If I was retiring with 5 million dollars in the bank, and I could only invest all my money into either stocks or a real estate portfolio, I fail to see how one would decide to invest the money into real estate. The S&P 500 index can average 10% returns per year on average with 0 work involved, while owning real estate/rentals is an active business.
Owning 5 million dollars of real estate from what i've researched, you can make 250k a year from rental income, unless you get 5% appreciation on property value per year (assuming you have 20% equity and a 25 million dollar portfolio) then you would earn 1.5 mill in yearly property value increase + 250k rentals.
Assuming I am retired and the RE rentals are my only source of income would the 4% yearly depreciation (1 mill for 25 mill portfolio) mean that I avoid getting taxed entirely if my rental earnings + selling properties is equal to under 1million dollars?
If this scenario is true then investing in stocks I would make 500k per year, but with real estate I would make 250k a year through rental income, 1.5 million each year in property appreciation, and have untaxed income for anything under 1 million dollars a year.
Is this true?
First, I invest in both the stock market and real estate. And in my opinion, each has its pros and cons and neither one is 100% superior to the other in every way. And so, I believe a well-diversified portfolio should have both asset classes.
To answer your question: it's a very different thing to say:
"The stock market has performed about 10% over the last 10 years"
versus:
"The stock market *will* perform about 10% over the *next* 10 years"
(or 20 years or whatever period).
The first is a fact. The second is highly speculative and no one really knows for sure (and anyone who says they do know is just guessing).
As an example, if you invested in the start market in February of 2009 then after 10 years you would have a -3% return. And the stock market has historically been much more volatile than real estate (with many more down periods).
A few years ago, a group of economists decided to take on the huge task of measuring the historical returns of all the asset classes over a much longer period. So they examined records back to 1870 (i.e. for about 150 years). And they called this study "The Rate of Return on Everything".
And they found that equities (meaning the stock market) and housing ( meaning residential real estate) performed about the same. And that was about 7%.
https://www.frbsf.org/wp-conte...
Note this didn't take into account the tax benefits of real estate which are usually much better then the stock market (and would thus make equivalent returns tilt toward real estate).
But that also doesn't make real-estate "better".
Because they also saw that returns on different asset classes have changed over time as the structure of the economy changed. This is something that many investors miss (who often assume the factors that caused past performance to occur will stay the same forever).
So who knows what will happen to the U.S economy in the next 150 years. But we can safely say that it's virtually guaranteed to be a lot different than the last 150. And as just one example: if certain trends continue, the US won't even be the largest economy in just 20 years (nor the leading economic power). If this happens, it will almost be guaranteed to have an effect on U.S stock market and real-estate returns (and cause them to change from the past).
So in my opinion it's a mistake to look back at past market returns and assume that guarantees future results of a certain amount (and then make plans as if the #s are guaranteed). And since no one can really predict for sure what will happen, I believe it's better to reduce the risk of guessing wrong by diversifying into multiple asset classes.
This response and @Carlos Ptriawan 's responses were my favorite in this thread. This question is not unlike many of those tweets you see on Twitter...they're fun to think about and interesting to read peoples' takes on this, but in reality, anyone with $5M in dry powder investing in only one asset class is not acting very prudently. Heck, even a 50/50 split between stocks and real estate isn't exactly to my liking either. Depending on where a person is in life and what their goals are should be an important determinant of where to invest your money. Saying real estate is better than stocks, or stocks are better than real estate is really ignoring the differing utility that each investment can provide.
But with that said, I agree that in Tech, this difference in efficiency is much less pronounced. In finance at least, there is a push to return to the office with the eventual goal being full-time. The company I work for, which is a finance giant, has just announced that 4 days week in the office will soon be mandatory. I give it 50/50 odds we will be fully back in the office 5 days a week sometime in '24. Most of the other large investment banks are following the same trend.
Hi Tony, the biggest issue is this..........so every new office syndication is saying they have 50% office deals right now and think they can lease out their space. But the question is.......... who in the world would lease an large office space in NYC, in Manhattan in the next 24 months ?......... when corporation in Finance and tech is cutting back their opex.
From what I know, less than 9% of office owner has equity in their building. Compare that to 70% of residential owners that has 70% equity or less. The bottom is still far for office.
Even retail mall is also collapsing nowadays.
Yeah, I hear you.
Back when we had the GFC, investors and retail home-owners lost their homes, large asset managers swooped in and bought these properties at a huge discount. This time around, the underwater commercial buildings are owned by the asset managers. Who is going to swoop in and purchase them at discounts when they can no longer service their debt? It'll be complex, and the trend toward companies like BlackRock, GoldmanSachs and all the other large institutions moving to 5x/week will probably not be enough...which was the original topic of discussion.
