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Told Ya So

September 19, 2019

We have been beating the drum longer and harder than anyone else regarding the need for Portland landlords to sell their rental properties and “get the hell out of Dodge” with DSTs.  This is because tougher rent control laws passed at the state and local levels would inevitably have a negative impact on property values. 

Guess what?  According to National Real Estate Investor, multifamily investors spooked by these laws are pushing cap rates up and prices down across nearly all markets with rent control.  Nearly 80 percent of markets with some form of rent regulation tracked by Real Capital Analytics (RCA) saw a spike in cap rates and a drop in multifamily property prices over the past year (National Real Estate Investor 8/13/2019).

Just as we predicted in this same blog space, investors are starting to pay less for apartment properties in markets that have some kind of rent regulation on the books.  These markets include a wide range of cities and suburbs in New York State, California, Washington DC, Northern New Jersey and (specifically) Portland Oregon.

The one thing they do have in common is they are high tax blue states.  Arthur B. Laffer stated in his prescient April 24, 2018 WSJ commentary So Long, California, Sayonara New York that “millions of people, thousands of businesses and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states.”  This migration is being driven in large part by tax considerations.

Now the ‘New Left Urbanist’ political class is adding fuel to the fire by regulating rents and rental properties in a draconian manner.  This of course spooks investors, causing them to draw back or hold off on transactions until they can better evaluate the exact effects of these ill-conceived measures.  In turn, property prices across the board are going down.  These radical fire-breathers who want to remake your city and up-end your life just can’t destroy enough wealth.

What’s a landlord to do?  Git out while the gittin’s good.  Unsurprisingly those markets without rent regulation (low-tax red states) have not yet seen cap rates rise.  In fact, places like Houston and South Florida are still experiencing cap rate compression.

Guess where the vast majority of DST offerings are located; low tax red states.  As such, DSTs are not just convenient from the standpoint of ownership and operation they seek to preserve wealth by allowing hard pressed landlords to flee increasingly hostile and non-remunerative markets.

Investors buying into markets that have recently experienced a tightening or increase in rent control may have difficulty in raising rents as anticipated.  They may then struggle to pay their mortgages and eventually end up in default.

If you are not already thinking long and hard about the DST option in 1031 exchange, it’s not too late. The ‘New Left Urbanists’ are just getting started in remaking the urban landscape.  As a landlord, they will demand you pay for it.  Their hatred of you and covetousness of wealth is what animates them.

Disclaimer

This material and views are prepared solely by the author and does not necessarily represent the views of the its affiliates. Statements concerning financial market trends are based on current market trend, which will fluctuate. Projections are inherently limited and should not be relied upon as an indicator of future results. Historical figures and performance are not indicative of future results. This is for informational purposes only and does not constitute an offer to buy or sell any investment.

DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.

Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice.  

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