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by breischl
3935 days ago
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Many consider the "1% Rule" as the minimum bar. You're probably right that there are a lot rentals around that level, but those are the marginal rentals that I mentioned would likely become for-sale housing. Also, since you define the tax increase as 1% of property value, then your math is correct. But I believe the proposition is to charge it on the value of the land, not including the value of the improvements, which is typically a much lower number. For single family homes it would still be a hit, but not as severe as your math indicates. For higher density developments it would be even less onerous - which is pretty much the point. Tangentially, I believe your estimate on ROI from rentals is inaccurate. Long term average stock returns are in the range of 7%, it's not uncommon to find rentals about 10%. As they should be, given the illiquidity, lack of diversification, various extra risks, and the work involved. All of which explains why stocks are more popular. |
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Let me put it this way, we both agree there are extra risks. I think, after those risks, RE is worth +.5%-1% on equivalent assets in a different asset class. [e.g. Stocks]
You think its worth the "paper value" of 10%.
Fair enough. I just am never going to agree that RE is worth the risk at -1% of what the current real returns is vs. Stocks.
> Many consider the "1% Rule" as the minimum bar. You're probably right that there are a lot rentals around that level, but those are the marginal rentals that I mentioned would likely become for-sale housing.
Yes. Its also the bar used for relatively safe real estate investments. Generally, when you hit 2%+ you are engaging in a greater level of risk. I believe the market prices assets accurately in regards to risk v. reward for the capital.
That being the case, greater than "1% rule" returns are gained through taking on larger risks.
> Also, since you define the tax increase as 1% of property value, then your math is correct. But I believe the proposition is to charge it on the value of the land, not including the value of the improvements, which is typically a much lower number. For single family homes it would still be a hit, but not as severe as your math indicates. For higher density developments it would be even less onerous - which is pretty much the point.
In major metro areas with heavy zoning, the land is worth more than the improvements on it. Literally every piece of residential real estate I have rental income from, this is the case. Sometimes its as high as 2:1 [land:improvement].
In situations where land is the "lower number", you have to recoup the losses from removing improvements from the equation which effectively makes the "tax on real estate" equivalent to the government as a source of revenue. You can't say "Well, we'll just take in 33% of the revenue we did before because the land is only worth 1/3rd of the value of the improvement." You've got to keep the tax revenue roughly the same, so its a tax swap.
Yes, you'll get better returns under a land value tax with highly dense construction...however, if you double the density of a city, that means the land outside that denser urban center is going to lose value and that compaction is going to require higher land taxes to recoup the loss from the less valuable land.
Ultimately, even the proponents of a LVT agree that land abandonment is a concern [although they in theory can fix this with a properly designed LVT regimee] when introducing into an area that previously only had a property tax and/or the LVT is used to replace other taxes. [e.g. income, sales]
So...I get you don't agree but until someone proves me wrong in practice, I don't have faith in it.