Expecting a final K-1 before the filing deadline is not realistic. Been an private investor for a long time now and I think I've received a K-1 in April just once in that entire time.
I also work for an asset manager that issues K-1's and just getting the 4/1 estimates out involves a lot of long hours and late nights.
How do you calculate cost basis when the property is a condo? From what I've been reading about depreciation, cost basis does not include the land. Is it just most of the time close to the purchase price? I paid $255,000 for my condo and it's on the third floor. The property appraised for $259,000, sorry if this is a noob question but does the appraisal report negate the value of the land underneath the condo?
Property tax bill will have the allocation between land and building. One way to do it is to apply that ratio to your purchase price to get the building and thus depreciation basis amount.
The data point that has me most interested is inventory on market.
In 2007, there were over 4,000,000 residential homes available before the bubble burst. Today, there is less than 1,000,000 despite the high rates. That tells me the residential market is pretty secure.
Commercial properties are the opposite. There are tons of vacancies and much lower demand. I wish I had better numbers on this because my only data is only anecdotal but everyone in commercial I speak to currently worries about banks holding too many bad commercial loans that will all have their rate adjust in the next two to three years.
The fundamental problem with office is that many companies are moving into hybrid workplace where people only come 1-3x a week to office.
From the chart that I read, from realized PSF positioning perspective, PSF required for employee to be working in 2023 has regressed to 2002 level, so if PSF has reduced a lot, then all office ,especially the one build in 1980s, shall have valuation moved to 2002 level. This is the one that's not happening yet in private commercial.
For tech companies, it's true that for company that's solely focusing on software, most of them already moved to 90% work from home anyway.
Most companies want to move away from this and go to either a hybrid (3X/week) or full-time attendance model. Right now, companies still don't have the kind of leverage needed to enforce this, but if the economy does actually reset, they will definitely have more leverage. At least that's the hope. My company is currently on a hybrid schedule but I know they're itching to return to full time. Even with the layoffs, we still have a tight labor market. We are still in a place where reversion to the norm is a long distance. But once we do get back to a dynamic where each new job opening will elicit dozens of qualified resumes, I don't see this can continue.
have lot of comments, one by one :
- I checked the most recent layoff data for startup only as they're one that's most vulnerable, currently at 5/5/2023 the layoff has been normalized meaning the number has been greatly reduced almost near to the average. Most startup funding now tap into bridge commercial loan these days rather than ask for equity investment.
- where company moving forward it seems divided, some want move like before, but most 'software only' co or investment only company is working through 100% WFH model , it seems not having office or greatly reducing office opex is way to go, look at google co where they immediately stopped the project to rebuild campus in downtown san jose
- it seems the majority is still willing to choose hybrid model, not just because of office opex is less but people seems enjoying more work-life-balance these days.
- dont think there would be reversion to the norm. Full 5 days working to office is gone in this century LOL, trend is move into hybrid 2-3-4 days coming to office LOL Friday is the new saturday.
When you say want or willing, are you referring to the employees or high level mgmt? Because I know what employees want :) A lot of them have deluded themselves into thinking they are just as productive at home as they are in the office. I personally like the hybrid model also, but I can tell you without hesitation that although startups don't have strong feelings about coming back to the office, larger companies definitely want at a very minimum a hybrid model. And secretly, they want to move back to a full-time at the office model and they will have the leverage to require that in the future. You have to realize that the labor market is still at usually tight. My company (finance industry) has many req's open with generous salaries. Prepandemic, these openings would get close to a 100 resumes. Now, we aren't able to fill them. Tech companies have a different issue.
Google's halt of its campus was more about caution and the general slow-down in the tech industry as opposed to their desire to move to a WFH model.
haha LOL I got perception that CxO level wanna do hybrid. They don't wanna do 5x 8am-7pm in the office anymore. Maybe financial sector is different than tech, but for few years from now it seems tech is "okay" with 2-4 days in the office only. Another reason is also lot of customer is doing opex optimization so many of them are delaying order, when customer is delaying order then eventually there's no need for folks to be 24/7 8am-8pm in the office like before.
Also with cloud computing with software like Zoom and Ms Team and online collaboration tools, there's nothing that we can't do by online. 5 guys changing spreadsheets ? no problemo. It doesn't even impact any software/hardware delivery quality as process is already there taken in place. But another lesson learned is that there would be more job moving out of US and they would move to usual "cheaper" place.
Another trend that we see and impacting real estate is that all these new built data center is moving to cash-flow state property like Milwaukee LOL
Man, I totally get what you're saying. Logistically speaking, there really isn't too much downside to being fully remote for many industries. Heck, many startup asset management firms are fully remote. VC firm I used to work for was just one day a week in the office, and that was hardly mandatory also. But as someone who's been in the weeds, I just cannot deny that person to person collaboration, especially in the finance industry, is still much better, swifter and a ton more rewarding than online. There are just so many one-offs that are so much easier to handle when the person is next to you. Also, when it comes to training and onboarding new employees, fully remote is slower and more difficult.
