How Would Joe Biden’s Tax Proposal Affect Apartment Investors

Biden proposes to redress changes from the The Tax Cuts and Jobs Act of 2017. Here are the proposed changes by Biden:

  1. Increasing the Capital Gains Tax from 20% to 39.6% for taxpayers earning over $1 million.
  2. Removing the stepped-up basis to tax capital gains at death.
  3. Eliminate 1031 exchanges.

Trump proposes to return Freddie Mac and Fannie Mae to private ownership. Biden proposes to focus Fannie Mae and Freddie Mac to increase apartment affordability which expands upon the current Fannie Mae Standard DUS mortgage criteria.

Fannie and Freddie don’t lend money directly to apartment owners. Instead, they buy mortgages from lenders, repackage them into securities and sell those securities to investors.

The investors are protected against losses by Fannie and Freddie’s guarantee backed by the Treasury Department.

The Freddie Small Balance Program is for 5+ multifamily units. Terms are $1 million to $5 million, 5 to 10years, max luv 80%, rates can be fixed and either balloon or roller over to a 20-year hybrid, up to 30-year amortization, rate locks up to 120-days, and assumable. In addition, replacement reserves and insurance escrow get waived and tax escrow gets waives for LTVs at or below 65%. To qualify, a borrower (aka the sponsor) must have a minimum 650 credit score, have a net worth equal to the loan amount, and liquidity equal to 9-months of debt service payments. These are non-recourse loans.

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Apartment Trends By Watching Sam Zell

Sam Zell sold Equity Office Properties to Backstone Group in 2007 at the top of the market.

It’s interesting to watch the apartment trends by 2015 Zell’s REIT Equity Residential was selling 23,300 units in South Florida, Denver, DC, Seattle and the Inland Empire (California) for $5.4 billion to Starwood Capital Group.

Rent growth in these areas have surpassed 4% over the past 5 years. The portfolio is mostly class B surface-parking, two to four-story, walk-up, garden-style properties with high Walk Scores.

In 2020, Zell predicts that the apartment market will become a buyer’s market in the near future. Zell through REIT Equity Residential owns more than 300 properties and more than 77,000 doors nationwide. From his experience, Zell is not making major acquisitions right now because he does not think that pricing has adjusted to the new reality post-covid.

When he started as a real estate investors, Zell focused on smaller emerging markets where there was less sophisticated and institutional investors. As his reputation and assets grew, he now focuses more on urban investments in NYC and San Francisco.

According to Zell, apartment investments will remain strong even though he predicts we go through something like the 1930s Great Depression. Zell believes that Retail, Hospitality and Industrial will be the asset classes negatively affected by covid.

For retail, he expects retail spaces converted to offices, warehouses and/or distribution centers. For hospitality, Zell sees an oversupply of hotel room inventory and general decline in prices. Finally, industrial has been hot with an oversupply in inventory including low barriers to entry.

Zell in interviews has articulated that no one can take away the market cycles although Trump “has added extra innings.”

In 2018, 500,000 new apartment units were created and this is the greatest increase in supply since 1971. In suburban markets, apartments are more likely to have an excess or oversupply in inventory. Zell is expecting a market correction in the multifamily sector “anytime now” because inventory rates are too high.

The reason why Sam Zell is the greatest multifamily investors is because he knows when to sit on the sidelines and investment in other things such as manufacturing and health care in the 1980s. He literally sat out the 1980s for investing in multifamily.

In the 1970s, Zell bought distressed multi-family in a massive arbitrage. He took on $3 billion in debt at 6% when inflation was at 9%. He didn’t like the trend in the 1980s away from 25-year fixed-rate loans and emphasis on short -term variable loans. Zell now states that the only mistake he made in the 1980s was not selling anything.

If you follow Zell closely, they don’t invest into development deals. They may acquire stabilized development deals but they don’t do new construction.

1987 saw a massive liquidation squeeze where banks were asking for significant pay downs of existing loans during a time when properties could not sell. Accounting standards were made super stringent as a “mark to market” and the underlying property had to be curried on the books at the current market value. In addition, workouts with lenders vanished.

