Inflation is More than Just Money Printing

The inflation we are experiencing in the United States is more than just money printing. It is because of herd mentality here in the States compounded by a growing lack of trust in the US Dollar abroad.

the first thing on most people’s minds during inflation is their food prices

Demand for Benjamins Abroad

When I lived in Malaysia, each weekend there was a line that stretched for at least a few dozen people at a mall named Mid Valley in heart of Kuala Lumpur. That line was people exchanging their local currency – the Malaysian ringgit, into US Dollars. They did so to preserve purchasing power since their local currency was being devalued due to their country’s dependence on oil production for their economy. You see, when the US dollar is the world reserve currency it tends to preserve its power since everyone wants to collect them and not necessarily spend them. Imagine if everyone in the world was doing the same, and not just the mom and pop citizens but also entire governments!

This action takes circulating USD out of circulation at least temporarily, and demand of this nature makes the USD stronger versus the currency that are being exchanged out of. Even though both the US and Malaysia were making fiat (and I’m not talking about the poorly made cars) paper currency, the US benefits from strong demand from other countries continuing to prop up the dollar and wanting to sell their goods for dollars.

Herd Mentality Causing Price Spikes at Home

Now if you tune into CNN or some other popular news channel you will be told that price hikes have to do exclusively with ports being backed up due to Covid related worker shortages – this is not the whole story. Demand for goods is higher, and the desire to hoard goods hasn’t completely gone away from more than a year ago (remember when everything was rationed?). If you go to the local Costco or Sams Club here in Albuquerque they are still limiting the number of bottle water packs you can buy to two or three, people seem to still be being more toilet paper than normal, and there are folks who are already finishing up their Christmas shopping for fear of items not being available or being much more expensive come December. This spending is what I like to call velocity of money in motion, and is causing prices to go up on main street.

What about Real Estate?

The cash that the Federal Reserve created months and years ago had already funneled into the financial system first and caused companies flush with cash to go for asset buying sprees, such as real estate. Big companies like OpenDoor and Zillow bought homes over their value, in anticipation of “flipping” them and making money purely from the upward price trend that was happening since mid 2020. The only problem is individuals stopped receiving stimulus checks and companies started opening up and wanting people to get back to work – slowing down the home buying and turning the rising price trend around if even slightly.

I wholeheartedly expect home prices to fall in the hottest areas this winter, but I do think the fall will be short-lived as moderate inflation catches up. People will start to demand higher wages and the most profitable industries will be able to provide them. Industries that cannot adjust their prices very much to keep track with inflation will suffer, and their employees will suffer with stagnant wages. I expect the agriculture industry to come out of this better than before, same with companies that sell inelastic goods such as food and modest housing. Luxury housing will suffer along with luxury good industries.

What can I do?

Go back to my blog and read the article titled “How To Preserve Your Assets During 1970’s Style Inflation?

Make sure your income keeps up with inflation, pivot to make that happen. Make sure you have skills that are in demand that are well compensated for if you’re starting out, and if you already have assets make sure they are cash flowing. Having debt during high inflation is a great thing as long as your income keeps up with inflation. For example, if you own a rental property and pay a 30 year fixed rate mortgage ideally you’ll be able to adjust your rent for inflation.

Bottom Line

Inflation is not transitory in that it will return to what it was before Jerome Powell’s speech. It may slow down and prices for certain things may decrease as supply rises to meet demand, but you shouldn’t be dormant with your cash but put it to work ASAP. Watch for a real estate correction this winter for a buying opportunity if you’ve been waiting. Don’t panic.

Calculating Cash on Cash Return from Multiple Properties

The gist of this exercise is to get data from Zillow, import it into excel using the “Zillow to Excel” Chrome extension, and then creating another custom tab on the Excel file to analyse the data. We take annual income minus expenses and divide that over our cash investment which consists of our downpayment and closing costs. If there is rehab or initial repair work that would also be in the denominator.

Watch for yourself and see if you can make your own cash return spreadsheet to find the best deal! If you wouldn’t mind I’ve love for you to subscribe to my YouTube channel while you’re at it by clicking on the video via the “Watch on Youtube” link and subscribing.

Younger People Not Owning Homes

Home Ownership is Fleeting

Millennials are less likely to claim home ownership by age 30 than baby boomers at the same age. A report by the Standford Center on Longevity that 48% of Baby Boomers owned homes by thirty versus 36% of Millennials.

A huge factor that plays into this figure is the number of unmarried Millennials – 55% of married Millennials own homes while only 19% of single Millennials do. The average age of marriage is rising – where in the 1950’s and 60’s the average age was 20, now the average age is 27.4 and rising according to the US Census Bureau historical marital status tables.

Other factors are increased housing costs, high student debt, and need for some workers to relocate.

Who Benefits?

The largest beneficiary, in my view, of lower home ownership is the landlord or corporation who rents out their home or apartment. As home ownership decreases, you’ll see the rise of more publicly traded REITS which take investor money, plop down new apartment units, and pay a share of the profits to their investors while driving away private investors through economy of scale price reductions. Private investors can employ a strategy involving buying, rehab/renovating, renting, and then refinancing to chain purchase multiple investment properties. As competition between private and public investors increases, the prices for properties goes up – further distancing potential first time home buyers. As long as there is a strong rental demand, the potential for cashflow means investors may buy in bulk.

Who Suffers?

Renters who pay more in rent than they otherwise would pay on a mortgage gain no principal ownership in their residence. While they may forgo having to fix home appliances and heating/plumbing they will gain nothing when they leave. Home owners with typical 30 year loans will have principal invested into their home and may be fortunate enough to have their house sell for more than it was purchased for. Historically house price appreciation is the norm, especially for homes in good locations. Depreciation of the house structure is usually offset by the appreciation of land value that the house sits on.

