September 23, 2019 at 6:34am | Phil Aitken


1.  The 1031

There are a TON of 1031 tax-deferred exchanges occurring at the present time resulting in gargantuan profits for multifamily syndicator/investors post recession.  We might be in for some serious record-breaking taxation, so hold on!  This exchange permits sellers to trade asset for asset while avoiding capital gains taxation until the time at which the asset is sold.  Of course, this could go on inevitably if sellers just continually exchange asset for asset.  In the long run, sellers will have to make a decision: pay the taxes or purchase a new asset?

2. The "Foreign Exchange"

Foreigners are willing to invest at zero in return if exchanging foreign money for a more valuable, stable currency from an alternate country is an option.   For example: the Chinese Renminbi has not retained its value over the past few years and is not as stable as U.S. currency.  Therefore, the people of China could exchange their currency with that of the U.S. and benefit from a sizable gain in value.  This mean that Chinese investors are happy to overpay for U.S. investment assets (a.k.a. multifamily market) in order to enjoy returns of 20% and higher.  At the end of the day, the competition is heated as Americans attempting to purchase multifamily units in order to gain 5-10% back in a cash-on-cash return are ultimately competing against foreign buyers who are willing to overpay while accepting no return.  This forces the hand of determined Americans who must now overpay as well in order to "win" the property.  
Related: Seattle Boasts Double the National Average in Price Gains

3. Institutionalized

REIT's and life insurance companies prefer stable and predictable commercial real estate for their asset of choice.  They are generally happy with a four percent annual return, therefore they go after large assets in large, coastal markets.   They NEED a return!  The problem is that it is getting difficult to find these assets which means prices are higher when they CAN be found, thus forcing institutions to go after smaller, less stable assets such as a multifamily property of less than 500 units, constructed prior to 1999.

4. Inexperience

As society grows increasingly dissatisfied with boring desk jobs, coaching and mentorships continue to push newbies into the investment world.  These rookies know nothing of investing prior to the recession.  In addition, there is a huge increase of investor monies, resulting in overpayment on the part of syndicator/investors.  This should not invite overoptimism unless you have the numbers to back it up. If a broker of financier advises you on the worth of a multifamily asset, do the homework yourself.  You might be risking it all on the word of someone who is likely to gain at your expense.  
Related: 5 Tips for New Investors

5. Over-Promising

There will always be those who will say anything in order to make a buck and still others who might have investors in their back pockets who are jumping at the gun to invest.  Always, always, always seek sponsors with interests parallel to your own.  Stand guard for those who are in it for the acquisition fee or commission to be gained at pushing the deal through.  If sounds too good to be true, then it probably is.  

6. Tax Reform  

The Tax Reform Act revitalized our otherwise stale market and its impact is substantial, to say the least.  
The National Real Estate Investor noted a 50% investor sentiment increase in January, 2018, shortly after the the new act was implemented. This is quite a jump from 26% in November and 41% in January and is still charging full steam ahead one year after the fact.

For more information, contact The Aitken Home Team today!

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