Zell predicts a massive consolidation. He compares the real estate market in 2020 to the auto market in 1920. There were 200 auto companies in 1920 and in the 1930s there were only 3 remaining.

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Hedge Fund Manager Tips on Apartment Investing

Lesson #1. Don’t wait for the markets to crash. You won’t have an establish track record to get access to deals and capital if you’ve not established it in boom markets. Always be buying apartments.

Lesson #2. Don’t trust look at price and the cap rate. Rather ask yourself, “Will I lose money on this acquisition?”

“What could go wrong on this acquisition that could cause me to lose money?”

“How do I exit from this property?”

“What is the employment market?”

“Is this property cash flowing when the numbers are calculated properly?”

“What value add can I add to this property?”

“Is this property in a great location?”

Lesson #3. Be skeptical of foreclosure properties. If a property failed once, it might be likely to fail again. Buy great properties in great location with great cash flow in great job markets. Again, don’t focus on price or cap rate.

Lesson #4: Look at 100 properties to buy 1 property.

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Could China And Russia Go To War In The Next Decade?

President Xi Jinping of China has called Vladimir Putin his “best friend” and colleague. These public statements bely history. For example, in 1969 unprovoked Chinese attacks on Russian soldiers which lead to a border clash.

In recent history, the border discrimination against the Han race exemplify racial tensions and mistrust between the Russian and Chinese people.

For the time being, the public relationship with Xi Jinping makes sense for Putin as it gives ease to Chinese investment and undermines leadership as world leader. In addition, US Congress derived sanctions against Russia and Trump’s trade war on China have brought the two countries closer together.

When diving deeper through Putin is fighting a political battle with Chinese interests in corporate boardrooms, Silk Road initiatives and manipulative economic practices.

What will likely drive tensions between Putin and China are land encroachments on Russia’s eastern region bordering the Pacific Ocean. Chinese military leaders already consider specific regions owned by China. As seen in Vietnam, the Philippines, India, and Japan, China will flex it’s military and financial muscles to it’s own benefit. It seems inevitable that China will demand revisions to the Czar’s border treaties or at least “land-lease” rights. The Russian policy has between to deter aggression by the threat of nuclear retaliation.

The current Russian political paradigm is post-imperial and it no longer seeks to conquer new countries. Instead, it’s diplomatic paradigm is to insure the balance between the US and Chinese powers. In the mid-2000s, the Shanghai Co-operation Organization (SCO) was built to forge a collaboration between China and Russia against NATO and the US.

From the Chinese perspective, the policy is for Russia to neither collude or collide with the US. First, China is aware of the US Foreign policy strategy exemplified by Secretary of State Hilary Clinton to encircle China. China’s worst fear is for Russia to join forces with the US. On the other hand, it is against Chinese interest for their to be any tensions between Russia and the US such as in the 2008 war in Georgia.

To read more about our economic analysis, it will always be on the first Monday of every month. If you’d like to learn more about apartments, join our free Facebook group at

The “Mega 3” Apartment Forecasting Report: Ray Dalio, Warren Buffet + George Soros On The Economy

Every quarter, I’ll update the economic apartment forecasting that both Ray Dalio, Warren Buffett and George Soros have on the economy.

Ray Dalio

Ray Dalio has been analyzing China for 36 years. Dalio believes the current state of the US resemble the late 1930s prior to World War II. Interestingly, there was no major stock market crash in the late 1930s and 1940s.

This time the US is like Europe in the late 1930s and China is like America was in the 1930s. The US like Europe in the late 1930s will feel a lot of pressure to sell bonds and also Dalio believes that the Feds will have limited power to save the economy. He forecasts a flight where capital flees the US but capital restrictions will block it from China.

The world is now divided between countries that have to decide to side with the US or China. If a country needs military protection, they side with the US. If a country needs economic stimulus, they side with China.

In a financial or military crisis, the President of the US will use it’s emergy powers to cut off capital flows to China, freeze payments on debt owed to China and apply sanctions.

Warren Buffet

Warren Buffet raised eyebrows when he bought 21 millions of Barrick Gold worth $563 million while selling Wells Fargo, JPMorgan and Goldman stakes. This is the same Buffett who said about gold just a few years ago, “It has no utility. Anyone watching from Mars would be scratching their head.”

