1031 Yes OR No? 1 Week left to Identify. Economy recessing hard?

Question

Hey Everyone,

I am new on here, but I have seen some good posts so here we go!My name is Brian, I am 28 and I am in the hotel industry.

Long story short - I usually like to purchase economy brand hotel assets around $35k - $42k / key @ <3X RevenueThis criteria for my purchases was pre-covid19

Right now I am seeing alot of properties come up for sale, but not at the price I anticipate they will be in 12-18 months from now.

I guess the biggest question is, is the economy going to recess hard? Should I just pay the $250k and hold onto about $550k hard cash and wait to invest?

My though process is that the 30% gains tax ($250k) I will have to pay will be offset by seeing hotels go into foreclosures and maybe purchase them at a discount far greater than $250K?

A property I paid $4MM for was purchased by an investor in 2013 at auction for $1MM cash.

Any opinions? This whole economic climate has me doubting myself or at-least my past experience which has only been in a strong economy.

Any other investment ideas? I am stuck on paying the gains tax or reinvesting.

Brian Shaha · Answer

@Chris Montgomery - Sorry it's been a while. I am from Kenosha, WI and I am sure you have seen what has been going on up here....

So my game plan for now is to hold off on any large investments until after the elections. I feel like the economy is heavily effected and dependent on the politics.

I have also been looking at diversifying my investments into new ventures. I did do some research on OZ's and its was an interesting option.

Once again thanks for the input!

Chris Montgomery · Answer

@Brian Shaha   One other option for you to consider is to invest your gains into an opportunity zone fund.  You can obtain a tax deferal on the gain by investing only the gain, while keeping your original principal on the sidelines while you determine where want to invest it.  OZ Funds also have a  requirement to invest within 180 days of realizing the gain, but the IRS has extended the deadline this year through 12/31/20 due to Covid.  For many people who were considering a 1031, an OZ Fund investment not only provides additional time to make a decision but also the ability to separate out your gains from your original principal rather than roll everything forward as required by a 1031.

Brian Shaha · Answer

Craig, thank you for the in depth insight. Very helpful to see it from someone else's perspective.

I believe that the after effects of the current "lock downs" are soon to be seen, and the negative results we have seen so far are not even a glimpse of what is to come. I say this because the economy has been artificially kept afloat temporarily and that can not go on forever. If and when congress starts to cut back on spending, then I believe we will really see the true impacts of this whole situation we are currently in.

For now I will eat the taxes on my 1031 (identification ends in about 3 hours), wait on the elections / see what the political agenda has in store for us, and then consider investment strategies.

Here is another question, where would you seek to learn about other types of investments outside of your comfort zone? Have you ever taken a risk on investments that were very "new" to you or that you knew very little about?

All I know is hotels, hotel operations, and other smaller residential real estate investments. I have never looked past brick and mortar , but would like to learn and possible take a calculated risk.

Craig Anderson · Answer

In response to the question, of will there be an huge down-turn in the Markets, going into 2021?, I think that this depends on how current work, for remedies against COVID-19 go. It would seem that the U.S. Congress is propping up the U.S. economy in 2020, in the belief that doing so, improves the chances, that remedies against COVID-19 are better effected. Hence, the predicted downturn in the Markets, in my opinion, will occur, once remedies for this COVID-19 virus are effected, & which could be of several such remedy-avenues. (There's a good chance that vaccines, against COVID-19, may never be workable. Look at the hoped for vaccine against the A.I.D.S. virus, & yet it still doesn't exist. And the U.S. might have to resort to the South Korea model, of a testing-tracing regime, to get it under control.) Hence, it might be wise, to invest in the next 6 months, in a short-term manner, ready to close out said investments, in 6 months, as Congress continues to prop up the U.S. economy. However, beware of investing long-term, due to I think that an economic crash is inevitable.And I do expect that an huge drop in U.S. stock-prices, will occur, maybe in 2020, or in 2021. But I think that U.S. housing market prices will crash, if unemployment in the U.S. gets too far along.

