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Updated over 8 years ago,

User Stats

88
Posts
49
Votes
Jonathan McKay
  • Investor
  • Spokane WA
49
Votes |
88
Posts

Seeking High Volatility Markets, Which would you Choose?

Jonathan McKay
  • Investor
  • Spokane WA
Posted

I have something of a theoretical question. My current strategy has been to invest for cashflow, and to these aims I have purchased a triplex in my hometown of Spokane and am under contract for my first SFH in Indianapolis. I expect to continue purchasing SFR in Indianapolis, but this weekend was considering the tangent of investing for appreciation.

Let's assume that investing for appreciation is pure gambling, but the good news is that the dice are rigged. If I get appreciation on a property, I can 1031 it into a cash-flowing property later on, without having to pay taxes. If I lose the appreciation game, I can sell the property and deduct it against my regular W2 income, meaning that I get ~55% of the money back (highest tax bracket, live in CA). Not bad right?

The caveat is that this sort of gamble makes more sense in higher volatility markets. If the appreciation is low, (i.e. only 3%), transaction costs are going to eat all of my gains. However if appreciation is highly stochastic (even if the mean is zero!) I can gain significantly from the tax implications.

With that in mind, what would be good markets to roll the dice? Primary criteria is high volatility in real estate home values, with a secondary criteria of low cost of owning property. (As measured by cashflow)

Quick scans of Zillow reveal the following candidates:

(Note that I treat zillow predictions as a measure of expected variance, not a measurement of expected growth!)

Tacoma: 13.4% appreciation last year, predicted 6.0% appreciation this year

Portland: 20.1% last year, 7.5% predicted this year

Dallas: 17% last year, 7.6% predicted this year

If you had rigged dice, which market would you roll the dice in?

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