George Soros

George Soros holds the view that Trump has been manipulating the economy to win the 2020 election including the 2017 Tax Cuts and Jobs Act. Soros was correct about a devaluation of the pound, an Iranian regime change, the Argentina debt payoff, a bitcoin collapse and a Democrat win in the House elections. He has not been right yet about a collapse in the European economy and on China.

“That crisis never ended. It just moved in different forms, travelled from one continent to another. But nevertheless it has always been with us. The world never went back to some kind of equilibrium after 2008,” says Soros. “What coronavirus has done, it has deepened and accelerated this never-ending non-stop crisis that began in 2008.”

The “Big 3” Report on the economy will always come out on the second Monday of each month. If you’d like to learn more about apartments, join our free Facebook group at

How We Analyze Apartments

Rule #1: Don’t lose money.

Rule #2: Don’t forget rule #1. This classic Warren Buffet mantra.

Rule #3: Make sure you have cash flow for the property for the trailing last 12-months and trailing 24-months.

Rule #4: Don’t buy on a budget. Find investors.

Rule #5: You must find a superstar property manager and pay them well. The managers knows the neighborhood, loves taking care of the tenants, and they care about the success of the apartment. Lenders will require management history.

Rule #6: Know your locations. Do a ton of research on the location. Where are the jobs? Know the public transit plans and zoning plans. How are the schools? Who are the major employers?

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Understanding Gross Potential Rent and Economic Vacancy

Gross Potential Rent (GPR) is the total number of income that a real estate investor can expect to receive from a purchased property based on “market rent.”

Lesson 1. GPR is based on “market rent” and not “proforma rent.” Don’t let sneaky broker or savvy sellers fool you with imaginary “proforma” rent numbers.

You need a seasoned property manager in the class of apartments that you are investing and rely on their data for market rents today… not market rents in the future. Even better if your property manager is Fannie or Freddie approved as both are the primary source of apartment financing in Fall 2020.

Lesson 2. GPR assumes 100% occupancy and that each tenants is paying 100% of their rent.

And every seasoned investor knows that nothing is ever 100% occupied and tenants never pay 100% of the rents due either due to concessions, late payments or loss to lease.

Economic vacancy can be caused by physical vacancy (empty units), bad debts (tenants not paying), concessions (giving first month rent to attract tenants), and/or loss to lease (rents paid being lower than market rents).

Lesson 3. To calculate Annual GPR, take the market rents times the total number of units * 12. For example, this Vallejo apartment has $1997/month market rents times 24 units * 12 or a Annual GPR of $575,136.

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Why We Love Investing In Apartments

A Class properties are usually newer, white collar, nicer amenities, and low in deferred maintenance. Life insurance companies love buying A Class properties as they have long term appreciation.

B Class properties are about 5% to 7% returns plus appreciation. The gold mine is buying B Class properties in A Class areas.

C Class properties are twenty five-years old, have a lot of deferred maintenance, and usually have lots of cash flow. You want cash-on-cash returns at least 8%. The goldmine is buying C Class properties in A Class or B Class areas.

D Class properties are way too risky and often unsafe. Stay away from D Class properties. More management and labor intensive.

Stay away from properties with declining employment or if they are dying.

Here is why apartments can be attractive:

  • Apartment can’t be easily replaced and it appreciates in value if you pick the right location that has strong employment.
  • Apartments provide cash flow if you buy the right property in the right location with the right use of leverage and the property’s income (and not just your personal income) can be used for debt.
  • Apartments have a multiplier effect because rents rise over time, which means the property value rises.

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Is The Law Of Attraction A Scam?

For many years, I was a huge skeptic of the Law Of Attraction. After all, neuroscience has never discovered a location in the brain for spiritual “mind.” In all fairness, neuroscience has also never discovered a location in the brain where emotions reside. And most people would agree that emotions are not a figment of our imagination.

The Law of Attraction comprises of three steps. Ask the Universe, receive from the Universe, and being in the vibration of allowing. For most people, the first two steps are easy. However, most people do not manifest what they desire because they are not in the vibration of allowing.