Craig Anderson · Answer

In response to the question, as to how hard the current 2020 Recession will hit, (there's 2 videos, I found on U-Tube, the last time I checked it, which I found on the right-hand side bar, of related videos to what I was seeking. And both of the ones am referring too, are done by the Economist mag. of Britain, one of which is entitled, "COVID-19:Why The Economy Could Fare Worse Than You Think/ The Economist", May 22nd, 2020, & the other one is entitled, "COVID-19: What Will Happen To The Global Economy?/ The Economist", July 3rd, 2020. And The Economist might have another video, done by them, since July 3rd, 2020, on what is going on in the Economy.); the answer pre-supposes that the Recession we already are in, by 2020, that if its hits harder than the Recession of 2009-2010, that hitting harder would suggest unemployment levels, nearing 20%, while still in the teens. The difference between a Recession & a Economic Depression, is the unemployment rate, for one point for said differences. The great problem of Recession are that political movements arise in them, which often de-rail efforts to counter Recession, due to most people don't understand the writings of John Maynard Keynes, of if they do, they are want to dis-believe what Keynes argued for, as being the remedy to Recessions, & Depressions.And in the last few decades, The Chicago School of Economics has sought to de-bunk basic points of this Keynes, on how to stop economic crashes. And in the last Recession, austerity governments took over in Europe, opposed to spending money, toward stimulating an economy. So this political situation is as much a monkey-with-a-wrench, than if the U.S. Congress does decide to embark on large government-spending programs, the results of said government-spending, is open to what will be the results of said spending. (Keynes kept warning Pres. FDR, prior to WWII broke out, that he was spending too little in the U.S. in the 1930's, to have any hope that the Depression of that decade would end. And in the said War years, the U.S. spent 8 times more than it did, 1933-1939, in government-spending, which economists say is what lifted the U.S., out of the Depression, despite any nay-saying by the Chicago School.) So in response to how hard the 2020 Recession will hit, going into 2021?, this is not fully predictable. And the only thing I know for sure, is that Congress will not continue to spend money, as it has in the 1st half of 2020, to keep the U.S. economy propped-up. (In the last 10 years, The FED continued to ask Congress to do massive fiscal-spending, to improve the U.S. economy; & which resulted in not much got done, in this requested for direction.) So think back to the early years of the Pres. Obama Administration, & maybe then will be like it will be for the U.S. into 2021.

Brian Shaha · Answer

Thanks Craig, thanks Bill for your responses.

I guess the more refined question is, how hard do you think the recession will hit?

What is your personal opinion? Would you invest right now? Are you anticipating a huge downturn in the markets?

Craig Anderson · Answer

If you aren't yet using the Steri-Mist device, sold by TOMI, to apply ionized hydrogen peroxide to walls, etc., in hotel rooms, to kill any residue COVID-19; then you might consider this device. It's mad for hospitals, to sterialize rooms in hospitals, in which the ill have been in. And Steri-Mist has the advantage of being less corrosive to what it is applied to, than other devices that also ionize hydrogen-peroxide.----------------------------------------------------------------------------------------------------------------------------------------------------------Something that bothers me, is that so little progress is being achieved in 2020, so far, in testing kits against COVID-19. And if better such kits could be available; then hotels & motels could be testing all who enter their doors. In early Jlu 2020, in some newspapers it said that a saliva test is now available which tests for this virus. And maybe this would be a better testing system, than the one currently used, which is a long q-tip, up the nose, which only catches 80% of who has this virus.

Craig Anderson · Answer

So much depends on what can be effected against COVID-19 virus, in the next 12 months. And am continually reading the Wall Street Journal, doing so since April 2020, on this virus, for developments with it. And in the Journal of July 27th, it says that scientists don't know if any of the vaccines they are currently testing, will (1) work out, as hoped for, & (2) will impart long-term immunity to this virus. And all of this won't be known, until sometime in 2021. And if the current vaccines, now being tested, don't have hoped for results in 2021; then another approach will be needed with this virus, & willlikely be a testing-tracing regime, in which the effort is for who has the virus, & then to isolate them, so they won't be spreading it. And in this 2nd scenario, in 2021, if the vaccines prove useless; then hotels & motels will be turned into isolation housing, is one possible plan, with who owns them will likely get paid to house those infected with COVID-19, but who are not yet sick enough to go into hospitals. Otherwise, the forecasts, as am reading in the Journal, for several months now, is that the Reccession being created by this virus, will hit harder than the Recession of 2009-2010. And the result will be many hotels-motels out-of-business. I'd say to not take any unnecessary risks in 2020, due to in 2021, the economy will likely get even worse.

Bill B. · Answer

YouR math makes it appear close. As long as that hotel you buy won’t make any money while you hold it waiting for a price drop that may never come. What if you pay the $250k taxes and then prices go up 5%. Now you’re out $450k plus the hotel’s profit.

I guess if you can’t find any hotels that actually make a return on $4million then sell. After all a simple 4% return negates your $150k in “savings” that may never appear. I assume you wouldn’t buy if you can’t make 12-16% so that’s 3 months of profits?

Craig Anderson · Answer

Something else am looking at, with the COVID-19 virus, is that how many are likely to die from it, into 2021. And this number will present to what extent that U.S. people will stop playing around with this virus, & will suddenly be willing to do what it takes, to stop this virus, as in wear masks in a consistent way, & etc., And I haven't heard, nor read any numbers for said deaths, except that last week, Peter Navarro told Trump that if Trump didn't start taking this virus seriously, that 1 to 2 million U.S. people could die form this virus. In the event that the death-rate in the U.S. into 2021, gets worse; then there might be an effort to turn hotels into isolation housing for those afflicted with this virus.----------------------------------------------------------------------------------------------------------------------------------In another plague in the Middle Ages in Europe, called The Black Death; anywhere from one third to two thirds of the people there, died of this germ. And if COVID-19 were to kill in similar numbers, then the number of deaths would wake people up, to do more than they are now doing, against this virus.