Answer to an email; Why was this decade’s real estate debacle a great time to buy rental properties?

Tax code changes encourage home price speculation
Earlier this decade provided us with a once-in-a-generation time to buy rental properties. Capital gains exclusions of up to $500k on owner-occupied properties since 1998 encourages price speculation, but rents grow consistently every year regardless of economic conditions.

A background of the Taxpayer Relief Act of 1997

The Taxpayer Relief Act of 1997 [TRA] also permanently exempted from taxation capital gains on the sale of a personal residence amounting up to $500,000 for married couples filing jointly, and $250,000 for single individuals. This exemption only applies to residences taxpayers have occupied for at least two of the last five years. Taxpayers can only claim this exemption once every two years.

Before the TRA was phased in for 1998, you had to take the profit from your home sale and use it to buy another, more expensive house, within a period of two years. If you didn’t do this, taxation on your profits was inevitable.

The only other option you had to protect your earnings was based on age. If you were 55 or older, you could take a one-time individual exemption of up to $125,000.

In the wake of the TRA, I think you can see how home owners could be encouraged to speculate and sell for the highest prices possible.

Despite fears to the contrary, rents usually continue rising during recessions
  • Rents continue to rise during recessions
  • Home prices will often fall
  • Capitalization rates and internal rates of return rise during recessions
  • Recessions often provide the best times to acquire rental properties

During the last U.S housing crisis in 2008, did the price of rent go down with the house prices, or stay the same.


V – Canada

I think the above chart speaks for itself. I knew real estate investors were handed an auspicious opportunity to accumulate rental properties earlier this decade, because I observed that my rent rolls continued moving higher. Yet, at the same time, prices on certain real estate assets (e.g. condos) dropped by as much as 65-70% and some single-family properties in distressed areas dropped by as much as 40%. In 2005, a condo cap rate was about 6%, but by 2014, the cap rates were approaching 16 – 18%.

Yes, you read those numbers correctly. Armed with this information, I think spotting opportunities in real estate investing becomes self-evident. I loaded up and told everyone who would listen to do the same.


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