The more I studied neuroscience, I began to become aware of the dogmas in neuroscientists. Currently post-Galileo, the science dogma can be classified as Materialism. Galileo demarcated the natural sciences away from consciousness… and so science today believes that anything non-material cannot really exist.

This is all fine and dandy except when it contradicts the scientific research. Quantum mechanics is considered the “holy grail” of science as it’s finding predict the empirical results with some of the highest degrees of certainty (yes it’s a bit of a pun lol) in the study of science.

If you’re not familiar with superpositions in quantum mechanics, watch this Schrodinger’s Cat cartoon.

Quantum mechanics oddly have lead scientists to two bizarre possibilities to explain why a conscious observer must be present for the cat to be either dead or alive.

The first possibility are infinite numbers of parallel universes… in one universe the cat is dead, in another universe the cat is alive. Scientists prefer this possibility because they dogmatically consider the second and alternative possibility of panpsychism preposterous.

Panpsychism can be be explained by recalling Master Yoda and the Force that lives in all live things.

We can’t prove the Law of Attraction with quantum mechanics, but the bizarre world of the quantum entanglement also does not refute the Law of Attraction.

So let’s narrow this discussion with a closer view in modern neuroscience. Lisa Barrett’s book “How Emotions Are Made” has been causing a scientific revolution in neuroscience and definitely damaging the materialistic dogma.

We now know that emotions are not reactions based on triggers to the amygdala. Emotions are cognitive functions known as goal-based concepts. No other animal experiences human emotions…. your brain requires the conceptual understandings of fifty shades of anger before it can experience the emotion of anger.

In other words, we can consciously experience the world without emotions. Without emotions, we are unable to think. Without emotions, we would not have this human experience.

The Law of Attraction states that we manifest what we desire when we have higher vibrations of emotions. Be in a constant state of gratitude and you’ll be connected to the “Source” or the energy that creates universes.

Again, neuroscience does not prove that the Law Of Attraction is true, but Lisa Barrett’s discoveries about neuroscience definitely align with the Law of Attraction.

So to revisit the question posed by this blog post “Is The Law Of Attraction A Scam?” I’d answer conclusively that science aligns with Law of Attraction. However, science will never prove the Law of Attraction. That’s by definition impossible ever since Galileo removed consciousness from the field of science.

Will Brexit Crash The Global Economy?

Brexit may be the catalyst that crashes the entire global economy.

On June 2016, 17.4 million voters in England opted for Brexit. The UK official left the European Union (EU) on January 31, 2020. Areas effected include law enforcement, data sharing and security, aviation standards and safety, access to fishing waters, supplies of electricity and gas, and licensing and regulation of medicines. Currently, the UK is in a transition period till December 31, 2020 and must negotiate a new trade agreement with the EU by this date. If a trade deal is not negotiated, the UK could be facing tariffs to the EU.

How did Brexit happen? Because of the Great Crash in 2008, European debtor nations sustained severe austerity problems that lead to massive unemployment and economic malaise. In addition, political refugees from Syria, Somalia, Bhutan, Iran, and Afghanistan fueled massive racism as well as escalate social service spending. The growing divide between the rich and poor and racial tensions have stoked the fires of populism and anti-EU sentiment.

As a result of Brexist, the sterling pound should massively devalue. Unlike the last major sterling pound devaluation in 1992, the Bank of England this time around will not be able to cut interest rates to soften the severity of the devaluation. In addition, the UK has a current account deficit that it didn’t have in 1992 and is very sensitive to the whims of the global bond market. A vicious cycle will also be created by the sterling pound devaluation. The 27-countries of the EU will feel threatened by deflationary pressures from super cheap English exports and likely start a trade war with the UK.

In this nightmare scenario, the US after unilaterally altering the Iran deal will not have the ability to eliminate the trade war. However, the Fed will be able to lower interest rates to soften the blow of sterling pound devaluations. China current sits on a leverage bubble similar to the US prior to the Great Crash 2007; a EU trade war could bring down the Chinese economy.

Brexit is eerily similar to the currency devaluations in 1921 in Germany followed by the sterling pound devaluation that followed. Currency wars lead inevitably to tariffs and a breakdown in global trade and lead to the Great Depression in the 1930s.

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