I've always preferred real estate over stocks as a way to build meaningful long-term wealth. To be able to just live in your home and get rich without much effort is a dream come true.
Within 30 years, you'll then own a cash flow generating property outright that can be gifted to your children at a stepped up basis so they don't have to pay any capital gains tax so long as you're under the estate tax threshold.
What I realized recently is that the higher taxes go, the happier I've become. Let me explain with a couple examples.
The Pain Of Property Taxes
Paying property taxes is OK when property prices are going up. But if you still have to pay property taxes when your property is losing value it doesn't feel too good.
I remember having to fight the city of San Francisco for three years in a row to lower my property taxes once the property market started slowing in 2007. If I didn't, I would have automatically had to pay ~3% more each year.
Just like gas stations, local governments are slow to lower taxes in a recession, but quick to raise taxes in a bull market.
One of the key reasons why I decided to offload my rental home in 2017 is because San Francisco was now billing me a whopping $23,000 a year in property tax.
A lot of people said I was lucky that my property taxes can only go up by ~2%-3% a year due to Proposition 13. But still, $23,000 is a large tax bill when compared to its gross rental income of ~$96,000.
I always think long-term when owning property, like 10 – 20 years out. So when I started adding up the total property tax cost over this time frame, it started making me fill uncomfortable.
Can you imagine paying $250,000 – $550,000 in property tax for one property over a 10 – 20 year period? That is insane!
Once I added on $1,500 a year in insurance, $3,000 a year in maintenance, $26,000 a year in mortgage interest, and dealing with PITA tenants, it became much easier for me to sell.
It's actually hard for me to fathom that the new buyer is now paying $35,000 a year in property tax based on the sale price of $2,740,000 X 1.29%.
Related: The Latest Average Tax Refund Is Down Big YoY
There Is A Property Tax Breaking Point
Local governments need to be careful about how much property tax they charge their homeowners. Eventually, homeowners will revolt and leave.
$23,000 was only one property tax bill. Then I had a $15,000 property tax bill for my primary residence. A $9,000 property tax bill for my rental condo, and then a $6,000 property tax bill for my vacation rental in Lake Tahoe.
The total adds up to roughly $53,000 a year in property taxes. Painful.
My property tax breaking point is $50,000. It feels foolish to spend so much money on property taxes since I also have to pay California state income tax and Federal income tax.
The city doesn't mind I sold the house because they're now earning even more property tax. But eventually, enough people will vote with their feet and leave. Once you escape rat race cities, you will feel much less stressed.
If you're a savvy real estate crowdfunding investor, then you'll pay attention to these demographic trends and invest accordingly. My bet is on the heartland of America. We'll see in five years whether my investment decision plays out.
With the median San Francisco home price hovering around $1.4M, it takes a $300,000 – $500,000 household income to afford a very average home after a $300,000 downpayment. I don't see how this is sustainable. There's either going to be a surge in new construction or a lot of folks who decide to relocate.
They keep talking about not enough housing being build in San Francisco. But all the new condo construction downtown directly impacted my asking rent price for the home I sold.
I was charging $9,000 a month, and after 45 days of trying to find new tenants at the same price, the best offers I got were for $7,500 – $8,000 a month.
Fundrise is my favorite real estate crowdfunding platform. They were founded in 2012 and have the most innovative offerings with well-vetted properties. They are open to accredited and non-accredited investors alike.
Earn Income More Easily
The older I get and the stronger stocks perform, the more I like investing in stocks over real estate. Therefore, I believe one's preference between stocks and real estate highly depends on one's age, state of mind, and responsibilities.
Real estate can really be a pain. With tenants to manage and maintenance to deal with, I don't like holding as much physical real estate anymore.
For my rental condo, I've got to send in my proxy vote for the annual HOA meeting I don't plan on attending. Then I've got to coordinate with my tenants of 1.5 years who've decide to move to NYC in the middle of winter! Then I've got to do background checks on the new prospective tenants before notifying the HOA and coordinating the move-in process.
Although I no longer own a single family rental home in one of the most expensive areas in San Francisco, I'm happy for the extra freedom I've earned back by reinvesting $550,000 of the proceeds into real estate crowdfunding.
I didn't think ever rising property tax bills would be a significant catalyst for simplifying my life, but it has.