Renters are also at the whims of the landlord or property management company as to when their rents will go up. When I first started working my rent started at $880 in Atlanta and it went up to $1000 by the time I left 3 years later. This was not because they had improved the property – in fact the property slowly got worse. The reason they could increase rent is because demand was up – population growth and an influx of new younger workers means more people looking for rent. It is simply business.

What Should Younger People Do?

First off, everyone should choose what they want to do with their own lives. I can’t dictate that someone should study engineering rather than political science as much as I can force you to like the color orange more than brown. However, as this website aims to help people get a higher return on their money I would 100% encourage younger people to buy a home rather than rent one. I would ask them to take advantage of the historically low interest rates and get a low interest rate mortgage which limits how much the bank can increase interest rates. Pay a mortgage of equivalent value to what they’re paying in rent and look to save money and buy a rental property. Take advantage of the fact that your peers are renting and rent to them instead of from them.

 

 

How to Avoid Capital Gains Tax on Your Residence

Selling Your House for a Profit? You May Qualify for an Exclusion on Capital Gains Tax

A lot of people have a false assumption they have to pay capital gains tax on their house if they make a profit on it. According to the IRS (as of January 5th, 2019), you may exclude up to $250,000 dollars of gain if you file single or up to $500,000 if you file joint with your spouse, as long as you meet their criteria which I will mention later.

That means if you buy, for example, a $250,000 house and sell it for $750,000 you can keep that gain in your pocket as long as you file joint with your spouse.

Now let’s get to the important part, the criteria.

IRS Section 121 Exclusion Criteria

You must have used the house as your main house for two of the past five years before the sale. That doesn’t mean you need to have owned it for five years, it just means you must have used it as your main home for two of the past five years before the sale date of the property.

It logically follows that you generally could not have claimed this exclusion on a different property less than two years prior to the sale date. <See IRS Publication 523>

This general rule does not apply to certain situations including government assignments (military, intelligence, etc) and they can extend that five year window out further to ten years.

How does the IRS determine your “main” home?

  • US Postal Service Address
  • Federal and State Tax Return Address
  • Drivers License Address

They may also consider other information including:

  • Where you work
  • Where you bank

Disqualifiers

  • You can not have acquired the property through a 1031 exchange. <See Investopedia for more information about 1031 exchanges>
  • You cannot be subject to expatriate tax. This is a tax on US citizens renouncing their citizenship.

Partial Exclusion

The IRS allows for partial exclusion under the following circumstances:

  • Work related moves
    • New work location more than 50 miles further from home
  • Health related moves
    • Move to take care of relative
    • Move based on doctor recommendation
  • Unforeseeable events
    • Disaster
    • Deaths
      • Of owner(s)
    • Birth of Two or more children
    • Home Destruction
    • Act of Terrorism on Property

Other Things to Remember

Even though this is a great exclusion written in the tax code, it could change! Make sure to double check the rules when you do end up selling your house for profit. Also, keep in mind that some of your closing costs in buying the property can go into the cost basis for the house – keep those records! Lastly, make sure to report the sale to the IRS – even though you may qualify for a complete exclusion.

Wallstreet Enters Single Family Housing Market… Again

Single family American home

 

REITS are Eating Homes

“The American dream no longer includes homeownership,” said Jordan Kavana, chief executive of Transcendent Investment Management LLC. Transcendent Investment Management is buying up rental homes, and expects Americans to transition into all being renters to drive profits for his and other similar companies.

This type of corporate incursion into housing was popular back in 2013 when houses were dirt cheap, but it’s starting to ramp up yet again. A few publicly traded companies involved in this type of business include Blackstone (BX), and American Homes 4 Rent (AMH). American Homes 4 Rent has been the largest player in the single family homes arena until Blackstone and Starwood properties merge their operations to join Blackstone’s existing single family division Invitation Homes (INVH). The merger will see Invitation Homes landlord almost 100,000 single family homes spread across the United States.

The Giants are Coming

These massive REITs may be part of some of your 401k mutual funds already, and are driving up prices for single families and potentially forcing them to buy more expensive homes. This is not unexpected due to the historically low interest rate the US still supports – and the benefits that come with scaling up operations. My problem with this is that by investing in these REITs you could be inadvertently encouraging Wall Street investors to drive up home prices around you putting the younger generation at more risk of lifelong homelessness (you get what I’m saying).

Traditionally most REITs focused on multifamily apartment buildings, we shall see how this foray into single family housing impacts the US economy for years to come. For millennials, this does not bode well for their home ownership prospects. I would prefer to be an owner of my own residential property than invest in these types of REITs, and if anything I would stick to multi-family apartment focus REITs as they should yield better returns. For more information on REITs and how to make money on real estate, check out my real estate page.

Getting the ROI on Rental Properties

Everyone knows that Real Estate is one of the major ways to make income. Like stocks, you have to put money in to get a return which will either be positive or negative. Unlike stocks, it isn’t so simple to figure out how much your return is. Online brokerages like Fidelity, Merrill Edge, and Charles Schwab have nifty graphs and reports that can tell you exactly how well you’re doing over a specified time frame.

If you have considered buying a real estate property, measuring your return is one of the most important factors to identify your successes and failures. I found a great video by BiggerPockets.com which goes through the process in a simple way that will help you manually compute your return on investment. Of course, as you build your real estate portfolio it is important to find a good way to keep all the information together which can be done using a myriad of tools out there.