential income properties, then I suggest there may be some supply coming to the market.  Professionals would be well served to see how they can assist these groups.

My guess is we will see more 1031 exchanges now as well.  Many will want to shift out of the residential income properties into other commercial property types where the perceived risk is lower (and the headaches may be reduced as in triple net leased properties).  There are many options to consider here.  Feel free to give me a call to discuss how one might prepare for these opportunities.  Hopefully, all of this gives you some food for thought.

As always, I welcome any of your strategic financing questions.  Have a good week.

See the table below for approximate interest rates.

Type Rate Fixed Term
Apartments 3.825% – 4.660% 3 to 10 year (30 yr amortization)
Commercial 4.165% – 4.960% 3 to 10 year (25 yr amortization)
Construction Call for Rate Call for Rate
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