All Forum Posts by: David Haynes

Based on the median price paid, both out-of-towners and hometowners were overpaying. Someone could make the argument that this research was done in Australia between 2003 and 2009. But are American sentiments much different than Australian sentiments and have our mindsets really changed since then? Just food for thought. Here's a chart of the research they did. As you can see, hometowners paid much more than out-of-towners on average. Zero percent is the median. The median was being set by non-investors. Whether you want to say this applies to Americans and to this time period or not, at least this helps make us aware of our weakness to overpay for the "perfect" property within our location. We'd rather pay $10K more for a home close to us than $10K less for an identical house far away from us. This is where the overpayment comes from. When our supply is limited to our surrounding area, we pay more. Simple supply and demand at play.

I see three forces complicating things for many buy-and-holders using the 1031 exchange: 

1) COVID is causing many to diversify their holdings to mitigate potential losses. In other words, their need to use the 1031 exchange has increased. 

2) The shortage of listed properties is complicating the 45-day search for another property. They are having to decide between paying capital gains tax by missing the deadline or paying higher for scarce properties. 

3) Biden's proposed tax plan is threatening the highest-earning 1031 exchangers (please don't make this a political debate). The point is, investors are losing trust in their previous way of avoiding taxes.

Feel free to add to my list of forces. This is by no means exhaustive or detailed.

I'm really wondering where everyone's minds are at and how you're coping with these forces...

For those needing to sell properties now, are you struggling to sell them? For your next property, how are you finding ones that make financial sense? Are you paying higher prices for your next property just to meet that 45-day deadline? Are you losing faith in the exchange itself? Have any of you considered Delaware Statutory Trusts? 

@Jon Schwartz

I wouldn’t link an article I had no access to. Thanks for bringing this up though. It doesn’t help to link an article most people have no way of reading.

This research was done within the Australian real estate market. Since it focused on the psychological factors that affect our investing, I found no issue referencing it here.

@Steve Morris

I’m just passing on what research shows. Hometown investors are overpaying, are highly concentrated, and aren’t at an advantage.

But thanks for sharing your one example.

I grew up in a small Alabama town where it was rumored, "Everyone born here stays here." The prophecy didn't prove true for me, though it did for many of my old friends. I just couldn't get used to chewing tobacco and cotton fields. I ended up moving to Europe, completing my M.S. in Finance, and starting my real estate career in Philadelphia. Now don't get me wrong. I love Alabama, but I'm definitely odd for not having that hometown bias.

People often do develop a "hometown bias". How does that affect our real estate investment? If I ask you where your first investment property was (or will be), odds are it was (or will be) in your hometown. This is completely understandable. You understand that area and think that you have strong negotiating power, networks, and insights. The problem comes when you start expanding your real estate portfolio and avoid venturing out of your hometown comfort zone. The lack of diversification brings a high level of unintended risk. 

Here is a strong example of how that risk is affecting investors today:

Let's say you have one rental property in Manhattan. For years the rent has been strong, your tenants have been pleased, and your cash flow is very rewarding. Then COVID hits. Most jobs and schools switch to online working and online studying. Consequently, your tenants no longer find living in the city a necessity. They can work from home anywhere and their children are being taught on their iPads. Why continue paying high rent for a small apartment in a populated city when you could be doing the same exact thing anywhere in the world? Your tenants move out to find an affordable, spacious SFH in the suburbs of Philadelphia. And they're paying the same price. Hoards of people are doing this very thing! Check out the news: Empty Manhattan apartments reach record levels, landlords slash rent. Your one property has now lost significant income and value. That's fine. It's only one property and you have a full-time job. You'll recover. Sadly, this can't be said for investors who concentrated their entire 50-property portfolio within Manhattan. Hometown bias is the enemy of successful investments. 

Here's how to break out of your hometown comfort zone:

Sophistication: By "sophistication" I mean experience and knowledge. A study conducted in October of last year showed that investors who broke out of their hometown bias had several investments under their belt and, consequently, had a thorough knowledge of real estate investing. Through experience, their investment strategies became more sophisticated and diversified. Sophistication comes through experience. However, sophistication can also come through studying. Many of us won't get the chance to speak personally with Brandon Turner, but we could speak with him right now if we open his books or listen to his numerous podcasts. Take advantage of that. I'm impressed by the diversification he has within his portfolio. 

Self-realization: Many hometown investors assume that their local knowledge is helping them make wiser purchases. The opposite is actually true. Research has shown that local investors are, more often than not, paying a premium for their local properties. This makes sense, right? If you go to a shoe store looking only for Lebron shoes, you are unknowingly willing to pay a premium over any other similar pair of shoes. Your bias is costly. It hurts realizing you don't have an advantage over non-locals, but you must come to this self-realization.

Stoicism: Sorry, trying to stick with the "S"s. By this, I mean to be a Stoic. Don't let emotions come into play. Remember that real estate investment is a numbers game. The winners are the ones who use sound judgment, not the ones who follow their feelings. Learn to look at a property as an income statement, not as an easy commute to pick up the rental payment. Research has also shown that hometown investors are more likely to purchase non-locally when their own market has underperformed and a neighboring market has overperformed. Sounds smart, but this is still following your emotions! The technical term is momentum chasing. You are forever chasing the momentum but are never strategically placed to catch the momentum when it initially starts. That's a great way to drain the bank account. You're behaving no differently than the dot-com bubble chasers in 1999. Stoics look at numbers, diversify their portfolio, and never follow their instinct. They are the Warren Buffets of the real estate world.