But with that said, I agree that in Tech, this difference in efficiency is much less pronounced. In finance at least, there is a push to return to the office with the eventual goal being full-time. The company I work for, which is a finance giant, has just announced that 4 days week in the office will soon be mandatory. I give it 50/50 odds we will be fully back in the office 5 days a week sometime in '24. Most of the other large investment banks are following the same trend.
Nothing is beating inflation right now. Most assets are performing negatively, so a T-Bill at 5% needs to be measured against comparative options. Right now, flips are getting destroyed in rising rates with people buying falling knives. Which stocks are consistently performing 20% this year? Sure mega cap tech stocks are but there are no promises with those for the rest of the year. S&P is up a little over 8% YTD, that's beating inflation. My point is short term, you're not beating 5% T Bills.
But being a stock picker is a lot more of a risk than buying a house slightly OTM today. Right now, the Fed is telling the market quit being investors, quit being speculative, and stay trim.
If you don't have the tolerance to weather a long(er) downturn, a vacant house for an extended period, or anything that is associated with managing a physical asset than you definitely do not want to step in now. If you can, then this is exactly when you want to step in. When nobody else wants to or can. If you're rejecting a solid house in a good neighborhood because it's costing you $100/month, you're missing the point. When the environment is more investor friendly, this house will be in too much demand for you to ever in compete for again.
Likewise, if you're lowering your budget to fill your monthly cash flow due to rising rates and the inability to keep up in a seller's market to markets that are treacherous, slumlord ridden, or high risk. I'd recommend to not invest in physical real estate. You're just not fit for this.
Anyone that's thinking the investment environment today is anything like 2009-2022(first half) is highly mistaken. This is completely different, this is more like normal real estate investing in other countries and in other times. You buy your house, you don't leave your house, it'll get passed down. Great land and house on it is getting more and more scarce.
This post and some of your earlier posts in this thread should be required reading for anyone wanting to get into RE, especially in the current market and especially for some folks who think RE is a fix for their financial situation. Friends and family are often telling me they'd like to get into real estate and asking for advice. I just flat out tell them that you missed the boat if you're looking for immediate cash flow. And unless you're fine with just parking your money with little to no return for the next decade, look into something else.
The data point that has me most interested is inventory on market.
In 2007, there were over 4,000,000 residential homes available before the bubble burst. Today, there is less than 1,000,000 despite the high rates. That tells me the residential market is pretty secure.
Commercial properties are the opposite. There are tons of vacancies and much lower demand. I wish I had better numbers on this because my only data is only anecdotal but everyone in commercial I speak to currently worries about banks holding too many bad commercial loans that will all have their rate adjust in the next two to three years.
The fundamental problem with office is that many companies are moving into hybrid workplace where people only come 1-3x a week to office.
From the chart that I read, from realized PSF positioning perspective, PSF required for employee to be working in 2023 has regressed to 2002 level, so if PSF has reduced a lot, then all office ,especially the one build in 1980s, shall have valuation moved to 2002 level. This is the one that's not happening yet in private commercial.
For tech companies, it's true that for company that's solely focusing on software, most of them already moved to 90% work from home anyway.
Most companies want to move away from this and go to either a hybrid (3X/week) or full-time attendance model. Right now, companies still don't have the kind of leverage needed to enforce this, but if the economy does actually reset, they will definitely have more leverage. At least that's the hope. My company is currently on a hybrid schedule but I know they're itching to return to full time. Even with the layoffs, we still have a tight labor market. We are still in a place where reversion to the norm is a long distance. But once we do get back to a dynamic where each new job opening will elicit dozens of qualified resumes, I don't see this can continue.
have lot of comments, one by one :
- I checked the most recent layoff data for startup only as they're one that's most vulnerable, currently at 5/5/2023 the layoff has been normalized meaning the number has been greatly reduced almost near to the average. Most startup funding now tap into bridge commercial loan these days rather than ask for equity investment.
- where company moving forward it seems divided, some want move like before, but most 'software only' co or investment only company is working through 100% WFH model , it seems not having office or greatly reducing office opex is way to go, look at google co where they immediately stopped the project to rebuild campus in downtown san jose
- it seems the majority is still willing to choose hybrid model, not just because of office opex is less but people seems enjoying more work-life-balance these days.
- dont think there would be reversion to the norm. Full 5 days working to office is gone in this century LOL, trend is move into hybrid 2-3-4 days coming to office LOL Friday is the new saturday.
