In an article by kiplinger in January of 2015, they forecast that home prices nationally will rise by 3.5% around mid to late 2015, at the low end of the historical range of 3% to 5% annual appreciation (before inflation). They also expect existing-home sales to increase 8% in 2015 (after declining 2% in 2014) and new-home sales to rise 25% in 2015 (after a meager 4% rise in 2014).
Around the same time Pacific Union posted an article saying that new home sales and prices should rise in the coming year, per recent projections from housing industry executives, while the chance of a downturn over the next three years appears less likely than it did one year ago.
Many sources expect new home sales to increase by around 10% on average from 2015 to 2016 depending on your market, and predict a steady appreciation rate for major metro markets. However, steady to high growth also bring rising interest rates.
Along with home prices and sales volume, most industry executives also think that mortgage rates will increase over the coming year, with 59 percent predicting gains of between 0.25 and 0.75 percent. Another 36 percent believe that rates will remain essentially flat.
There is no doubt that interest rate will eventually rise, the only question in when and by how much.
So If You Own a Home or Investment Property What Does This Mean for You?
If you are considering selling or exchanging a property now may be the time!
Many home sellers will want to repurchase once the sale is complete, so you actually become a buyer directly after the sale. The problem is, if you wait until the very top of the market (no one really knows when that is) interest rates will most likely be high and so will the price of your new home.
Let’s say you sell for a high price and repurchase at a high price, but now your interest rate is also high, what is the long term cost of a high interest rate? The time to sell is often when the price of your property is at about 95% of your markets maximum value (before a decline), and you can repurchase at a decent price while receiving a low to moderate interest rate on your new loan (saving money year after year).
A very common mistake made by Investors is delaying their 1031 Exchange based on a belief that their existing (relinquished) property is going to appreciate more in the next year or two (and this may be true), but is that the whole picture?
Unfortunately delaying an exchange in hopes of future appreciation will often result in lost rental income and phantom appreciation.
The Real Example Below Will Help Clarify This.
1. Annual Loss of Rental Income
All Investors who are planning to do a 1031 exchange are looking for a replacement property to provide higher rental incomes and returns than their current property.
Many times investors put too much weight on the unknown (appreciation) when doing an exchange and should focus more on Rental Income. Below is a real life example of how investors are losing significant rental income each year that the exchange is delayed.
A 5 unit property in San Francisco is worth 2.1mm, and has annual net income of $75,000.
The investor has identified potential replacement properties in a few markets (San Jose and Portland). They have found properties in these areas where 2.1mm will buy properties with annual net incomes of around $115,000.
The difference in gross rental incomes between the investors current property and replacement properties is around $40,000 per year if we don’t include the property management fees, expenses, taxes, etc.
If the investor waits 2 years to do a 1031 Exchange they would be missing out on $80,000 dollars of income, and an additional $40,000 dollars per year after that!
2. Phantom Appreciation
Many strong Real Estate Markets will move in the same direction when it comes to appreciation.
In the example above, suppose the investor waits a year and their San Francisco property appreciates 5% and is now worth $2,205,000.
If their replacement property also appreciates 5% then the purchase price will be $2,205,000. This is called Phantom Appreciation. The net effect of the appreciation of both properties is a wash to the investor.
Whether an Investor does a 1031 Exchange in a strong market or a weak market they will most likely not win on both sides of the exchange. This is true by the fact that they will be both a seller and a buyer. In a seller’s market they will feel that they received a great price for the relinquished property and overpaid on the replacement.
Unfortunately many investors fail to see that delaying their Exchanges will usually cost them lost income and returns.
As an Independent Advisor for Real Estate Investors we take pride in giving Objective Advice, Resources, and Analysis. At SIFF we provide current and projected returns on your properties so you can make educated decisions on whether to hold, sell, or do a tax-deferred (1031) exchange.
A 1031 exchange can be used for investment properties or to convert a high value personal residence into an income generating asset!
If you would like to set up a complimentary meeting with us to find out how to maximize your property, please give us a call. We are happy to answer your questions.
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