Trump Tax Plan & Real Estate

Last September we reviewed the highlights of the Trump Tax Plan and for the most part liked what we saw. When we read the plan we knew it would be good for business.  Here’s why….

Actions Have Consequences

In hindsight, the phrase ‘good for business’ appears to have been somewhat of an understatement.  

The corporate tax rate has been reduced by nearly 40% – from a 35% tax rate down to a rate of 20%.  For individuals, the standard deduction has been almost doubled and the mandate to purchase health insurance has been eliminated.

Now that the Plan has been signed into law we expect the impact on business – and on the real estate investment business in particular – to be very positive for 2018 and beyond.

We’re not alone.  The New York Times has called this the most consequential tax bill in the past 30 years, and the markets seem to agree.

Equity vs. Debt vs. Cash

Just a few short days into 2018 stock markets around the world continue to reach all-time highs.  But we suspect this continued rallying of the equity markets will be short lived.

First, both the Federal Reserve and the European Central Bank appear to be in a contest to begin unwinding the bond purchases they’ve made over the past many years.  This will create upward pressure on interest rates, pulling money out of the equity markets and into the debt markets.

As interest rates increase, it’s less attractive to be a borrower vis-a-vis a publicly held company and more attractive to be a lender via the bond market.

Secondly, countries such as Ireland that have benefited from their status as a tax-haven will likely become less attractive, due to a 20% tax on payments made to countries outside of the U.S.  

Take Apple Computer and Ireland for example.

Recently The Guardian estimated that about two-thirds of the company’s global profits accumulate in Ireland essentially tax free.  This from a company whose total overseas cash hoard is guessed to be around $250 billion.

Back In The USA

Our intent isn’t to bash Ireland or Apple Computer, or any other country or company.  They were simply playing by the rules and doing what made good business sense at the time.

But now the rules have changed.

The Trump Tax Plan makes it less advantageous for companies to park profits overseas, and in fact penalizes them for doing so.  Because of this we expect to see a tremendous amount of capital make its way back into the U.S.

All of that money coming back into the United States will need to be put to work.  Real estate is and always will be one of the few asset classes that is consistently attractive to portfolio managers and corporate asset managers.

This need to invest will increase the already strong demand for not just Class A property but all types of income-producing real estate investments.

We also expect interest rates to begin rising in the not too distant future, as money shifts from the stock market to debt financing.

These two factors are creating a window of opportunity for real estate investing.

Please contact us today to learn more about the past, present, and future real estate investment options offered by TwinRock Partners.