When you say want or willing, are you referring to the employees or high level mgmt? Because I know what employees want :) A lot of them have deluded themselves into thinking they are just as productive at home as they are in the office. I personally like the hybrid model also, but I can tell you without hesitation that although startups don't have strong feelings about coming back to the office, larger companies definitely want at a very minimum a hybrid model. And secretly, they want to move back to a full-time at the office model and they will have the leverage to require that in the future. You have to realize that the labor market is still at usually tight. My company (finance industry) has many req's open with generous salaries. Prepandemic, these openings would get close to a 100 resumes. Now, we aren't able to fill them. Tech companies have a different issue.
Google's halt of its campus was more about caution and the general slow-down in the tech industry as opposed to their desire to move to a WFH model.
I am a Real Estate Professional, but I seem to be having trouble with my CPA understanding how to account for this. 2022 was my first year as a Real Estate Professional. My husband has a W-2 job with a large amount of tax withheld. In 2022 we did a cost segregation study to capture a massive amount of depreciation on multiple properties, so there's a lot of bonus depreciation to be taken. Our tax structure has each property in an LLC that is owned by an S Corp, and my husband and myself both own the S Corp. Our CPA is telling us that she did not see any additional ‘basis' or money that you personally invested in the LLC's, so we cannot claim the depreciation from the properties. She is also saying that she set us both at the "no limitation non-passive status" so the Real Estate Professional status is "immaterial".
I would love any help I can get here! I was at the MidTerm Rental Summit this past week and checked in with others, confirming that she doesn't seem to know how to do this. But am I missing something here? I've invested a lot into the cost segregation studies, and I really want to figure out how to capitalize on these tax incentives.
When your CPA says that because you didn't invest any additional basis or money into the LLC's, hence you cannot claim the accelerated depreciation, she is not taking into consideration that your RE status will allow you to deduct passive losses from your properties against your husband's ordinary income. If you didn't have RE professional status, then she would be right. You'd have to carryforward any losses that went beyond your LLC's basis. But I find it hard to believe that any CPA would not understand this.
RE status doesn't matter here. the loss is limited because basis limitation. If the basis is calculated correctly by the CPA, then CPA's determination is correct.
Got it, so the basis limitation meaning the basis went to zero? That would make sense.
I am a Real Estate Professional, but I seem to be having trouble with my CPA understanding how to account for this. 2022 was my first year as a Real Estate Professional. My husband has a W-2 job with a large amount of tax withheld. In 2022 we did a cost segregation study to capture a massive amount of depreciation on multiple properties, so there's a lot of bonus depreciation to be taken. Our tax structure has each property in an LLC that is owned by an S Corp, and my husband and myself both own the S Corp. Our CPA is telling us that she did not see any additional ‘basis' or money that you personally invested in the LLC's, so we cannot claim the depreciation from the properties. She is also saying that she set us both at the "no limitation non-passive status" so the Real Estate Professional status is "immaterial".
I would love any help I can get here! I was at the MidTerm Rental Summit this past week and checked in with others, confirming that she doesn't seem to know how to do this. But am I missing something here? I've invested a lot into the cost segregation studies, and I really want to figure out how to capitalize on these tax incentives.
When your CPA says that because you didn't invest any additional basis or money into the LLC's, hence you cannot claim the accelerated depreciation, she is not taking into consideration that your RE status will allow you to deduct passive losses from your properties against your husband's ordinary income. If you didn't have RE professional status, then she would be right. You'd have to carryforward any losses that went beyond your LLC's basis. But I find it hard to believe that any CPA would not understand this.
The data point that has me most interested is inventory on market.
In 2007, there were over 4,000,000 residential homes available before the bubble burst. Today, there is less than 1,000,000 despite the high rates. That tells me the residential market is pretty secure.
Commercial properties are the opposite. There are tons of vacancies and much lower demand. I wish I had better numbers on this because my only data is only anecdotal but everyone in commercial I speak to currently worries about banks holding too many bad commercial loans that will all have their rate adjust in the next two to three years.
The fundamental problem with office is that many companies are moving into hybrid workplace where people only come 1-3x a week to office.
From the chart that I read, from realized PSF positioning perspective, PSF required for employee to be working in 2023 has regressed to 2002 level, so if PSF has reduced a lot, then all office ,especially the one build in 1980s, shall have valuation moved to 2002 level. This is the one that's not happening yet in private commercial.
For tech companies, it's true that for company that's solely focusing on software, most of them already moved to 90% work from home anyway.
Most companies want to move away from this and go to either a hybrid (3X/week) or full-time attendance model. Right now, companies still don't have the kind of leverage needed to enforce this, but if the economy does actually reset, they will definitely have more leverage. At least that's the hope. My company is currently on a hybrid schedule but I know they're itching to return to full time. Even with the layoffs, we still have a tight labor market. We are still in a place where reversion to the norm is a long distance. But once we do get back to a dynamic where each new job opening will elicit dozens of qualified resumes, I don't see this can continue.