In conclusion, get a few investment properties under your belt, but eventually break through your hometown bias. Never limit yourself to one geographic location if you're planning to scale your real estate portfolio. Diversification is key. I work with investors here in Philly. I'm often shocked to see experienced investors concentrated within one or two neighborhoods within the city. I often hear the phrases, "I only want Germantown" or "I only buy SFH in Delaware County." I wonder how the "I only want Manhattan" investors are doing right now... I do see the other side as well. Several investors from far away cities are choosing to diversify here. Most are coming from New York City, but I'm seeing investors as far away as Connecticut, Maryland, Florida, California, Canada, and even the Middle East. These will be the ones who succeed in any kind of market.

Do you have anything to add to this? How have you brought diversification to your portfolio? Have you struggled with hometown bias? How did you break through your bias?

 Thanks for sharing! You've made it through the Great Recession, so why should this scare you, right? You obviously have a strategy that works. Keep it up!

 Thanks for your input! Love it!

I wanted to share what I have learned about transfer taxes, how they affect the value of homes, and ultimately your profitability. It can be tricky, so I wanted to share my research and some conclusions.

First of all, transfer taxes are so incredibly different from state to state. Check out this summary. For those investing inter-state, it can become quite a headache understanding those differences. I am in Pennsylvania where the transfer tax is seemingly simple. But there are even more differences to be discovered among Pennsylvania’s counties. Philadelphia has a 4.278% tax on the exchange of real estate. This can be split between the buyer and seller or paid fully by the buyer. The neighboring counties (Montgomery County and Delaware County) have a transfer tax of 2%. The state of PA sets the base level of 1%. Counties have the freedom to add on top of that.

The biggest question is how this plays into the value of the home and, ultimately, the bottom line of the investor's analysis. In PA, the transfer tax has become a bargaining tool. “I’ll accept $100,000 if you pay the full transfer tax.” For someone adept at finance, this trick makes no difference. For a novice investor, it can be a bit confusing. Essentially, every investor must realize how the tax can affect their profitability. I personally have set up an excel sheet with drop-down boxes allowing me to choose between “split and full” and “Philly/Montco/Delco”. It cuts out all the noise as I analyze a deal. It may be helpful to do the same. Otherwise, you'll be fumbling with your calculator when every second counts.

I want to address a misconception I have seen. Some investors focus on low transfer tax counties assuming it saves them money and protects their investment. However, for buy-and-holders, the opposite may be true. Research has shown that the introduction of a transfer tax or the raising thereof has an IMMEDIATE effect on the value of a home. A newly introduced transfer tax affects the current homeowner, not subsequent homeowners.

One can assume that high transfer tax counties have a lower probability of raising the tax in the future. Low transfer tax counties have a higher probability of raising that tax. Buying in Delaware County (2%), as opposed to Philadelphia (4.278%), actually increases your chances of losing value if the 2% tax rate were increased. So avoiding a high transfer tax county is counterproductive. For flippers, this risk is minimal, since their investment is short-term.

In conclusion: Firstly, transfer taxes can be difficult to navigate but don’t be distracted by its noise. Ultimately see how it affects your profitability. This is a numbers game. Don't let negotiation fool you. Secondly, don’t think that lower transfer tax counties or states are a safe haven. The opposite could prove to be true. Low transfer tax counties have a higher probability for future increases. Nevertheless, a 1% increase is not going to break you. 

How have transfer taxes affected your investments? Have you ever considered it a deal-breaker? Why? Is there anything that makes your state/county tax unique? I would love to hear about it.

Sorry, Justin, but you may not know what Robert Kiyosaki means by "poor." Apparently you haven't read the book you're criticizing, so I can help explain what he means. "Poor" people within his book are not necessarily low on money. They are low on financial intelligence. They do not know how to handle their money, investment opportunities, and risk. They are forever stuck in a never-ending rat race. In Kiyosaki's eyes, a rich person can be very "poor" by never escaping the 9-5 grind.

I quoted the book because it is mentioned within BiggerPockets podcasts as an all-time favorite and a big reason why many successful investors have found an escape into real estate. Check out the podcasts sometime. The information gleaned from them is priceless.

Having a masters in finance, I understand everyone has a personal risk tolerance. Obviously, someone planning to retire in five years should not be diving into risky investments whether real estate or stocks. My post was meant to create a discussion on strategy, and many have posted what they intend to do. 

Nowhere in my post will you see "buy real estate." But I can see how you are confused. I am simply encouraging people to develop a strategy, adapt their strategy, and execute that strategy. Lastly, I'm encouraging people to share that strategy. 

What is your strategy?

@Nic S. Amazing point Nic. The government is pouring money into the economy right now. That will definitely have a huge effect on the value of the USD. Many foreigners buy USD during crises which helps stabilize its value during tough times. However, the US may be the last to recover from COVID. I wonder how that plays into the predicament and if people are bailing out of the USD. It would be interesting to see the statistics on that.

Build up that asset column! Cash may be a liability.