The Long-Term Perspective
By the time this article is published, you would have already heard of Biden’s plan to eliminate 1031 “like-kind” exchanges for investors with annual incomes greater than $400,000. With Biden beating Trump by a wide lead according to recent polls, the real estate industry is bracing for even more turbulent times.
1031 “like-kind” exchanges have allowed investors to swap one property for another and defer payment of taxes.1 A study conducted by the Federation of Exchange Accomodators back in 2015 concludes that “elimination of real estate exchanges will likely lead to a decrease in prices in the short-run, followed by an increase in rents in the long run.” 2 Since rent regulations have become more restrictive on rent increases, property owners are pressed on all sides.
Market inefficiencies create opportunities for investors. As regulations become more restrictive, investors become more conservative and asset values scale back. While a lot of property owners sit back and wait for what happens after the election, I urge my clients to evaluate and stress-test their portfolios for the worst case scenario.
Financing: More and more, clients are opting for longer term loans, even at slightly higher rates than shorter term loans. Borrowers are also becoming more conservative on LTV’s to make sure that their cash flows are able to cover debt. If you currently have a mortgage on your property, your best course of action would be to refinance for a lower rate or reset the terms for a longer period considering the uncertainty of appraisal values in the coming years.
Sales: We are already seeing the effects of last year’s rent regulations and this year’s pandemic in property values. With the election coming up, it is even more important to evaluate your position. Hold on to assets you would like to keep in the long-term and sell the ones you don’t see yourself holding in the long run. You are better off taking a small loss in the short-term, and reinvesting that in higher yield opportunities rather than holding on to assets that yield small returns.
With the way things are, it is best to keep a long-term perspective to survive in this industry.
2 The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate
Author: Irene Uy
Questions? Comments? Reach out to Irene directly at 646.253.0906 or iuy@ergcre.com
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