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Over the past week, the 10-year yield actually dropped a bit.  Most of the pressure on interest rates seemed to be towards rates going higher.  However, Thursday, President Trump made things a bit more complex with the announcement of tariffs for aluminum and steel.  This created uncertainty once more; and the net overall effect is not clear.  There are many arguments on both sides of tariffs (depending on one’s bias).   All I know is that the stock market certainly became quite volatile after the announcement.

Turn Your Home into a 1031 Exchange:

I constantly am putting myself in my business partners and clients’ shoes.  This week, I was thinking about many of the folks here in Silicon Valley that have lots of equity in their homes, but struggle with a way to get to it.  Then I remembered about an idea that has been around for a long time.  So, let’s get to an example.

Home Value:  $2,000,000
Debt:  $200,000
Original Purchase Price (plus improvements):  $600,000
Ownership:  Husband and Wife
Long Term Capital Gains tax rate:  13.3% (CA) + 15% (FED) = 28.3%

Scenario 1:  Clients sell home for a $1,400,000 gain.  They are allowed $500,000 of the gain tax free.  That results in a $900,000 gain that will be taxed at 28.3%.  That results in a tax of $254,700.

Scenario 2:  Clients move out of home and rent it out for at least one year.  Assuming no other changes, they then sell the home through a 1031 tax-deferred exchange.  This would result in the deferral of the capital gains tax of $254,700.  Note also that the clients would still get to keep their $500,000 exclusion.

Now there are pros and cons to doing this as one would have to find another place to live.  However, keeping things simple, if that $254,000 is invested into another property and earns 6%, then that is an additional cash flow equaling $15,282 per year (see the weekly list of properties below showing cash on cash returns greater than 6%).

As I am not a CPA, all of this should be reviewed with your tax adviser should you like this strategy.  With all the tax changes recently, this is an idea that might be of benefit as you meet with your clients and contacts.  The ideas that I present here are to help you with your clients and contacts.  The goal is to provide choices as clients try to figure what best fits their own personal financial goals and objectives.

Investments Opportunities for Purchase with Strong Cash Flow:

Back on the January 15th update, I wrote about “Creating Residential Listings Using Commercial Opportunities.”  Each week,  I am presenting some of those investment opportunities to better educate all on what is actually available.  Note that these are all Single Tenant Net Leased properties that have listed in about the last 10 days.  In addition, I assumed a 5% loan with 50% down.  This is just a small sample of what is actually available.

If you assume investors in the Bay Area are getting a cash flow of 3.5%, then you can see the potential improvement with these properties above.  This approach is great for the investors desiring increased cash flow, an opportunity to get out of daily property management, and/or taking the challenges of rent control off the table.  Should you wish to discuss any of these or others, then give me a call.

That’s it for this week.  As always, feel free to give me a call with any of your strategic financing needs.

Articles of Interest:

Realtor.com reported “These States Have the Highest Property Taxes, but a Possible Loophole Offers Hope.”

CNBC reported “The US may be where the bond bubble bursts thanks to ‘aggressive debt issuance,’ investor warns.”  Not only will we have the FED selling bonds, but we will also have the US Treasury set to issue more debt.  Both will contribute to the supply of bonds available.  And, both will put upward pressure on interest rates.

Forbes reported “Investing In California Real Estate? Here Are A Few Things You Should Know.”

CNBC also reported “Larry Kudlow: Trump’s tariffs a ‘bad omen’ and could cause ‘major calamity’.”

See the table below for approximate interest rates.
Type Rate Fixed Term
Apartments 4.365% – 4.980% 3 to 10 year (30 yr amortization)
Commercial 4.685% – 5.280% 3 to 10 year (25 yr amortization)
SBA Lending Call for Options Call for Options