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I understand people wanting to invest in real estate when the stock market tanked in the late nineties (technology, Enron, etc.) Real estate is tangible, you can live in it or you can rent it out. But, it isn't LIQUID and is one of the hardest classes of assets to dispose of quickly if one needs to.
I think what caused the speculation was the initial financing of investment property. Not that long ago it was standard to require a LTV (Loan to Value) of 80% - meaning that to buy an investment property you needed a 20% down payment. That kept the number of investors to a smaller pool of buyers who had the wherewithal to purchase property for investment. Then, all of a sudden you had people with "Investor" loans crawling out of the woodwork that required almost no money down and all of America fancies themselves as "investors".
I think there is a difference between real estate "investment" and real estate "speculation". To me, an investor is one who purchases property with the intent of holding it, charging rents, hopefully having a positive cash flow and some tax advantages and then, finally cashing out at some time in the future. That was a good game plan when real estate appreciation was in the neighborhood of 3-5% a year. But, loosening up the pocketbook and allowing every Joe Shit and their brother to borrow money with no personal investment CREATED a giant new class of real estate "speculators" fueled by the easy money, late night infomercials, and Flip that House type shows. These guys were relying on fast, quick, high appreciation so that they could get in and get out quick - directly contributing to and blowing into the "bubble". I have seen estimates that somewhere from 25-30% of real estate transactions involved "investors". That kind of figure is just flat unheard of in the preceding decades. No wonder there was a real estate bubble.
Back to capital gains. I wonder how many of these so called speculators even realized how much short-term capital gains were going to eat up of their profits? The lower rates on long-term capital gains only kicks in after 2 years. So, some of these speculators who bought with giant NEGATIVE cash flows (insane on the face of it) would have to eat that negative cash flow for 2 years or get killed by the short term rates.
Those Flip This House type of shows are very deceptive. They say "Joe Shit bought this House for $300,000, put $75,000 into and sold it 12 weeks later for 450,000 for a net profit of 75K". Making 75K sounds good until you realize nowhere do they mention the carrying costs, commissions if any, and the killer short-term capital gains rate.
Now, after the subprime lending debacle, this group of speculators is pretty much a dead issue. Their funding is going to become very limited unless the ROI (return on investment) starts to make some kind of sense again WITHOUT banking on runaway appreciation.
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