Ready to Buy Property?
Thinking of buying a house, condo, parcel of land, or some rental property in 2021? The market dynamics for buying property still look favorable in 2021, especially for the best cities in the US.
While Q1 2021 is a little troubled, it’s actually a plateauing of prices in the housing market and an easing of sales. As vaccinations rise, the mood of the nation will rise from the doldrums.
Many buyers with high savings rates and need for more living space will be looking for a new home. And so too, will be rental property investors who are seeing the demand from millions of renters who can’t afford to buy a home or condo, or who may prefer to rent. Supply is low and it’s a crisis situation.
However, rent controls and high taxes can obliterate returns on property investment making the previous price vs rent calculation a lesser factor.
How do Others feel about Buying Real Estate?
This chart below taken from a 2018 survey shows investors regardless of age, have felt better about real estate vs the stock market. But a lot has happened recently which may deeply affect the outlook for rental property investment.
Real Estate Vs Stock Market. Screenshot courtesy of Statista.
Even if it looks like a no brainer to buy property in 2021, investors should weigh the big picture view first before diving in.
In this post, we look at the major issue of proposed tax changes from President Biden, and as well the upside for profit from rental property investment. Much of the changes proposed target wealthy investors, and not necessarily the small mom and pop rental property buyer.
Recovery, Wealth Taxes, Stimulus Money, and the Housing Shortage
Australia, UK, Germany, United States and Canada are all recovering from the Covid 19 pandemic recession at different rates.
In the United States, during the Trump administration years, tax breaks and benefits were plentiful. Many rental property investors jumped on the bandwagon and started buying rental houses, rental apartments and multifamily buildings. More than a few became rich. No doubt, billions of dollars in property investment was drawn back into the United States during President Trump’s term.
The question investors might ponder is whether it will be sent back to foreign markets that offer a higher return.
And with the new Biden administration, stimulus funds will help landlords and investors, however, many tax breaks could disappear for wealthy investors who control trillions in real estate value. The outcome will impact property management companies.
Is a Housing Market Bubble Forming?
The risk might be ballooning housing prices and a potential burst if the economy doesn’t respond as Biden expects. During the past winter, housing prices have climbed strongly. Few see any change in that trend. Forecasts for home prices in 2021 is anywhere from 5.7% to 7%. Consider what might happen if inflation takes hold. See the trends on apartment rent prices.
Positive Factors for US Property Investment
- housing shortages are severe, particularly in California
- unemployment expected to ease combined with new $15 minimum wage in the US
- Federal stimulus money of up to $2 Trillion will cause inflation
- the recovery will improve with lower unemployment
- wealthy investors could lower their taxable income through other investments to avoid the big tax increases planned
- stock market prices and returns may have peaked
- proposed renter’s tax credit that would help reduce rent and utility costs which would help ensure better cash flows for landlords
- a proposed low-income housing tax credit for developers of affordable housing
- more homes being drawn out of the rental market and into the homeownership market
- a proposed $15,000 tax credit to first-time homebuyers
- Biden immigration changes could see foreigners and illegal immigrants receiving permission and help to buy a home
- new taxation plans from Biden may not affect passive rental income property owners
- housing construction will take many years to catch up to demand
- demand is from millennials forming families and who want spacious homes outside of crowded cities
mortgage costs are very low - loan and interest write-offs still available
Negative Investment Factors for US Property Investment
- rising taxes makes the US a much less favorable place to invest and build
- some states might raise their own taxes on real estate sales
- reinstatement of capital gains taxes (almost 40% for those with income above $1 million)
- tax increases targeting the wealthy (i.e., successful property investors)
- Biden plan would propose to raise the tax rate to 45% and reduce the estate tax exemption from $11.58 million to $3.5 million
- long term capital gains tax increase from the current 20% to 39.6% for Adjusted Gross Income over $1,000,000
- 1031 exchange eliminated so wealthy buyers unable to swap similar properties without paying capital gains taxes
- reduction of the gift and estate tax exemption for greater tax on inheritance
- proposed end to the bonus immediate, depreciation of assets
- capping the tax deduction benefit at 28% of total deductions for individuals with incomes greater than $400,000
- restoration of the PEASE limitation and reducing the value of itemized deductions by 3% of adjusted gross income above $400,000
- rampant rent controls across the US to combat the effects of inflation
- rent moratoriums continuing in 2021
Real Estate Investment Decisions
The decision for property investors in the US, Canada, UK, Germany and Australia is a complicated one.
For rental property investors in particular, lower profits for large enterprise-level companies might see them ease off on their takeover ambitions. Smaller investors who manage a limited number of rental apartments and houses may find the waters quite comfortable.
The biggest obstacle for rental investors is the price of properties and the threat of rent controls. Review the full rental market in the US, UK, Germany or Australia for deeper insights into pros and cons.
Good luck with your investments. Please do review Managecasa’s rental property management platform to help you manage your investments, taxes, and tenants professionally. Simplify, automate, and build revenue opportunities for the new rental market.
Real Estate Investment Tools:
Real estate deal analysis: dealcheck.io
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* Disclaimer: This article was created for informational purposes only, and is not intended to provide advice, nor relied upon on as professional advice for investment, tax, legal or accounting decisions. Please consult your own tax, legal and accounting advisors before conducting any buying and selling of property. All information, tax numbers, proposed legislation, tips or comments made here are subject to change and interpretation.
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